<PAGE>
As filed with the Securities and Exchange Commission
on April 28, 2000
Registration Nos. 33-56654 and 811-4844
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 12 [X]
----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21 [X]
----
(Check appropriate box or boxes)
Separate Account I of Integrity Life Insurance Company
(Exact Name of Registrant)
Integrity Life Insurance Company
(Name of Depositor)
515 West Market Street, Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
---------------
Kevin L. Howard
Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on May 1, 2000 pursuant to paragraph (b) of Rule 485
/ / 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.
<PAGE>
PROSPECTUS
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by Integrity Life Insurance Company, a subsidiary of The Western and Southern
Life Insurance Company (W&S). The contract provides several types of benefits,
some of which have tax-favored status under the Internal Revenue Code of 1986,
as amended (THE CODE). You may allocate contributions to different investment
divisions of our Separate Account I, referred to as Variable Account Options and
Fixed Accounts. Together, the Variable Account Options and Fixed Account Options
are referred to as INVESTMENT OPTIONS.
Contributions you make to the Variable Account Options are invested in shares of
corresponding Portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III) (the PORTFOLIOS OR PORTFOLIO). The Portfolios are managed by Fidelity
Management & Research Company. The values allocated to the Options reflect the
investment performance of the Portfolios. The prospectus for the Portfolios
describes each one's investment objectives, policies and risks. There are
fourteen Variable Account Options, which invest in the following Portfolios:
- - VIP Money Market Portfolio: - VIP II Investment Grade Bond
Initial Class Portfolio: Initial Class
- - VIP High Income Portfolio: - VIP II Asset Manager Portfolio:
Initial Class Initial Class
- - VIP Equity-Income Portfolio: - VIP II Index 500 Portfolio:
Initial Class Initial Class
- - VIP Growth Portfolio: Initial - VIP II Contrafund-Registered
Class Trademark- Portfolio: Initial Class
- - VIP Overseas Portfolio: Initial - VIP II Asset Manager: Growth
Class Portfolio: Initial Class
- - VIP III Balanced Portfolio: - VIP III Growth Opportunities
Initial Class Portfolio: Initial Class
- - VIP III Growth & Income - VIP III Mid Cap Portfolio: Service
Portfolio: Initial Class Class
We also offer Guaranteed Rate Options (GROS) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you contribute to a GRO
grows at a fixed interest rate that we declare at the beginning of the duration
you select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your contribution, less prior withdrawals, plus interest compounded at an
annual effective rate of 3% (MINIMUM VALUE). Withdrawal charges and an annual
administrative charge may apply, which may invade principal. The money you
contribute to the STO grows at a fixed interest rate that we declare each
calendar quarter, guaranteed never to be less than an effective annual yield of
3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER
INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY
BASIS.
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them for
future reference. This prospectus isn't valid unless provided with the current
prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
Integrity Life Insurance Company, P.O. Box 740074, Louisville, Kentucky
40201-0074. The express mail address is Integrity Life Insurance Company, 515
West Market Street, Louisville, Kentucky 40202. You may also us at
1-800-325-8583.
A registration statement relating to the contract, which includes a Statement of
Additional Information (SAI) dated May 1, 2000, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A free copy of the SAI is available by writing to or calling
our Administrative Office. The table of contents for the SAI is found in
Appendix C.
THESE SECURITIES HAVEN'T BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
You can review and copy information about GrandMaster III at the SEC's Public
Reference Room in Washington, D.C. For hours of operation of the Public
Reference Room, please call 1-800-SEC-0330. You may also obtain information
about GrandMaster III on the SEC's Internet site at HTTP://WWW.SEC.GOV. Copies
of that information are also available, after paying a duplicating fee, by
electronic request to [email protected], or by writing the SEC's Public
Reference Section, Washington, D.C. 20459-0102.
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF OR GUARANTEED BY ANY BANK, NOR IS
IT INSURED BY THE FDIC; IT IS SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
* NOTE: A CONTRACT ISSUED IN OREGON WILL BE A SINGLE PREMIUM VARIABLE ANNUITY
RATHER THAN A FLEXIBLE PREMIUM VARIABLE ANNUITY. ALL REFERENCES TO FLEXIBLE
CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR ANY CONTRACT ISSUED IN OREGON.
The date of this Prospectus is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
GLOSSARY
<S> <C>
PART 1 - SUMMARY
Your Variable Annuity Contract...................................1
Your Benefits....................................................1
How Your Contract is Taxed.......................................1
Your Contributions...............................................1
Your Investment Options..........................................1
Account Value, Adjusted Account Value and Cash Value ............2
Transfers........................................................2
Charges and Fees.................................................2
Withdrawals......................................................2
Your Initial Right to Revoke.....................................2
Risk/Return Summary: Investments and Risks.......................2
Table of Annual Fees and Expenses................................3
Examples.........................................................5
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company.................................6
The Separate Account and the Variable Account Options............6
Assets of Our Separate Account...................................6
Changes In How We Operate........................................6
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios ..................................................7
The Portfolios' Investment Adviser...........................7
Investment Objectives of the Portfolios......................7
Fixed Accounts...................................................9
Guaranteed Rate Options......................................9
Renewals of GRO Accounts.................................10
Market Value Adjustments.................................10
Systematic Transfer Option..................................11
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges........................................11
Annual Administrative Charge....................................11
Reduction or Elimination of Separate Account or
Administrative Charges........................................11
Portfolio Charges...............................................11
State Premium Tax Deduction.....................................11
Contingent Withdrawal Charge....................................12
Reduction or Elimination of the Contingent Withdrawal Charge....12
Transfer Charge.................................................12
Hardship Waiver.................................................12
Tax Reserve.....................................................13
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract...............................13
Your Account Value..............................................13
Units in Our Separate Account...................................13
<PAGE>
How We Determine Unit Value.....................................14
Transfers.......................................................14
Excessive Trading...............................................15
Withdrawals.....................................................15
Assignments.....................................................15
Death Benefits and Similar Benefit Distributions................16
Annuity Benefits................................................16
Annuities.......................................................16
Annuity Payments................................................17
Timing of Payment...............................................17
How You Make Requests and Give Instructions.....................17
PART 6 - VOTING RIGHTS
Voting Rights...................................................18
How We Determine Your Voting Shares.............................18
How Portfolio Shares Are Voted..................................18
Separate Account Voting Rights..................................18
PART 7 - TAX ASPECTS OF THE CONTRACT
Introduction....................................................19
Your Contract is an Annuity.....................................19
Taxation of Annuities Generally.................................19
Distribution-at-Death Rules.....................................20
Diversification Standards.......................................20
Tax-Favored Retirement Programs.................................20
Federal and State Income Tax Withholding........................21
Impact of Taxes to Integrity....................................21
Transfers Among Investment Options..............................21
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals..........................................21
Income Plus Withdrawal Program..................................21
Dollar Cost Averaging...........................................22
Systematic Transfer Program.....................................22
Customized Asset Rebalancing....................................22
Callan Asset Allocation and Rebalancing Program.................23
Systematic Contributions........................................23
Performance Information.........................................24
PART 9 - PRIOR CONTRACTS
Prior Contracts.................................................24
Appendix A - Financial Information............................30
Appendix B - Illustration of a Market Value Adjustment........32
Appendix C - SAI Table of Contents............................35
</TABLE>
<PAGE>
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Investment Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT - the person upon whose life an annuity benefit and death benefit are
based.
BUSINESS DAY - any day that the New York Stock Exchange is open.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro-rata annual administrative charges that may apply.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Options, which offer durations of two, three, five, seven
and ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO
Account, assuming you haven't withdrawn or transferred any amounts, will be the
amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts,
collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges), accumulated at 3% interest annually,
less any administrative charges.
PORTFOLIO - an investment portfolio of a mutual fund in which the Separate
Account invests its assets.
RETIREMENT DATE - All annuity benefits under your contract are calculated as of
your Retirement Date. The Retirement Date can't be later than your 98th
birthday, or earlier if required by law.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in a variable account option.
UNIT VALUE - the value of each Unit calculated on any Business Day.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, other than the GROs and STO. The value of your contract will
reflect the investment performance of the Variable Account Options you choose.
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "we," "our" and "us" mean Integrity Life Insurance Company
(INTEGRITY). The terms "you" and "your" mean the Annuitant, the person upon
whose life the Annuity Benefit and the Death Benefit are based, usually the
owner of the contract. If the Annuitant doesn't own the contract, the owner has
all of the rights under the contract until annuity payments begin. If there are
joint owners, they share contract rights and they must both sign for any changes
or transactions. The death of the first joint owner will determine the timing of
distribution.
You can invest for retirement by buying a GrandMaster III if you properly
complete a Customer Profile form (an application or enrollment form may be
required in some states) and make a minimum initial contribution. Because the
premium is flexible, additional contributions can be any amount you choose, as
long as they are above the minimum required contribution discussed below.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit, and a death benefit.
These benefits are described in more detail below.
Your benefits under the contract may be controlled by the usual rules for
taxation of annuities, including the deferral of taxes on your investment growth
until you actually make a withdrawal. You should read Part 7, "Tax Aspects of
the Contract" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under certain tax-favored retirement
programs, which may be subject to special eligibility and contribution rules.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
However, most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The minimum initial contribution is $1,000 ($3,000 in Pennsylvania and South
Carolina). Additional contributions can be as little as $100. Some
tax-favored retirement plans allow smaller contributions. See
"Contributions Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and the Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine different Investment
Options at any one time. See "Contributions Under Your Contract" in Part 5. To
select Investment Options most suitable for you, see Part 3, "Your Investment
Options."
The Variable Account Options invest in shares of investment portfolios of mutual
funds. Each investment portfolio is referred to as a PORTFOLIO. The investment
goal of each Variable Account Option and its corresponding Portfolio is the
same. For example, if your investment goal is to save money for retirement, you
might choose a GROWTH oriented Variable Account Option, which invests in a
GROWTH Portfolio. Your value in a Variable Account Option will vary with the
performance of the corresponding Portfolio. For a full description of each
Portfolio, see that Portfolio's prospectus and Statement of Additional
Information.
1
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Accounts added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased by any Market Value Adjustments. Your
Account Value in the GROs can never be decreased below the Minimum Value. Your
CASH VALUE is equal to your Adjusted Account Value, minus any contingent
withdrawal charge and minus the pro-rata portion of the annual administrative
charge, if it applies. See "Charges and Fees" below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these in
Part 5, "Transfers." Any transfer must be at least $250 and may be arranged
through our telephone transfer service. Transfers may also be made among certain
Investment Options under the following special programs: (i) Dollar Cost
Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation and
Rebalancing Program, or (iv) to transfer your STO contributions. All of these
programs are discussed in Part 8. If you make more than twelve transfers between
your Investment Options in one contract year, your account can be charged up to
$20 for each transfer after the first twelve.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account.
A daily charge at an effective annual rate of 1.35% is deducted from the Account
Value of each of your Variable Account Options to cover mortality and expense
risks (1.20%) and certain administrative expenses (.15%). The charge will never
be greater than this. For more information, see Part 4, "Deductions and
Charges."
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company receives investment management fees from the Portfolios based on the
average net assets of each Portfolio. Advisory fees can't be increased without
the consent of shareholders. See "Table of Annual Fees and Expenses" below and
"The Portfolios' Investment Adviser" in Part 3.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be at least
$300. You may withdraw up to 10% of your Account Value each contract year
without paying withdrawal charges. After the first 10%, there may be a charge
for withdrawals you make, based upon the length of time your money has been in
your account. See "Contingent Withdrawal Charge" in Part 4.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in certain states. If you cancel your contract, we'll return your Account
Value, which may be more or less than your initial contribution. If your state
requires, we'll return all of your contributions without any adjustment. We'll
return the amount of any contribution to the Guaranteed Rate Options upon
cancellation.
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the GrandMaster III Variable Annuity are protecting your
investment, building for retirement and providing future income. We strive to
achieve these goals through extensive portfolio diversification and superior
portfolio management.
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks
2
<PAGE>
becomes financially impaired or if the stock market as a whole declines. Because
most of the Variable Account Options are in common stocks, there's also the
inherent risk that holders of common stock generally are behind creditors and
holders of preferred stock for payments in the event of the bankruptcy of a
stock issuer.
For a complete discussion of the risks associated with an investment in any
particular Variable Account Option, see the prospectus of the corresponding
Portfolio.
<TABLE>
<CAPTION>
TABLE OF ANNUAL FEES AND EXPENSES
<S> <C>
Owner Transaction Expenses
- --------------------------
Sales Load on Purchases................................................$0
Deferred Sales Load (as a percentage of contributions)(1)......8% Maximum
Exchange Fee(2)........................................................$0
Annual Administrative Charge
- ----------------------------
Annual Administrative Charge*....................................... $30
* This charge applies only if the Account Value is less than
$50,000 at the end of any contract year prior to your Retirement
Date. See "Annual Administrative Charge" in Part 4.
Separate Account Annual Expenses
(as a percentage of separate account value)(3)
- ----------------------------------------------
Mortality and Expense Risk Fees............................... 1.20%
Administrative Expenses....................................... .15%
------
Total Separate Account Annual Expenses........................ 1.35%
======
</TABLE>
3
<PAGE>
Portfolio Annual Expenses After Reimbursement
(As a Percentage of Average Net Assets)
- -------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market: Initial Class................. .18% .09% .27%
VIP High Income: Initial Class.................. .58% .11% .69%
VIP Equity-Income: Initial Class................ .48% .08% .56%(4)
VIP Growth: Initial Class....................... .58% .07% .65%(4)
VIP Overseas: Initial Class..................... .73% .14% .87%(4)
VIP II Investment Grade Bond: Initial Class..... .43% .11% .54%
VIP II Asset Manager: Initial Class............. .53% .09% .62%(4)
VIP II Index 500: Initial Class................. .24% .04% .28%(5)
VIP II Contrafund -Registered Trademark-:
Initial Class ................................ .58% .07% .65%(4)
VIP II Asset Manager: Growth: Initial Class..... .58% .12% .70%(4)
VIP III Balanced: Initial Class................. .43% .12% .55%(4)
VIP III Growth Opportunities: Initial Class..... .58% .10% .68%(4)
VIP III Growth & Income: Initial Class.......... .48% .11% .59%(4)
VIP III Mid Cap Portfolio: Service Class........ .57% .50% 1.07%(6)(7)
</TABLE>
- -------------------------
1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
have a free withdrawal of up to 10% of the Account Value in any contract
year.
2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
3) See "Deductions and Charges - Separate Account Charges" in Part 4.
4) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce Portfolio expenses. In addition, through arrangements with certain
Portfolios, or through Fidelity Research & Management (FMR) on behalf of
certain Portfolio's custodians, credits realized as a result of uninvested
cash balances were used to reduce a portion of each applicable Portfolio's
expenses. Without these reductions, the Total Annual Expenses presented
above would have been .57% for VIP Equity-Income Portfolio, .66% for VIP
Growth Portfolio, .91% for VIP Overseas Portfolio, .63% for VIP II Asset
Manager Portfolio, .67% for VIP II Contrafund-Registered Trademark-
Portfolio, .71% for VIP II Asset Manager: Growth Portfolio, .57% for VIP III
Balanced Portfolio, .69% for VIP III Growth Opportunities Portfolio, .60%
for VIP III Growth & Income Portfolio.
5) FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been .10% and the Total Annual Expenses would have been
.34%.
6) The Other Expenses for the VIP III Mid Cap Portfolio reflect the payment of
.10% pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual Fund.
7) FMR agreed to reimburse a portion of VIP III Mid Cap Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been 2.84% (including the payment of .10% pursuant to
the Rule 12b-1 Plan), and the Total Annual Expenses would have been 3.41%.
4
<PAGE>
EXAMPLES
The examples below show the expenses on a $1,000 investment, assuming a $40,000
average contract value and a 5% annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
PERIOD SHOWN:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- -------- ---------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $ 97.35 $113.67 $132.28 $199.81
VIP High Income: Initial Class.................. $101.65 $126.72 $154.25 $244.80
VIP Equity-Income: Initial Class................ $100.32 $122.70 $147.49 $231.08
VIP Growth: Initial Class....................... $101.24 $125.48 $152.18 $240.59
VIP Overseas: Initial Class..................... $103.50 $132.28 $163.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $100.12 $122.07 $146.45 $228.95
VIP II Asset Manager: Initial Class............. $100.94 $124.56 $150.62 $237.43
VIP II Index 500: Initial Class................. $ 97.45 $113.98 $132.81 $200.91
VIP II Contrafund-Registered Trademark-:
Initial Class ................................ $101.24 $125.48 $152.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $101.76 $127.03 $154.77 $245.84
VIP III Balanced: Initial Class................. $100.22 $122.39 $146.97 $230.01
VIP III Growth Opportunities: Initial Class..... $101.55 $126.41 $153.73 $243.75
VIP III Growth & Income: Initial Class.......... $100.63 $123.63 $149.06 $234.26
VIP III Mid Cap: Service Class.................. $105.55 $138.43 $173.79 $283.88
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT TO ANNUITIZE OR DON'T SURRENDER YOUR
CONTRACT AT THE END OF THE PERIOD SHOWN:
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $17.35 $53.67 $ 92.28 $199.81
VIP High Income: Initial Class.................. $21.65 $66.72 $114.25 $244.80
VIP Equity-Income: Initial Class................ $20.32 $62.70 $107.49 $231.08
VIP Growth: Initial Class....................... $21.24 $65.48 $112.18 $240.59
VIP Overseas: Initial Class..................... $23.50 $72.28 $123.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $20.12 $62.07 $106.45 $228.95
VIP II Asset Manager: Initial Class............. $20.94 $64.56 $110.62 $237.43
VIP II Index 500: Initial Class................. $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund-Registered Trademark-:
Initial Class ................................ $21.24 $65.48 $112.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $21.76 $67.03 $114.77 $245.84
VIP III Balanced: Initial Class................. $20.22 $62.39 $106.97 $230.01
VIP III Growth Opportunities: Initial Class..... $21.55 $66.41 $113.73 $243.75
VIP III Growth & Income: Initial Class.......... $20.63 $63.63 $109.06 $234.26
VIP III Mid Cap: Service Class.................. $25.55 $78.43 $133.79 $283.88
</TABLE>
These examples assume that all of the fixed charges of the Separate Account
and of the investment advisory fees and other expenses of the Portfolios will
continue as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE MORE OR
LESS. The annual rate of return assumed in the examples isn't an estimate or
guarantee of future investment performance. The table assumes an estimated
$40,000 average contract value, so that the administrative charge per $1,000 of
net asset value in the Separate Account is $0.75. This per $1,000 charge would
be higher for smaller Account Values and lower for higher values.
The table and examples above are to help you understand the various costs and
expenses that apply to your contract. These tables show expenses of the Separate
Account as well as those of the Portfolios. Premium taxes may also apply when
you receive a payout of your contributions.
CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNT IS PROVIDED IN APPENDIX
A.
5
<PAGE>
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Our principal executive office is in Louisville, Kentucky. We are authorized to
sell life insurance and annuities in 47 states and the District of Columbia. We
sell flexible premium annuities with underlying investment options other than
the Portfolios, fixed single premium annuities, and flexible premium annuities
offering both traditional fixed guaranteed interest rates and fixed equity
indexed options. Integrity is a subsidiary of W&S, a mutual life insurance
company originally organized under the laws of the State of Ohio on February 23,
1888.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account was established in 1986, and is maintained under the
insurance laws of the State of Ohio. It is a unit investment trust, which is a
type of investment company, registered with the Securities and Exchange
Commission (the SEC). SEC registration doesn't mean that the SEC is involved in
any way in supervising the management or investment policies of the Separate
Account. Each Variable Account Option invests in shares of a corresponding
Portfolio. We may establish additional Options from time to time. The Variable
Account Options currently available to you are listed in Part 3, "Your
Investment Options." Prior to September 3, 1991, the Portfolios invested in
shares of corresponding portfolios of Prism Investment Trust.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts participate in the
Separate Account in proportion to the amounts in their contracts. We can't use
the Separate Account's assets supporting the variable portion of these variable
contracts to satisfy liabilities arising out of any of our other businesses.
Under certain unlikely circumstances, one Variable Account Option may be liable
for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may allow charges owed to us to
stay in the Separate Account, and in that way, we can participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer them
to our general account.
CHANGES IN HOW WE OPERATE
We can change how we or our Separate Account operate, subject to your approval
when required by the Investment Company Act of 1940 ("1940 ACT") or other
applicable law or regulation. We'll notify you if any changes result in a
material change in the underlying investments of a Variable Account Option. We
may:
- add Options to, or remove Options from, our Separate Account, combine two or
more Options within our Separate Account, or withdraw assets relating to your
contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940
Act;
- operate our Separate Account under the direction of a committee or discharge
a committee at any time (the committee may be composed of a majority of
persons who are "interested persons" of Integrity under the 1940 Act);
- restrict or eliminate any voting rights of owners or others who have voting
rights that affect our Separate Account;
- cause one or more Option(s) to invest in a mutual fund other than or in
addition to the Portfolios;
- operate our Separate Account or one or more of the Options in any other form
the law allows, including a form that allows us to make direct investments.
We may make any legal investments we wish. In choosing these investments,
we'll rely on our own or outside counsel for advice.
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PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. The Portfolios' investment advisor may compensate
us for providing administrative services in connection with the Portfolios. This
compensation is paid from the investment advisor's assets. FOR A PROSPECTUS
CONTAINING MORE COMPLETE INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE
OFFICE TOLL-FREE AT 1-800-325-8583.
Each of the Portfolios is an open-end diversified management investment company
registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and variable
life contracts of insurance companies. Shares of the Portfolios are currently
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with FMR or Integrity. The Board of Trustees of each
of the Portfolios is responsible for monitoring the Fund for any material
irreconcilable conflict between the interests of the policyowners of all
separate accounts investing in the Portfolio and determining what action, if
any, should be taken in response. If we believe that a Portfolio's response to
any of those events doesn't adequately protect our contract owners, we'll see to
it that appropriate and available action is taken. See the Portfolios'
prospectus for a further discussion of the risks associated with the offering of
shares to our Separate Account and the separate accounts of other insurance
companies.
THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company (FMR)
is a registered investment adviser under the Investment Advisers Act of 1940. It
serves as the investment adviser to each Portfolio. Bankers Trust Company ("BT")
is the VIP II Index 500 Portfolio's sub-adviser. BT, a New York banking
corporation, is a wholly owned subsidiary of Bankers Trust New York Corporation.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP MONEY MARKET PORTFOLIO
VIP Money Market Portfolio seeks to earn a high level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
VIP HIGH INCOME PORTFOLIO
VIP High Income Portfolio seeks a high current income, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks, and convertible securities,
with an emphasis on lower-quality debt securities.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
that exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth may
be measured by factors such as earnings or revenue. Companies with high growth
potential tend to be companies with higher than average price/earnings (P/E)
ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities or have a strong
industry or market position. The stocks of these companies are often called
"growth" stocks.
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VIP OVERSEAS PORTFOLIO
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
VIP II INDEX 500 PORTFOLIO
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II CONTRAFUND-Registered Trademark- Portfolio
VIP II Contrafund-Registered Trademark- Portfolio seeks long-term capital
appreciation. FMR normally invests the Portfolio's assets primarily in common
stocks. FMR invests the Portfolio's assets in securities of companies whose
value FMR believes is not fully recognized by the public. The types of companies
in which the Portfolio may invest include companies experiencing positive
fundamental change such as a new management team or product launch, a
significant cost-cutting initiative, a merger or acquisition, or a reduction in
industry capacity that should lead to improved pricing; companies whose earning
potential has increased or is expected to increase more than generally
perceived; companies that have enjoyed recent market popularity but which appear
to have temporarily fallen out of favor for reasons that are considered
non-recurring or short-term; and companies that are undervalued in relation to
securities of other companies in the same industry.
VIP II ASSET MANAGER: GROWTH PORTFOLIO
VIP II Asset Manager: Growth Portfolio is an asset allocation fund that seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
----- -----------
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds,
which may be lower-quality debt securities.
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VIP III BALANCED PORTFOLIO
VIP III Balanced Portfolio seeks both income and growth of capital by investing
approximately 65% of assets in stocks and other equity securities, and the
remainder in bonds and other debt securities, including lower-quality debt
securities, when its outlook is neutral.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III MID CAP PORTFOLIO
FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common
stocks. FMR normally invests at least 65% of the Portfolio's total assets in
securities of companies with medium market capitalizations. Medium market
capitalization companies are those whose market capitalization is similar to the
capitalization of companies in the S&P Mid Cap 400 at the time of the
investment. Companies whose capitalization no longer meets this definition after
purchase continue to be considered to have a medium market capitalization for
purposes of the 65% policy.
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, INTERESTS IN CONTRACTS ATTRIBUTABLE TO FIXED ACCOUNTS
HAVEN'T BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), OR THE
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). THUS, NEITHER THESE CONTRACTS NOR
OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE
CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933
ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT. DISCLOSURES
REGARDING THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO
CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING
TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of two, three, five, seven and ten years. We can
change the durations available from time to time. When you put money in a GRO,
that locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select. The duration of your GRO Account is
the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new
GRO Account for the duration you choose at the then current Guaranteed Interest
Rate we declare. We won't declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. All contributions you make to a GRO are placed in a
non-unitized separate account. Values and benefits under your contract
attributable to GROs are guaranteed by the reserves in our GRO separate account
as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be
guaranteed for the Guaranteed Period's first year and declared at the time of
purchase. We can declare and credit additional interest based on Contribution,
Account Value, withdrawal dates, economic conditions or on any other lawful,
nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional
Interest credited to your GRO Account will be separate from the Guaranteed
Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED
RATE OR ADDITIONAL INTEREST MAY NOT BE AVAILABLE IN CERTAIN STATES.
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Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO, even though they may have different
maturity dates.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
The ten-year GRO isn't available in Oregon.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. You will receive the Guaranteed Interest Rate that is in
effect on that date. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10 years
and when it expires, we don't offer a 10-year GRO, but we do offer a seven-year
GRO, your new one will be for seven years. If you want something different, you
can tell us within 30 days before the GRO Account expires. You can't choose, and
we won't renew a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Guarantee Period. In addition, we won't make a Market
Value Adjustment for a death benefit. The market adjusted value may be higher or
lower than the GRO Value, but will never be less than the MINIMUM VALUE. Minimum
Value is an amount equal to your contribution to the GRO Account, less previous
withdrawals from the GRO Account and less any applicable contingent withdrawal
and administrative charges, plus 3% interest compounded annually. Withdrawal
charges and the administrative expense charge can invade the Minimum Value.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA = GRO Value x [(1 + A) /(1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a GRO
Account, the length of which is equal to the number of whole months remaining
in your GRO Account. Subject to certain adjustments, if that remaining period
isn't equal to an exact period for which we have declared a new Guaranteed
Interest Rate, B will be determined by a formula that finds a value between
the Guaranteed Interest Rates for GRO Accounts of the next highest and next
lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account will be zero. If for any reason we are no longer
declaring current Guaranteed Interest Rates, then to determine B we will use the
yield to maturity of United States Treasury Notes with the same remaining term
as your GRO Account, using a formula when necessary, in place of the current
Guaranteed Interest Rate or Rates.
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For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions made to the STO Account during the calendar quarter for which
the rate has been declared. You MUST transfer all STO contributions into other
Investment Options within one year of your most recent STO contribution.
Transfers will be made automatically in approximately equal quarterly or monthly
installments of not less than $1,000 each. You can't transfer from other
Investment Options into the STO. Normal contingent withdrawal charges apply to
withdrawals from the STO. We guarantee that the STO's effective annual yield
will never be less than 3%. See "Systematic Transfer Program" in Part 8 for
details on this program. This option may not be available in some states.
PART 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts a daily expense amount from the Unit Value equal to an
effective annual rate of 1.35% of your Account Value in the Variable Account
Options. We can't increase this daily expense rate without your consent. Of the
1.35% total charge, .15% is used to reimburse us for administrative expenses not
covered by the annual administrative charge described below. We deduct the
remaining 1.20% for assuming the expense risk (.85%) and the mortality risk
(.35%) under the contract. The expense risk is the risk that our actual expenses
of administering the contracts will exceed the annual administrative expense
charge. Mortality risk, as used here, refers to the risk Integrity takes that
annuitants, as a class of persons, will live longer than estimated and we will
be required to pay out more annuity benefits than anticipated. The relative
proportion of the mortality and expense risk charge may be changed, but the
total 1.20% effective annual risk charge can't be increased.
Integrity may realize a gain from these daily charges if they aren't needed to
meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, we charge an annual administrative charge of $30.
This charge is deducted pro-rata from your Account Value in each Investment
Option. The part of the charge deducted from the Variable Account Options
reduces the number of Units we credit to you. The part of the charge deducted
from the Fixed Accounts is withdrawn in dollars. The annual administrative
charge is pro-rated in the event of the Annuitant's retirement, death,
annuitization, or contract termination during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if we anticipate expense savings. We may do
this based on the size and type of the group and the amount of the
contributions.
We won't unlawfully discriminate against any person or group if
we reduce or eliminate these charges.
PORTFOLIO CHARGES
The Separate Account buys shares of the Portfolios at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without the approval of the
shareholders.
STATE PREMIUM TAX DEDUCTION
Integrity won't deduct state premium taxes from your contributions before
investing them in the Investment Options, unless required by your state law. If
the Annuitant elects an annuity benefit, we'll deduct any applicable state
premium taxes from the amount available for an annuity benefit. State premium
taxes currently range up to 4%.
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CONTINGENT WITHDRAWAL CHARGE
We don't deduct sales charges when you make a contribution to the contract.
However, contributions withdrawn may be subject to a withdrawal charge of up to
8%. As shown below, the charge varies, depending upon the "age" of the
contributions included in the withdrawal- that is, the number of years that have
passed since each contribution was made. The maximum of 8% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contribution year. We don't deduct withdrawal charges when you withdraw
contributions made more than seven years prior to your withdrawal. To calculate
the withdrawal charge, (1) the oldest contributions will be treated as the first
withdrawn and more recent contributions next, and (2) partial withdrawals up to
the free withdrawal amount aren't considered in the withdrawal charge
calculation. For partial withdrawals, the total amount deducted from your
Account will include the withdrawal amount requested, any Market Value
Adjustment that applies, and any withdrawal charges that apply, so that the net
amount you receive will be the amount you requested.
You may take up to 10% of your account value each year without any contingent
withdrawal charge or Market Value Adjustment. This is referred to as your "free
withdrawal." If you don't take any free withdrawals in one year, you can't add
it to the next year's free withdrawal. If you aren't 59 1/2 , federal tax
penalties may apply.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current............................. 8%
First Prior......................... 7
Second Prior........................ 6
Third Prior......................... 5
Fourth Prior........................ 4
Fifth Prior......................... 3
Sixth Prior ........................ 2
Seventh Prior and Earlier........... 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from Integrity either an immediate annuity benefit with life contingencies or an
immediate annuity without life contingencies with a restricted prepayment option
that provides for level payments over five or more years. Similarly, we won't
deduct a charge if the Annuitant dies. See "Death Benefits and Similar Benefit
Distributions" in Part 5.
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge for individuals or a
group of individuals if we anticipate expense savings. We may do this based on
the size and type of the group and the amount of the contribution or whether
there is some relationship with Integrity. Examples of these relationships would
include being an employee of Integrity or an affiliate, receiving distributions
or making internal transfers from other contracts issued by Integrity, or making
transfers of amounts held under qualified plans sponsored by Integrity or an
affiliate. We won't unlawfully discriminate against any person or group if we
reduce or eliminate the contingent withdrawal charge.
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Asset Allocation and
Rebalancing, or (iv) systematic transfers from the STO, nor do these transfers
count toward the twelve free transfers you may make in a contract year.
HARDSHIP WAIVER
We can waive withdrawal charges on full or partial withdrawal requests of $1,000
or more under a hardship circumstance. We can also waive the Market Value
Adjustment on any amounts withdrawn from the GRO
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Accounts. Hardship circumstances include the owner's (1) confinement to a
nursing home, hospital or long term care facility, (2) diagnosis of terminal
illness with any medical condition that would result in death or total
disability, and (3) unemployment. We can require reasonable notice and
documentation including, but not limited to, a physician's certification and
Determination Letter from a State Department of Labor. Some of the hardship
circumstances listed above may not apply in some states, and, in other states,
may not be available at all.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment performance of the Variable Account
Options.
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000
($3,000 in Pennsylvania and South Carolina). We'll accept contributions of at
least $50 for salary allotment programs. We have special rules for minimum
contribution amounts for tax-favored retirement programs.
See "Tax-Favored Retirement Programs" in the SAI.
We may limit the total contributions under a contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach nine years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by Integrity for
all Annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have RECEIVED (as defined below) both the contribution and instructions
for allocation among the Investment Options at our Administrative Office,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining the nine Investment Options, each of your GRO Accounts
counts as one Investment Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are deemed received on the next Business Day. Contributions
by check or mail are deemed received when they are delivered in good order to
our Administrative Office.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that accompanies it and for all future contributions. We can also
accept changes by telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. The value
of contributions made to the Variable Account Options isn't guaranteed. The
value of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase Units. On any
given day, the value you have in a Variable Account Option is the Unit Value
multiplied by the number of Units credited to you in that Option. The Units of
each Variable Account Option have different Unit Values.
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The number of Units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
Unit Value, calculated as of the close of business that day. The number of Units
for a Variable Account Option at any time is the number of Units purchased less
the number of Units redeemed. The value of Units fluctuates with the investment
performance of the corresponding Portfolios, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as their expenses. The Unit Values also change because of
deductions and charges we make to our Separate Account. The number of Units
credited to you, however, won't vary because of changes in Unit Values. Units of
a Variable Account Option are purchased when you make new contributions or
transfer contributions you made to a different Option into that Option. Units
are redeemed when you make withdrawals or transfer amounts out of a Variable
Account Option into a different Option. We also redeem Units to pay the death
benefit when the Annuitant dies and to pay the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine Unit Values for each Variable Account Option at 4 p.m. Eastern Time
on each Business Day. The Unit Value of each Variable Account Option for any
Business Day is equal to the Unit Value for the previous Business Day multiplied
by the net investment factor for that Option on the current day. We determine a
NET INVESTMENT FACTOR for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Portfolios.
- Next, we add any dividends or capital gains distributions by the
Portfolio on that day.
- Then we charge or credit for any taxes or amounts set aside as a
reserve for taxes.
- Then we divide this amount by the value of the amounts in the Option at the
close of business on the last day on which a Unit Value was determined
(after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a Unit Value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is equal to an effective annual rate of 1.35%. This charge is for the
mortality risk, administrative expenses and expense risk we assume under
the contract.
Generally, this means that we adjust Unit Values to reflect what happens to the
Portfolios and for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's transfer restrictions. You can't make a transfer
into the STO. Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Transfers you make from a GRO Account, except within
30 days before your GRO Account expires, are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. Transfers from GROs will be
made according to the order in which money was originally allocated to the GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing Program or systematic transfer programs, described in Part 8.
You may request a transfer by writing to our Administrative Office. Each request
for a transfer must specify the contract number, the amounts to be transferred
and the Investment Options to and from which the amounts are to be transferred.
Transfers may also be arranged through our telephone transfer service if you
have established a Personal Identification Number (PIN CODE). We'll honor
telephone transfer instructions from any person who provides correct identifying
information. We aren't responsible for any fraudulent telephone transfers that
we
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believe to be genuine in accordance with these procedures. You bear the risk of
loss if unauthorized persons make transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it. A transfer request doesn't change the allocation of current or
future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' Unit Values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m. Eastern Time (or the close of the New York Stock Exchange, if earlier) will
be processed using Unit Values as of the close of business on the next Business
Day after the day you call. All transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed no later than the next Business Day after
our Administrative Office receives the requests.
EXCESSIVE TRADING
We reserve the right to limit the number of transfers in any contract year or to
refuse any transfer request for an owner or certain owners if we believe in our
sole discretion that (a) excessive trading by the owner or owners or a specific
transfer request or group of transfer requests may have a detrimental effect on
Unit Values or the share prices of the underlying mutual funds; or (b) we are
informed by one or more of the underlying mutual funds that the purchase or
redemption of shares is to be restricted because of excessive trading, or that a
specific transfer or group of transfers is expected to have a detrimental effect
on share prices of affected underlying mutual funds. We also have the right,
which may be exercised in our sole discretion, to prohibit transfers occurring
on consecutive Business Days.
We will notify you or your designated representative if your requested transfer
is not made. Current SEC rules preclude us from processing your request at a
later date if it is not made when initially requested. ACCORDINGLY, YOU WILL
NEED TO SUBMIT A NEW TRANSFER REQUEST IN ORDER TO MAKE A TRANSFER THAT WAS NOT
MADE BECAUSE OF THESE LIMITATIONS.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be for at
least $300. The money will be taken from your Investment Options, pro-rata, in
the same proportion that their value bears to your total Account Value. For
example, if your Account Value is divided in equal 25% shares among four
Investment Options, when you make a withdrawal, 25% of the money withdrawn will
come from each of your Investment Options. You can tell us if you want your
withdrawal handled differently. During the first seven years of your contract,
there is a contingent withdrawal charge for any withdrawals other than your free
withdrawals. The charge starts at 8% and decreases depending on the age of your
account. This charge is in addition to any Market Value Adjustments made to
early withdrawals from GRO Accounts. Under some circumstances, the contingent
withdrawal charge and Market Value Adjustment may be waived.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any contingent
withdrawal charges and any Market Value Adjustments. The total amount that you
receive will be the total that you requested. Most of the withdrawals you make
before you are 59 1/2 years old are subject to a 10% federal tax penalty. If
your contract is part of a tax-favored plan, the plan may limit your
withdrawals. See "Tax Aspects of the Contract" in Part 7. Residents of
Pennsylvania and South Carolina are required to keep at least $3,000 in their
Accounts.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
consequences. See Part 7, "Tax Aspects of the Contract." We won't be bound by an
assignment unless it is in writing and our Administrative Office has received it
in a form acceptable to us.
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DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the Account
Value at the end of the Business Day when we receive proof of death. Similarly,
if the contract was issued on or after the youngest Annuitant's 86th birthday,
the death benefit is the Account Value at the end of the Business Day when we
receive proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the highest of:
(a) your highest Account Value on any contract anniversary before age 81,
plus subsequent contributions and minus subsequent withdrawals (after
being adjusted for associated charges and adjustments);
(b) total contributions, minus subsequent withdrawals (after being adjusted
for associated charges and adjustments); and
(c) your crrent Account Value.
The reductions in the death benefit described in (a) and (b) above for
subsequent withdrawals will be calculated on a pro-rata basis with respect to
Account Value at the time of withdrawal.
Death benefits and benefit distributions required because of a separate owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The owner selects the beneficiary of the death benefit. An owner may change
beneficiaries by sending the appropriate form to the Administrative Office. If
an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit
is generally paid to the Annuitant's estate. A death benefit won't be paid after
the Annuitant's death if there is a contingent Annuitant. In that case, the
contingent Annuitant becomes the new Annuitant under the contract.
The maximum issue age for the Annuitant is 85 years old.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 98th birthday or earlier, if required by law. Contract
terms that apply to the various retirement programs, along with the federal tax
laws, establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time. A lump sum
payment will provide the Annuitant with the Cash Value under the contract
shortly after the Retirement Date. The amount applied toward the purchase of an
annuity benefit will be the Adjusted Account Value, less any pro-rata annual
administrative charge, except that the Cash Value will be the amount applied
instead if the annuity benefit doesn't have a life contingency and either the
term is less than five years or the annuity can be commuted to a lump sum
payment without a withdrawal charge applying.
ANNUITIES
Annuity benefits can provide for fixed payments, which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must be
at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually.
If you haven't already selected a form of annuity, within six months prior to
your Retirement Date we'll send you a notice form. You can tell us on the form
the type of annuity you want or confirm to us that we're to provide the normal
form of annuity, which is the LIFE AND TEN YEARS CERTAIN ANNUITY. However, if we
don't receive a completed form from you on or before your Retirement Date, we'll
extend the Retirement Date until we receive your written
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instructions at our Administrative Office. During this extension, the values
under your contract in the various Investment Options will remain invested in
those options and amounts remaining in Variable Account Options will continue to
be subject to the associated investment risks. However, your Retirement Date
can't be extended beyond your 98th birthday or earlier, if required by law.
You'll receive a lump sum benefit if you don't make an election by then.
We currently offer the following types of annuities:
A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10
years of payments guaranteed, funded through our general account.
A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period you select when you select the type of annuity you want. If the Annuitant
dies before the end of the period selected, the Annuitant's beneficiary can
choose to receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant or the lives of the
Annuitant and another annuitant under a joint and survivor annuity. If the
Annuitant (or the Annuitant and the other annuitant under a joint and survivor
annuity) dies before the period selected ends, the remaining payments will go to
the Annuitant's beneficiary. The Annuitant's beneficiary can redeem the annuity
and receive the present value of future guaranteed payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the Annuitant's age (or
Annuitant and a joint annuitant in the case of a joint and survivor annuity) and
sex (except under most tax-favored retirement programs). If our annuity rates
then in effect would yield a larger payment, those rates will apply instead of
the contract rates.
If the age or sex of an annuitant has been misstated, any benefits will be those
that would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally apply your Adjusted Account Value to the purchase of an annuity
within seven days after we receive the required form at our Administrative
Office. We can defer our action, however, for any period during which:
(1) the New York Stock Exchange has been closed or trading on it is restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account fairly
to determine the value of its net assets; or
(3) the SEC, by order, permits us to defer action in order to protect persons
with interests in the Separate Account. We can defer payment of your Fixed
Accounts for up to six months, and interest will be paid on any such payment
delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the cover page
of this prospectus. We can't honor your requests unless they are in proper and
complete form. Whenever possible, use one of our printed forms, which you can
get from our Administrative Office.
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PART 6 - VOTING RIGHTS
VOTING RIGHTS
Integrity is the legal owner of the shares of the Portfolios held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Portfolios' Boards of Directors, to
ratify the selection of independent auditors for the Portfolios, and on any
other matters described in the Portfolios' current prospectus or requiring a
vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all owners, we'll vote shares in a
Portfolio for which we have not received instructions in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain Qualified Plans, your voting instructions must be
communicated to us indirectly, through your employer, but we aren't responsible
for any failure by your employer to ask for your instructions or to tell us what
your instructions are. We'll vote any Portfolio shares that we're entitled to
vote directly, because of amounts we have accumulated in our Separate Account,
in the same proportion that other owners vote. If the federal securities laws or
regulations or interpretations of them change so that we are permitted to vote
shares of the Portfolios in our own right or to restrict owner voting, we may do
so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
have been invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing the amount of your Account Value
allocated to that Option by the net asset value of one share of the
corresponding Portfolio as of the record date set by the Portfolios' Boards for
the shareholders' meeting. We count fractional shares. The record date for this
purpose can't be more than 60 days before the shareholders' meeting. After
annuity payments have begun, voting rights are calculated in a similar manner
based on the actuarially determined value of your interest in each Variable
Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by those companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by Integrity from its owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require owner approval. In that case,
you'll be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by owners.
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PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It
is based upon our understanding of the present federal income tax laws as
currently interpreted by the Internal Revenue Service (IRS) and various courts.
We cannot guarantee that the IRS or the courts will not change their views on
the treatment of these contracts. Future legislation may affect annuity
contracts adversely. Moreover, we have not attempted to consider any applicable
state or other tax laws. Because of the complexity of the tax laws and the fact
that tax results will vary according to the particular circumstances, any one
considering buying a contract, or selecting annuity payments under the contract,
or receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS,
FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars.
Earnings under the contract will not generally be taxed until you make a
withdrawal. An individual (or employer) may also purchase the annuity to fund a
tax-favored retirement program (contributions are with pre-tax dollars), such as
an IRA or qualified plan. Finally, an individual (or employer) may buy the
Annuity to fund a Roth IRA (contributions are with after-tax dollars and
earnings are excluded from taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules that apply to an annuity purchased to fund a tax-favored retirement
program (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits to qualify for its special treatment under the federal tax law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) will not be taxed when you receive those amounts back in a
distribution. Also, an owner is not generally taxed on the annuity's earnings
until some form of withdrawal or distribution is made under the contract.
However, under certain circumstances, the increase in value may be subject to
current federal income tax. For example, corporations, partnerships, and other
non-natural persons can't defer tax on the annuity's income unless an exception
applies. In addition, if an owner transfers an annuity as a gift to someone
other than a spouse (or former spouse), all increases in its value are taxed at
the time of transfer. The assignment or pledge of any portion of the value of a
contract will be treated as a distribution of that portion of the value of the
contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for each
type of distribution. Section 72 of the Code states that the proceeds of a full
or partial withdrawal from a contract before annuity payments begin are treated
first as taxable income, but only to the extent of the increase of the Account
Value. The rest of the withdrawal, representing your basis in the annuity, isn't
taxable. Generally, the investment or basis in the contract equals the
contributions made by you or on your behalf, minus any amounts previously
withdrawn that weren't treated as taxable income. Special rules may apply if the
contract includes contributions made prior to August 14, 1982 that were rolled
over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is determined using a ratio of the owner's investment to
his or her expected return under the contract (exclusion Ratio). The rest of
each payment will be ordinary income. That means that part of your payment is
tax-free and part of it is taxable. When all of these tax-free portions add up
to your investment in the annuity, future payments are entirely ordinary income.
If the
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Annuitant dies before recovering the total investment, a deduction for the
remaining basis will generally be allowed on the owner's final federal income
tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, you may be subject to a tax penalty
of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59 1/2;
(2) as a result of the owner's death;
(3) part of a series of substantially equal periodic payments (paid at least
annually) for the life (or life expectancy) of the taxpayer or joint lives
(or joint life expectancies) of the taxpayer and beneficiary;
(4) a result of the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the Code);
(7) purchased by an employer on termination of certain types of qualified plans
and held by the employer until the employee separates from service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) for the purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses; or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals" in
Part 5.
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under Section 72(s) of the Code, to be treated as an annuity, a contract must
provide the following distribution rules: (a) if any owner dies on or after the
Retirement Date and before the entire interest in the contract has been
distributed, then the rest of that annuity must be distributed at least as
quickly as the method in effect when the owner died; and (b) if any owner dies
before the Retirement Date, the entire interest in the contract must be
distributed within five years. However, any interest that is payable to a
beneficiary may be annuitized over the life of that beneficiary or over a period
not extending beyond the life expectancy of that beneficiary, so long as
distributions begin within one year after the owner's death. If the beneficiary
is the owner's spouse, the contract (along with the deferred tax status) may be
continued in the spouse's name as the owner.
DIVERSIFICATION STANDARDS
Integrity manages the investments in the annuities under Section 817(h) of the
Code to ensure that they will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An owner can use this annuity with certain types of retirement plans that
receive favorable tax treatment under the Code. Numerous tax rules apply to the
participants in qualified plans and to the contracts used in connection with
those qualified plans. These tax rules vary according to the type of plan and
the terms and conditions of the plan itself. 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,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loans must be repaid. (Owners
should always consult their tax advisors and retirement plan fiduciaries
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before taking any loans from the plan.) Special rules also apply to the time at
which distributions must begin and the form in which the distributions must be
paid. THE SAI CONTAINS GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE
VARIOUS TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON INTEGRITY
The contracts allow Integrity to charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract prior to your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is to be
made. You may specify a dollar amount for each withdrawal or an annual
percentage to be withdrawn. The minimum systematic withdrawal currently is $100.
Residents of Pennsylvania and South Carolina are required to keep a $3,000
minimum account balance. You may also specify an account for direct deposit of
your systematic withdrawals. To enroll in our systematic withdrawal program,
send the appropriate form to our Administrative Office. Withdrawals may begin as
soon as one Business Day after we receive the form. You may terminate your
participation in the program upon one day's prior written notice, and we may
terminate or change the systematic withdrawal program at any time. If on any
withdrawal date you don't have enough money in your Account to make all of the
withdrawals you have specified, no withdrawal will be made and your enrollment
in the program will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't deduct a contingent withdrawal charge
and no Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO
THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWAL AND TO INCOME TAXATION. See
Part 7, "Tax Aspects of the Contract."
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59 1/2. You won't have to pay any tax
penalty for these withdrawals, but they will be subject to ordinary income tax.
See "Taxation of Annuities Generally," in Part 7. Once you begin receiving
distributions, they shouldn't be changed or stopped until the later of:
- - the date you reach age 59 1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions before you reached age 59 1/2 made under the Income Plus
Withdrawal Program plus interest.
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You can choose the Income Plus Withdrawal Program any time before you reach age
59 1/2. You can elect this option by sending the election form to our
Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We'll
calculate the amount of the distribution under a method you select, subject to a
minimum, which is currently $100. You must also specify an account for direct
deposit of your withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Withdrawals may begin as soon as one Business Day
after we receive your form. You may end your participation in the program upon
seven Business Day's prior written notice, and we may terminate or change the
Income Plus Withdrawal Program at any time. If on any withdrawal date you don't
have enough money in your Accounts to make all of the withdrawals you have
specified, no withdrawal will be made and your enrollment in the program will be
ended. This program isn't available in connection with the Systematic Withdrawal
Program, Dollar Cost Averaging, Systematic Transfer Option or Asset Allocation
and Rebalancing Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS
WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE
WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET
VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
that you have made to the VIP Money Market Option on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must tell us how much you want to be transferred into each Variable Account
Option. The current minimum transfer to each Option is $250. We won't charge a
transfer charge under our dollar cost averaging program, and these transfers
won't count towards your twelve free transfers.
To enroll in our dollar cost averaging program, send the appropriate form to our
Administrative Office. You may terminate your participation in the program upon
one day's prior written notice, and we may terminate or change the dollar cost
averaging program at any time. If you don't have enough money in the VIP Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis to one or more
other Investment Options that you select. We'll transfer your STO contributions
in equal installments of not less than $1,000 over a one-year period. If you
don't have enough money in the STO to transfer to each Option specified, a final
transfer will be made on a pro-rata basis and your enrollment in the program
will be ended. Any money remaining in the STO at the end of the year during
which transfers are required to be made will be transferred on a pro-rata basis
at the end of that year to the Options you have chosen for this program. We
won't charge a transfer charge for transfers under our systematic transfer
program, and these transfers won't count towards your twelve free transfers.
To enroll in our systematic transfer program, send the appropriate form to our
Administrative Office. We can terminate the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a Customized Asset Rebalancing program that allows you to determine how
often rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will
automatically be rebalanced by transfers among your Investment Options, and you
will receive a confirmation notice after each rebalancing. Transfers will occur
only to and from those Variable Account Options where you have current
contribution allocations. We won't charge a transfer charge for transfers under
our Customized Asset Rebalancing program, and they won't count towards your
twelve free transfers.
22
<PAGE>
Fixed Accounts aren't eligible for the Customized Asset Rebalancing program.
To enroll in our Customized Asset Rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, as well as transfers and withdrawals
that you make, may not work with the Customized Asset Rebalancing program. You
should, therefore, monitor your use of other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. You may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or change the Customized Asset Rebalancing program at any
time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates. Callan Associates is an independent research and
consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contributions you are making will initially be allocated among
the Options established for each Model. If we change the Model, your account
values will be automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
When you select this program, your account values will be allocated and your
variable portfolios will automatically be rebalanced at least annually. The
program automatically applies to all contributions made to your annuity contract
while you are still participating. You will receive a confirmation notice after
each rebalancing. We won't charge a transfer charge for transfers made under the
Asset Allocation and Rebalancing Program. These transfers won't count toward
your twelve free transfers.
In each Asset Allocation Rebalancing Model, a part of each contribution is
allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to
the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. If you withdraw or transfer your GRO funds, they may be subject to a
Market Value Adjustment that may increase or decrease your account value.
To enroll in the Asset Allocation and Rebalancing Program, complete the
appropriate form and send it to our Administrative Office. You should be aware
that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work with the Customized Asset
Rebalancing program. If, after selecting one of the five models, you request a
transaction that results in a reallocation outside one of the Models, your
participation in the Model program automatically ends. You should, therefore,
monitor your use of other programs, transfers, and withdrawals while the
Customized Asset Rebalancing program is in effect. This program isn't available
with the Customized Asset Rebalancing program. We can terminate or change this
program in whole or in part, or restrict contributions to the program. This
program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account to
make your contributions. To enroll in this program, send the appropriate form to
our Administrative Office. You may terminate your participation in the program
upon 30 days' prior written notice. We may terminate your participation if your
bank declines to make any payment. The minimum amount for systematic
contributions is $100 per month.
23
<PAGE>
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. This performance data is based only the performance of a
hypothetical investment in that Option during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame. It
shouldn't be considered as a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply, including any
contingent withdrawal charge that would apply if an owner surrendered the
contract at the end of the period shown. Total returns also may be shown that
don't take into account the contingent withdrawal charge or the annual
administrative charge that is applied when the Account Value is less than
$50,000 at the end of the contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually several years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would produce the same cumulative total return
if the Investment Option experienced exactly the same return each year for the
entire period shown. Because performance will fluctuate on a year-by-year basis,
the average annual total returns tend to show a smooth result that won't mirror
actual performance, even though the end result will be the same.
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses or the contingent withdrawal charge that
may apply if you withdraw your money at the end of the hypothetical period.
The VIP Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in that Option over
a specified seven-day period. Effective yield is calculated in a similar manner
except that it assumes that the income earned is reinvested, and the income on
the reinvested amount is included. The VIP II Investment Grade Bond and VIP High
Income Option may advertise a 30-day yield which reflects the income generated
by an investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
PART 9 - PRIOR CONTRACTS
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
(IDENTIFIED UNDER GRANDMASTER II MARKETING NAME)
This section shows the Death Benefit information for contracts issued before
January 1, 1997. It may be different from other provisions in this prospectus.
For contracts issued before January 1, 1995, the amount of the death benefit is
the greatest of:
- - your Adjusted Account Value
- - the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
- - your total contributions less the sum of withdrawals.
For contracts issued during 1995, the amount of the death benefit is the
greatest of:
- - your Adjusted Account Value
- - the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- - your total contributions less the sum of withdrawals
24
<PAGE>
For contracts issued during 1996, the amount of the death benefit is the
greatest of:
- - your Account Value
- - the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- - your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments that apply to those withdrawals and reduce the
death benefit on a pro rata basis.
FOR CONTRACTS ISSUED BEFORE FEBRUARY 15, 1997 (IDENTIFIED UNDER GRANDMASTER II
MARKETING NAME) (2/27/97 IN WASHINGTON, 5/30/97 IN PENNSYLVANIA, 7/7/97 IN
MARYLAND, 10/16/97 IN OREGON) THE FOLLOWING RULES APPLY EVEN IF THEY ARE
DIFFERENT FROM OTHER PROVISIONS IN THIS PROSPECTUS:
CONTINGENT WITHDRAWAL CHARGE
There is a withdrawal charge of up to 7% on all contributions withdrawn. As
shown below, this charge varies, depending upon the "age" of the contributions
included in the withdrawal, that is, how long ago you made your contributions.
The maximum of 7% would apply if the entire amount of the withdrawal consisted
of contributions made during your current contract year. No withdrawal charge
applies when you withdraw contributions made earlier than your fifth prior
contribution year. For purposes of calculating the withdrawal charge, (1) the
oldest contributions will be treated as the first withdrawn and more recent
contributions next, and (2) partial withdrawals up to the free withdrawal amount
won't be considered a withdrawal of any contributions. For partial withdrawals,
the total amount deducted from your Account Value will include the withdrawal
amount requested, any applicable Market Value Adjustment and any applicable
withdrawal charge, so that the net amount you receive will be the amount
requested.
No charge will be applied to your partial withdrawals that don't exceed the free
withdrawal amount in any contract year. On any Business Day, the free withdrawal
amount is the greater of (i) 10% of your Account Value and (ii) any investment
gain during the prior contract year, less withdrawals during the current
contract year. Investment gain is calculated as the increase in the Account
Value during the prior contract year, minus contributions during that year, plus
withdrawals made during that year. We'll deduct contingent withdrawal charges
for any partial withdrawal amount that is over the free withdrawal amount. The
contingent withdrawal charge is a sales charge to help pay our costs of selling
and promoting the contracts. We don't expect revenues from contingent withdrawal
charges to cover all of those costs. Any shortfall will be made up from our
General Account assets, which may include profits from other charges under the
contracts.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current............................. 7%
First Prior......................... 6
Second Prior........................ 5
Third Prior......................... 4
Fourth Prior........................ 3
Fifth Prior......................... 2
Sixth Prior and Earlier............. 0
</TABLE>
We won't deduct a contingent withdrawal charge if the Annuitant uses the
withdrawal to buy from us either an immediate annuity benefit with life
contingencies or an immediate annuity without life contingencies with a
restricted prepayment option that provides for level payments over five or
more years. Similarly, we won't deduct a charge if the Annuitant dies and the
withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and
Similar Benefit Distributions" in Part 5.
25
<PAGE>
RETIREMENT DATE
The Retirement Date will be the date you specify, but no later than your 85th
birthday or the 10th Contract Anniversary, whichever is later.
TABLE OF ANNUAL FEES AND EXPENSES FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997.
<TABLE>
<S> <C>
Owner Transaction Expenses
- --------------------------
Sales Load on Purchases............................................ $0
Deferred Sales Load (1).................................... 7% Maximum
Exchange Fee (2)................................................... $0
Annual Administrative Charge
- ----------------------------
Annual Administrative Charge* ................................... $30
* This charge applies only if the Account Value is less
than $50,000 at the end of any contract year prior to your
Retirement Date. See "Annual Administrative Charge" in Part 4.
Separate Account Annual Expenses (as a
percentage of separate account value)(3)
- ----------------------------------------
Mortality and Expense Risk Fees................................. 1.20%
Administrative Expenses......................................... .15%
-----
Total Separate Account Annual Expenses.......................... 1.35%
=====
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Portfolio Annual Expenses After Reimbursement
(As a percentage of average net assets)
- --------------------------------------
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market: Initial Class................. .18% .09% .27%
VIP High Income: Initial Class.................. .58% .11% .69%
VIP Equity-Income: Initial Class................ .48% .08% .56%(4)
VIP Growth: Initial Class....................... .58% .07% .65%(4)
VIP Overseas: Initial Class..................... .73% .14% .87%(4)
VIP II Investment Grade Bond: Initial Class..... .43% .11% .54%
VIP II Asset Manager: Initial Class............. .53% .09% .62%(4)
VIP II Index 500: Initial Class................. .24% .04% .28%(5)
VIP II Contrafund-Registered Trademark-:
Initial Class ................................ .58% .07% .65%(4)
VIP II Asset Manager: Growth: Initial Class..... .58% .12% .70%(4)
VIP III Balanced: Initial Class................. .43% .12% .55%(4)
VIP III Growth Opportunities: Initial Class..... .58% .10% .68%(4)
VIP III Growth & Income: Initial Class.......... .48% .11% .59%(4)
VIP III Mid Cap Portfolio: Service Class........ .57% .50% 1.07%(6)(7)
</TABLE>
- -------------------------
1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
have a free withdrawal of up to 10% of the Account Value in any contract
year.
2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
3) See "Deductions and Charges - Separate Account Charges" in Part 4.
4) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce Portfolio expenses. In addition, through arrangements with certain
Portfolios, or through Fidelity Research & Management (FMR) on behalf of
certain Portfolio's custodians, credits realized as a result of uninvested
cash balances were used to reduce a portion of each applicable Portfolio's
expenses. Without these reductions, the Total Annual Expenses presented
above would have been .57% for VIP Equity-Income Portfolio, .66% for VIP
Growth Portfolio, .91% for VIP Overseas Portfolio, .63% for VIP II Asset
Manager Portfolio, .67% for VIP II Contrafund-Registered Trademark-
Portfolio, .71% for VIP II Asset Manager: Growth Portfolio, .57% for VIP III
Balanced Portfolio, .69% for VIP III Growth Opportunities Portfolio, .60%
for VIP III Growth & Income Portfolio.
5) FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been .10% and the Total Annual Expenses would have been
.34%.
6) The Other Expenses for the VIP III Mid Cap Portfolio reflect the payment of
.10% pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual Fund.
7) FMR agreed to reimburse a portion of VIP III Mid Cap Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been 2.84% (including the payment of .10% pursuant to
the Rule 12b-1 Plan), and the Total Annual Expenses would have been 3.41%.
27
<PAGE>
EXAMPLES
The examples below show the expenses on a $1,000 investment, assuming a $40,000
average contract value and a 5% annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $ 87.35 $103.67 $122.28 $199.81
VIP High Income: Initial Class.................. $ 91.65 $116.72 $144.25 $244.80
VIP Equity-Income: Initial Class................ $ 90.32 $112.70 $137.49 $231.08
VIP Growth: Initial Class....................... $ 91.24 $115.48 $142.18 $240.59
VIP Overseas: Initial Class..................... $ 93.50 $122.28 $153.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $ 90.12 $112.07 $136.45 $228.95
VIP II Asset Manager: Initial Class............. $ 90.94 $114.56 $140.62 $237.43
VIP II Index 500: Initial Class................. $ 87.45 $103.98 $122.81 $200.91
VIP II Contrafund-Registered Trademark-:
Initial Class ............................... $ 91.24 $115.48 $142.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $ 91.76 $117.03 $144.77 $245.84
VIP III Balanced: Initial Class................. $ 90.22 $112.39 $136.97 $230.01
VIP III Growth Opportunities: Initial Class..... $ 91.55 $116.41 $143.73 $243.75
VIP III Growth & Income: Initial Class.......... $ 90.63 $113.63 $139.06 $234.26
VIP III Mid Cap: Service Class.................. $ 95.55 $128.43 $163.79 $283.88
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT TO ANNUITIZE OR DON'T SURRENDER YOUR
CONTRACT AT THE END OF THE PERIOD SHOWN:
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $17.35 $53.67 $ 92.28 $199.81
VIP High Income: Initial Class.................. $21.65 $66.72 $114.25 $244.80
VIP Equity-Income: Initial Class................ $20.32 $62.70 $107.49 $231.08
VIP Growth: Initial Class....................... $21.24 $65.48 $112.18 $240.59
VIP Overseas: Initial Class..................... $23.50 $72.28 $123.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $20.12 $62.07 $106.45 $228.95
VIP II Asset Manager: Initial Class............. $20.94 $64.56 $110.62 $237.43
VIP II Index 500: Initial Class................. $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund-Registered Trademark-:
Initial Class ............................... $21.24 $65.48 $112.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $21.76 $67.03 $114.77 $245.84
VIP III Balanced: Initial Class................. $20.22 $62.39 $106.97 $230.01
VIP III Growth Opportunities: Initial Class..... $21.55 $66.41 $113.73 $243.75
VIP III Growth & Income: Initial Class.......... $20.63 $63.63 $109.06 $234.26
VIP III Mid Cap: Service Class.................. $25.55 $78.43 $133.79 $283.88
</TABLE>
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment advisory fees and other expenses of the
Funds as they were for the year ended December 31, 1996, except for VIP III
Growth & Income Portfolio, which were based on estimated current expenses.
ACTUAL FUND EXPENSES MAY BE GREATER OR LESS THAN THOSE ON WHICH THESE EXAMPLES
WERE BASED. The annual rate of return assumed in the examples is not an estimate
or guarantee of future investment performance. The table also assumes an
estimated $40,000 average contract value, so that the administrative charge per
$1,000 of net asset value in the Separate Account is $0.75. Such per $1,000
charge would be higher for smaller Account Values and lower for higher values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
28
<PAGE>
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
The Callan Asset Allocation and Rebalancing Program uses the 4-year
Guaranteed Rate Option for the Fixed Income Investment Sector of the
Model.
HARDSHIP WAIVERS
Hardship Waivers aren't available.
CONTRACTS ISSUED TO OREGON RESIDENTS
If you are a resident of Oregon and your Contract was issued before 10/16/97
(Contract Form No. 11960CNQ-I-OR), additional contributions into Investment
Options are accepted, including the 10-Year GRO Account, and the prospectus
provisions relating to these items apply.
FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
ANNUITY PAYMENTS
For contracts issued before May 1, 1999, additional annuitization options may
have been available.
29
<PAGE>
APPENDIX A
FINANCIAL INFORMATION
The table below shows the Unit Value for each Variable Account Option at
inception, the number of Units outstanding at December 31 of each year since
inception, and the Unit Value at the end of each period. The Unit Value at the
beginning of each period is the Unit Value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
MONEY HIGH EQUITY- INVESTMENT MID
MARKET INCOME INCOME GROWTH OVERSEAS GRADE BOND CAP
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $10.18 - $7.74 $7.51 $8.13 $10.21 -
Number of Units 1,952 - 25,560 50 7,250 26,988 -
December 31, 1988 $10.75 - $8.49 $7.48 $8.93 $10.69 -
Number of Units 2,062 - 8,962 2,043 2,019 45,789 -
December 31, 1989 $11.57 - $10.41 $10.45 $11.02 $12.20 -
Number of Units 43,299 - 8,517 2,284 1,937 4,372 -
December 31, 1990 $12.34 - $9.04 $11.04 $10.16 $12.82 -
Number of Units 2,427 - 29,446 2,060 1,779 3,350 -
December 31, 1991 $12.90 - $12.92 $17.96 $12.44 $14.38 -
Number of Units 1,422 - 7,198 1,777 945 1,160 -
December 31, 1992 $13.22 - $14.90 $19.36 $10.95 $15.13 -
Number of Units 68,139 - 124,911 129,511 35,346 80,734 -
December 31, 1993 $13.46 $11.45 $17.38 $22.80 $14.83 $16.57 -
Number of Units 346,644 615,289 748,436 444,077 480,406 330,360 -
December 31, 1994 $13.84 $11.12 $18.35 $22.49 $14.88 $15.73 -
Number of Units 1,363,372 989,407 1,206,683 988,674 1,272,218 454,358 -
December 31, 1995 $14.46 $13.23 $24.46 $30.03 $16.10 $18.20 -
Number of Units 1,823,146 2,238,450 2,264,897 1,665,857 1,308,440 627,020 -
December 31, 1996 $15.03 $14.88 $27.57 $33.98 $17.98 $18.53 -
Number of Units 1,839,938 2,871,483 2,977,144 2,311,771 1,792,964 807,207 -
December 31, 1997 $15.64 $17.27 $34.85 $41.39 $19.79 $19.93 -
Number of Units 2,298,303 3,057,834 3,512,365 2,026,809 2,066,717 834,294 -
December 31, 1998 $16.28 $16.30 $38.37 $56.96 $22.01 $21.40 -
Number of Units 3,190,762 3,293,280 3,398,759 1,942,238 1,813,403 1,235,812 -
December 31, 1999 $16.89 $17.40 $40.25 $77.23 $30.97 $20.89 $13.11
Number of Units 3.247,590 2,520,734 2,434,119 1,747,063 1,327,100 1,010,650 10,125
</TABLE>
*The Inception date for each Option is shown below:
February 19, 1993 for the VIP High Income Option; March 4, 1993 for the VIP II
Index 500 Option; February 6, 1995 for the VIP II Contrafund-Registered
Trademark- Option and the VIP II Asset Manager: Growth Option; December 31, 1996
for the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP
III Growth & Income Option; September 24, 1999 for the VIP III Mid Cap Option.
Inception dates for the remaining Options all were in the third quarter of 1987.
Prior to September 3, 1991, the Variable Account Options invested in shares of
corresponding portfolios of Prism Investment Trust, and the VIP Money Market,
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and
VIP II Asset Manager Options were known as the Money Market, Common Stock,
Aggressive Stock, Global, Bond, and Balanced Options, respectively.
30
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
ASSET
ASSET INDEX CONTRA- MANAGER GROWTH GROWTH
MANAGER 500 FUND GROWTH BALANCED INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $8.00 - - - - - -
Number of Units 29,166 - - - - - -
December 31, 1988 $8.98 - - - - - -
Number of Units 11,300 - - - - - -
December 31, 1989 $11.16 - - - - - -
Number of Units 10,635 - - - - - -
December 31, 1990 $11.02 - - - - - -
Number of Units 12,194 - - - - - -
December 31, 1991 $13.60 - - - - - -
Number of Units 5,272 - - - - - -
December 31, 1992 $15.01 - - - - - -
Number of Units 309,292 - - - - - -
December 31, 1993 $17.92 $10.52 - - - - -
Number of Units 1,748,246 98,288 - - - - -
December 31, 1994 $16.60 $10.49 - - - - -
Number of Units 3,509,145 218,119 - - - - -
December 31, 1995 $19.15 $14.20 $13.50 $12.03 - - -
Number of Units 2,973,440 474,834 1,068,907 175,138 - - -
December 31, 1996 $21.65 $17.20 $16.15 $14.23 - - -
Number of Units 2,708,795 1,207,882 2,382,588 479,960 - - -
December 31, 1997 $25.77 $22.51 $19.78 $17.56 $11.33 $12.11 $11.90
Number of Units 2,687,060 2,028,663 2,782,642 695,464 124,495 412,889 458,320
December 31, 1998 $29.25 $28.50 $25.36 $20.37 $13.15 $15.48 $14.62
Number of Units 2,454,761 2,724,340 3,185,222 745,989 300,468 1,438,416 1,094,151
December 31, 1999 $32.05 $33.89 $31.09 $23.16 $13.56 $16.67 $15.04
Number of Units 1,723,306 2,467,236 2,827,810 642,566 366,568 1,477,124 1,043,627
</TABLE>
*The Inception date for each Option is shown below:
February 19, 1993 for the VIP High Income Option; March 4, 1993 for the VIP II
Index 500 Option; February 6, 1995 for the VIP II Contrafund-Registered
Trademark- Option and the VIP II Asset Manager: Growth Option; December 31, 1996
for the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP
III Growth & Income Option; September 24, 1999 for the VIP III Mid Cap Option.
Inception dates for the remaining Options all were in the third quarter of 1987.
Prior to September 3, 1991, the Variable Account Options invested in shares of
corresponding portfolios of Prism Investment Trust, and the VIP Money Market,
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and
VIP II Asset Manager Options were known as the Money Market, Common Stock,
Aggressive Stock, Global, Bond, and Balanced Options, respectively.
31
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs at the end of the three year period after the
initial contribution. The Market Value Adjustment operates in a similar manner
for transfers. No contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed for the purposes of these examples that no prior partial withdrawals or
transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next lower
number of complete months. If we don't declare a rate for the exact time
remaining, we will use a formula to find a rate using GRO Accounts of durations
closest to (next higher and next lower) the remaining period described above.
Three years after the initial contribution, there would have been four years
remaining in your GRO Account. These examples also show the withdrawal charge
which would be calculated separately.
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 three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 6% would be assessed against the $50,000 original
contribution:
$3,000.00 = $50,000.00 X .06
Thus, the amount payable on a full withdrawal would be:
$51,688.58 = $57,881.25 - $3,192.67 - $3,000.00
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
The non-free amount would be:
32
<PAGE>
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free
amount, would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$957.18 = [($14,211.87+ $783.91)/(1 - .06)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,741.09 = $20,000.00 + $783.91 + $957.18
The ending Account Value would be:
$36,140.16 = $57,881.25 - $21,741.09
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 6% would be assessed against the $50,000 original
contribution:
$3,000.00 = $50,000.00 X .06
Thus, the amount payable on a full withdrawal would be:
$56,564.96 = $57,881.25 + $1,683.71 - $3,000.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$880.75 = [($14,211.87 - $413.41)/(1 - .06)] - ($14,211.87 - $413.41)
33
<PAGE>
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,467.34 = $20,000.00 - $413.41 + $880.75
The ending Account Value would be:
$37,413.91 = $57,881.25 - $20,467.34
Actual Market Value Adjustments may have more or less impact than shown in the
examples, depending on the actual change in interest crediting rate and the
timing of the withdrawal or transfer in relation to the time remaining in the
GRO Account. Also, the Market Value Adjustment can never decrease the Account
Value below premium plus 3% interest, before any applicable charges. Account
values less than $50,000 will be subject to a $30 annual charge.
34
<PAGE>
APPENDIX C
<TABLE>
<CAPTION>
SAI TABLE OF CONTENTS
<S> <C>
Part 1 - Integrity and Custodian.................................1
Part 2 - Distribution of the Contracts...........................1
Part 3 - Performance Information.................................2
Part 4 - Determination of Accumulation Values....................8
Part 5 - Tax-Favored Retirement Programs.........................8
Traditional Individual Retirement Annuities..................8
Roth Individual Retirement Annuities.........................8
SIMPLE Individual Retirement Annuities.......................8
Tax Sheltered Annuities......................................8
Simplified Employee Pensions.................................9
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans...................................9
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations..............................9
Distributions Under Tax-Favored Retirement Programs.........9
Part 6 - Financial Statements...................................10
</TABLE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account I (GrandMaster III)
Name:
------------------------------------------------------------
Address:
--------------------------------------------------------
City: State: Zip:
-------------------------------- --------- -------
35
<PAGE>
Prospectus
- -----------
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract
offered by Integrity Life Insurance Company, a subsidiary of The Western and
Southern Life Insurance Company (W&S). The contract provides several types of
benefits, some of which have tax-favored status under the Internal Revenue
Code of 1986, as amended (THE CODE). You may allocate contributions to
different investment divisions of our Separate Account I, referred to as
Variable Account Options and Fixed Accounts. Together, the Variable Account
Options and Fixed Account Options are referred to as INVESTMENT OPTIONS.
There is no sales load on the contracts.
Contributions you make to the Variable Account Options are invested in shares
of corresponding Portfolios of the following mutual funds: Fidelity's
Variable Insurance Products Fund (VIP), Fidelity's Variable Insurance
Products Fund II (VIP II), Fidelity's Variable Insurance Products Fund III
(VIP III), MFS Variable Insurance Trust Funds (MFS FUNDS), and Janus Aspen
Series (the PORTFOLIOS or PORTFOLIO). The Fidelity Portfolios are managed by
Fidelity Management & Research Company. The MFS Funds are managed by
Massachusetts Financial Services Company (MFS). The Janus Aspen Series are
managed by Janus Capital. The values allocated to the Options reflect the
investment performance of the Portfolios. The prospectus for the Portfolios
describes each one's investment objectives, policies and risks. There are
fourteen Variable Account Options, which invest in the following Portfolios:
<TABLE>
<CAPTION>
FIDELITY'S VIP FUNDS MFS FUNDS
-------------------- ---------
<S> <C>
- VIP Money Market Portfolio: Initial Class - MFS Capital Opportunities Portfolio: Service Class
- VIP High Income Portfolio: Service Class - MFS Emerging Growth Portfolio: Service Class
- VIP Equity-Income Portfolio: Service Class - MFS Growth With Income Portfolio: Service Class
- VIP Growth Portfolio: Service Class - MFS Mid Cap Growth Portfolio: Service Class
- VIP Overseas Portfolio: Service Class - MFS New Discovery Portfolio: Service Class
- VIP II Asset Manager Portfolio: Service Class - MFS Growth Portfolio: Service Class
- VIP II Investment Grade Bond Portfolio: Initial - MFS Total Return: Service Class
Class
- VIP II Index 500 Portfolio: Initial Class JANUS ASPEN SERIES
- VIP II Contrafund Portfolio: Service Class ------------------
- VIP II Asset Manager: Growth Portfolio: Service - Janus Aspen Growth Portfolio: Service Shares
Class
- VIP III Balanced Portfolio: Service Class - Janus Aspen Aggressive Growth Portfolio: Service
Shares
- VIP III Growth & Income Portfolio: Service Class - Janus Aspen Equity Income: Service Shares
- VIP III Growth Opportunities Portfolio: Service - Janus Aspen International Growth: Service Shares
Class
- VIP III Mid Cap Portfolio: Service Class - Janus Aspen Capital Appreciation Portfolio: Service
Shares
</TABLE>
We also offer Guaranteed Rate Options (GROS) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you contribute to a
GRO grows at a fixed interest rate that we declare at the beginning of the
duration you select. A Market Value Adjustment will be made for withdrawals,
surrenders, transfers and certain other transactions made before your GRO
Account expires. However, your value under a GRO Account can't be decreased
below an amount equal to your contribution less prior withdrawals, plus
interest compounded at an annual effective rate of 3% (MINIMUM VALUE). An
annual administration charge may apply, which may invade principal. The money
you contribute to the STO grows at a fixed interest rate that we declare each
calendar quarter, guaranteed never to be less than an effective annual yield
of 3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER
INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY
BASIS.
<PAGE>
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them
for future reference. This prospectus isn't valid unless provided with the
current prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
Integrity Life Insurance Company, P.O. Box 740074, Louisville, Kentucky
40201-0074. The express mail address is Integrity Life Insurance Company, 515
West Market Street, Louisville, Kentucky 40202. You may also call us at
1-800-325-8583.
A registration statement relating to the contract, which includes a Statement
of Additional Information (SAI) dated May 1, 2000, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A free copy of the SAI is available by writing to or calling
our Administrative Office. The table of contents for the SAI is found in
Appendix C.
THESE SECURITIES HAVEN'T BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
You can review and copy information about IQ the SMARTAnnuity at the SEC's
Public Reference Room in Washington, D.C. For hours of operation of the
Public Reference Room, please call 1-800-SEC-0330. You may also obtain
information about IQ the SMARTAnnuity on the SEC's Internet site at
http://www.sec.gov. Copies of that information are also available, after
paying a duplicating fee, by electronic request to [email protected], or by
writing the SEC's Public Reference Section, Washington, D.C. 20459-0102.
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY, ANY BANK,
NOR IS IT INSURED BY THE FDIC. IT IS SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
* NOTE: A CONTRACT ISSUED IN OREGON WILL BE A SINGLE PREMIUM VARIABLE ANNUITY
RATHER THAN A FLEXIBLE PREMIUM VARIABLE ANNUITY. ALL REFERENCES TO FLEXIBLE
CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR ANY CONTRACT ISSUED IN OREGON.
The date of this Prospectus is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GLOSSARY
PART 1 - SUMMARY
Your Variable Annuity Contract.................................................1
Your Benefits..................................................................1
How Your Contract is Taxed.....................................................1
Your Contributions.............................................................1
Your Investment Options........................................................1
Account Value, Adjusted Account Value and Cash Value ..........................2
Transfers......................................................................2
Charges and Fees...............................................................2
Withdrawals....................................................................2
Your Initial Right to Revoke...................................................2
Risk/Return Summary, Investments and Risks.....................................2
Table of Annual Fees and Expenses..............................................3
Examples.......................................................................6
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company...............................................7
The Separate Account and the Variable Account Options..........................7
Assets of Our Separate Account.................................................7
Changes In How We Operate......................................................7
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios.................................................................8
The Portfolios' Investment Adviser........................................8
Investment Objectives of the Portfolios...................................8
Fixed Accounts ...............................................................11
Guaranteed Rate Options..................................................11
Renewals of GRO Accounts..............................................12
Market Value Adjustments..............................................12
Systematic Transfer Option...............................................13
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges......................................................13
Annual Administrative Charge..................................................13
Reduction or Elimination of Separate Account or Administrative Charges........14
Portfolio Charges.............................................................14
State Premium Tax Deduction...................................................14
Transfer Charge...............................................................14
Tax Reserve...................................................................14
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract.............................................14
Your Account Value............................................................15
Units in Our Separate Account.................................................15
How We Determine Unit Value...................................................15
Transfers.....................................................................16
<PAGE>
Excessive Trading.............................................................16
Withdrawals...................................................................17
Assignments...................................................................17
Death Benefits and Similar Benefit Distributions..............................17
Annuity Benefits..............................................................18
Annuities.....................................................................18
Annuity Payments..............................................................19
Timing of Payment.............................................................19
How You Make Requests and Give Instructions...................................19
PART 6 - VOTING RIGHTS
Voting Rights.................................................................19
How We Determine Your Voting Shares...........................................20
How Portfolio Shares Are Voted................................................20
Separate Account Voting Rights................................................20
PART 7 - TAX ASPECTS OF THE CONTRACT
Introduction..................................................................20
Your Contract is an Annuity...................................................20
Taxation of Annuities Generally...............................................21
Distribution-at-Death Rules...................................................22
Diversification Standards.....................................................22
Tax-Favored Retirement Programs...............................................22
Federal and State Income Tax Withholding......................................22
Impact of Taxes to Integrity..................................................22
Transfers Among Investment Options............................................22
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals........................................................23
Income Plus Withdrawal Program................................................23
Dollar Cost Averaging.........................................................24
Systematic Transfer Program...................................................24
Customized Asset Rebalancing..................................................24
Callan Asset Allocation and Rebalancing Program...............................24
Performance Information.......................................................25
PART 9 - PRIOR CONTRACTS
Prior Contracts...............................................................26
Appendix A - Financial Information..........................................29
Appendix B - Illustration of a Market Value Adjustment......................32
Appendix C - SAI Table of Contents..........................................34
</TABLE>
<PAGE>
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Investment Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT - the person upon whose life an annuity benefit and death benefit are
based.
BUSINESS DAY - any day that the New York Stock Exchange is open.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro-rata annual administrative charges that may apply.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Options, which offer durations of two, three, five, seven
and ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO
Account, assuming you haven't withdrawn or transferred any amounts, will be the
amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges), accumulated at 3% interest annually,
less any administrative charges.
PORTFOLIO - an investment portfolio of a mutual fund in which the Separate
Account invests its assets.
RETIREMENT DATE - All annuity benefits under your contract are calculated as of
your Retirement Date. The Retirement Date can't be later than your 98th
birthday, or earlier if required by law.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in a variable account option.
UNIT VALUE - the value of each Unit calculated on any Business Day.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, other than the GROs and STO. The value of your contract will
reflect the investment performance of the Variable Account Options you choose.
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "we," "our" and "us" mean Integrity Life Insurance
Company (INTEGRITY). The terms "you" and "your" mean the Annuitant, the
person upon whose life the Annuity Benefit and the Death Benefit are based,
usually the owner of the contract. If the Annuitant doesn't own the contract,
the owner has all of the rights under the contract until annuity payments
begin. If there are joint owners, they share contract rights and they must
both sign for any changes or transactions. The death of the first joint owner
will determine the timing of distributions.
You can invest for retirement by buying an IQ Smart Annuity if you properly
complete a Customer Profile form (an application or enrollment form may be
required in some states) and make a minimum initial contribution. Because the
premium is flexible, additional contributions can be any amount you choose,
as long as they are above the minimum required contribution discussed below.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit, and a death benefit.
These benefits are described in more detail below.
Your benefits under the contract may be controlled by the usual rules for
taxation of annuities, including the deferral of taxes on your investment
growth until you actually make a withdrawal. You should read Part 7, "Tax
Aspects of the Contract" for more information, and possibly consult a tax
adviser. The contract can also provide your benefits under certain
tax-favored retirement programs, which may be subject to special eligibility
and contribution rules.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
However, most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The minimum initial contribution is $1,000 ($3,000 in Pennsylvania and South
Carolina). Additional contributions can be as little as $100. Some
tax-favored retirement plans allow smaller contributions. See "Contributions
Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and the Fixed Accounts are together referred to as
the INVESTMENT OPTIONS. You may have money in as many as nine different
Investment Options at any one time. See "Contributions Under Your Contract"
in Part 5. To select Investment Options most suitable for you, see Part 3,
"Your Investment Options."
The Variable Account Options invest in shares of investment portfolios of
mutual funds. Each investment portfolio is referred to as a PORTFOLIO. The
investment goal of each Variable Account Option and its corresponding
Portfolio is the same. For example, if your investment goal is to save money
for retirement, you might choose a GROWTH oriented Variable Account Option,
which invests in a GROWTH Portfolio. Your value in a Variable Account Option
will vary with the performance of the corresponding Portfolio. For a full
description of each Portfolio, see that Portfolio's prospectus and Statement
of Additional Information.
1
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Accounts added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased by any Market Value Adjustments.
Your Account Value in the GROs can never be decreased below the Minimum
Value. Your CASH VALUE is equal to your Adjusted Account Value, minus the
pro-rata portion of the annual administrative charge, if it applies. See
"Charges and Fees" below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these
in Part 5, "Transfers." Any transfer must be at least $250 and may be
arranged through our telephone transfer service. Transfers may also be made
among certain Investment Options under the following special programs: (i)
Dollar Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset
Allocation and Rebalancing Program, or (iv) to transfer your STO
contributions. All of these programs are discussed in Part 8. If you make
more than twelve transfers between your Investment Options in one contract
year, your account can be charged up to $20 for each transfer after the first
twelve.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of
$30 is deducted from your Account.
A daily charge at an effective annual rate of 1.45% is deducted from the
Account Value of each of your Variable Account Options to cover mortality and
expense risks (1.30%) and certain administrative expenses (.15%). The charge
will never be greater than this. For more information, see Part 4,
"Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company receives investment management fees from the Portfolios based on the
average net assets of each Portfolio. Advisory fees can't be increased
without the consent of shareholders. See "Table of Annual Fees and Expenses"
below and "The Portfolios' Investment Adviser" in Part 3.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be at
least $300.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by
returning it to our Administrative Office. We will extend the ten-day period
as required by law in certain states. If you cancel your contract, we'll
return your Account Value, which may be more or less than your initial
contribution. If your state requires, we'll return all of your contributions
without any adjustment. We'll return the amount of any contribution to the
Guaranteed Rate Option upon cancellation.
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the IQ SMARTAnnuity are protecting your investment,
building for retirement and providing future income. We strive to achieve
these goals through extensive portfolio diversification and superior
portfolio management.
2
<PAGE>
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and
you could lose money. This could happen if one of the issuers of the stocks
becomes financially impaired or if the stock market as a whole declines.
Because most of the Variable Account Options are in common stocks, there's
also the inherent risk that holders of common stock generally are behind
creditors and holders of preferred stock for payments in the event of the
bankruptcy of a stock issuer.
For a complete discussion of the risks associated with an investment in any
particular Variable Account Option, see the prospectus of the corresponding
Portfolio.
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<CAPTION>
OWNER TRANSACTION EXPENSES
- --------------------------
<S> <C>
Sales Load on Purchases....................................... $0
Exchange Fee (1).............................................. $0
</TABLE>
<TABLE>
<CAPTION>
ANNUAL ADMINISTRATIVE CHARGE
- ----------------------------
<S> <C>
Annual Administrative Charge* ................................. $30
* This charge applies only if the Account Value is less than
$50,000 at the end of any contract year prior to your
Retirement Date. See "Annual Administrative Charge" in
Part 4.
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF SEPARATE ACCOUNT VALUE) (2)
- -----------------------------------------------
<S> <C>
Mortality and Expense Risk Fees.............................. 1.30%
Administrative Expenses...................................... .15%
-----
Total Separate Account Annual Expenses....................... 1.45%
=====
</TABLE>
3
<PAGE>
PORTFOLIO ANNUAL EXPENSES AFTER REIMBURSEMENT
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ---------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO MANAGEMENT OTHER TOTAL ANNUAL
- --------- FEES EXPENSES EXPENSES
---- -------- --------
<S> <C> <C> <C>
VIP Money Market: Initial Class................... .18% .09% .27%
VIP High Income: Service Class.................... .58% .21%(3) .79%
VIP Equity-Income: Service Class.................. .48% .18%(3) .66%(4)
VIP Growth: Service Class......................... .58% .17%(3) .75%(4)
VIP Overseas: Service Class....................... .73% .25%(3) .98%(4)
VIP II Investment Grade Bond: Initial Class....... .43% .11% .54%
VIP II Asset Manager: Service Class............... .53% .20%(3) .73%(4)
VIP II Index 500: Initial Class................... .24% .04% .28%(5)
VIP II Contrafund: Service Class.................. .58% .17%(3) .75%(4)
VIP II Asset Manager: Growth: Service Class....... .58% .23%(3) .81%(4)
VIP III Balanced: Service Class................... .43% .23%(3) .66%(4)
VIP III Growth Opportunities: Service Class....... .58% .20%(3) .78%(4)
VIP III Growth & Income: Service Class............ .48% .21%(3) .69%(4)
VIP III Mid Cap: Service Class.................... .57% .50%(3) 1.07%(6)
MFS Capital Opportunities: Service Class.......... .75% .36% 1.11%(8)
MFS Emerging Growth: Service Class................ .75% .29%(7) 1.04%(8)
MFS Growth With Income: Service Class............. .75% .33%(7) 1.08%(8)
MFS Mid Cap Growth: Service Class................. .75% .35%(7) 1.10%(8)
MFS New Discovery: Service Class.................. .90% .37%(7) 1.27%(8)
MFS Growth: Service Class......................... .75% .36%(7) 1.11%(8)
MFS Total Return: Service Class................... .75% .35%(7) 1.10%(8)
Janus Aspen Growth: Service Shares................ .65% .27%(9) .92%(10)
Janus Aspen Aggressive Growth: Service Shares..... .65% .27%(9) .92%(10)
Janus Aspen Equity Income: Service Shares......... .62%(11) .88%(9) 1.50%(10)
Janus Aspen International Growth: Service Shares.. .65% .36%(9) 1.01%(10)
Janus Aspen Capital Appreciation: Service Shares.. .65% .29%(9) .94%(10)
</TABLE>
- -------------------------
1) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers.
2) See "Deductions and Charges - Transfer Charge" in Part 4.
3) The Other Expenses reflect the payment of 0.10% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
4) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce Portfolio expenses. In addition, through arrangement with certain
Portfolio's custodians, credits realized as a result of uninvested cash
balances were used to reduce a portion of each applicable Portfolio's
expenses. Without these reductions, the Total Annual Expenses presented
above would have been .67% for VIP Equity-Income Portfolio, .77% for VIP
Growth Portfolio, 1.01% for VIP Overseas Portfolio, .74% for VIP II Asset
Manager Portfolio, .78% for VIP II Contrafund Portfolio, .82% for VIP II
Asset Manager: Growth Portfolio, .67% for VIP III Balanced Portfolio, .79%
for VIP III Growth Opportunities Portfolio, and .70% for VIP III Growth &
Income Portfolio.
5) Fidelity Research and Management Company (FMR) agreed to reimburse a
portion of VIP II Index 500 Portfolio's expenses during the period. Without
this reimbursement, the Other Expenses for the Portfolio would have been
.10% and the Total Annual Expenses would have been .34%.
4
<PAGE>
6) The Other Expenses for the VIP III Mid Cap Portfolio reflect the payment
of .10% pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual
Fund.
7) The Other Expenses reflect the payment of 0.20% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
8) MFS has contractually agreed, subject to reimbursement, to bear the
Portfolios' expenses so that the Other Expenses presented in the table do
not exceed 0.15% annually (this reimbursement does not include the 0.20%
Rule 12b-1 fee described above or the expense offset arrangement described
below). These contractual fee arrangements will continue until at least
May 1, 2001, unless changed with the consent of the board of trustees that
oversees the Portfolios. In addition, each Portfolio has an expense offset
arrangement that reduces its custodian fee based upon the amount of cash it
maintains with its custodian and dividend disbursing agent. The Portfolios
may enter into other similar arrangements and directed brokerage
arrangements, which would also have the effect of reducing their expenses.
The Other Expenses do not take into account these expense offset
reductions, and are therefore higher than the actual expenses of the
Portfolios. Without these contractual fee arrangements and expense offset
arrangements, the Total Annual Expenses presented in the table are
estimated to be 1.22% for the Capital Opportunities Portfolio, 1.41% for
the Mid Cap Growth Portfolio, 2.69% for the New Discovery Portfolio, and
1.66% for the Growth Portfolio.
9) The Other Expenses reflect the payment of 0.25% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
10) Expenses are based on the estimated expenses that the new Service Shares
Class of each Portfolio expects to incur in its initial fiscal year. All
expenses are shown without the effect of expense offset arrangements.
11) There is a contractual waiver of expenses between the Portfolio and Janus
Capital. The waiver is first applied to the Management Fee and then against
Other Expenses, and will continue until at least the next annual renewal of
the management agreement. Without such waiver, the Management Fee and the
Total Annual Expenses for the Janus Aspen Equity Income Portfolio would
have been 0.65% and 1.52%, respectively.
5
<PAGE>
EXAMPLE
The example below shows the expenses on a $1,000 investment, assuming a
$40,000 average contract value and a 5% annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT WHETHER YOU ELECT TO ANNUITIZE, SURRENDER OR
CONTINUE YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $18.37 $56.79 $ 97.55 $210.70
VIP High Income: Service Class.................. $23.70 $72.90 $124.58 $265.55
VIP Equity-Income: Service Class................ $22.37 $68.89 $117.87 $252.11
VIP Growth: Service Class....................... $23.29 $71.66 $122.52 $261.44
VIP Overseas: Service Class..................... $25.65 $78.74 $134.30 $284.89
VIP II Investment Grade Bond: Initial Class..... $21.14 $65.17 $111.66 $239.54
VIP II Asset Manager: Service Class............. $23.09 $71.05 $121.49 $259.37
VIP II Index 500: Initial Class................. $18.48 $57.10 $ 98.07 $211.78
VIP II Contrafund: Service Class................ $23.29 $71.66 $122.52 $261.44
VIP II Asset Manager: Growth: Service Class..... $23.91 $73.51 $125.60 $267.61
VIP III Balanced: Service Class................. $22.37 $68.89 $117.87 $252.11
VIP III Growth Opportunities: Service Class..... $23.60 $72.59 $124.06 $264.53
VIP III Growth & Income: Service Class.......... $22.68 $69.81 $119.42 $255.23
VIP III Mid Cap: Service Class.................. $26.57 $81.49 $138.88 $293.92
MFS Capital Opportunities:
Service Class................................ $26.98 $82.72 $140.91 $297.90
MFS Emerging Growth Portfolio:
Service Class................................ $26.26 $80.58 $137.36 $290.91
MFS Growth With Income Portfolio:
Service Class................................ $26.67 $81.80 $139.39 $294.91
MFS Mid Cap Growth: Service Class............... $26.88 $82.41 $140.40 $296.91
MFS New Discovery: Service Class................ $28.62 $87.61 $148.99 $313.68
MFS Growth: Service Class....................... $26.98 $82.72 $140.91 $297.90
MFS Total Return: Service Class................. $26.88 $82.41 $140.40 $296.91
Janus Aspen Growth: Service Shares.............. $25.04 $76.89 $131.24 $278.82
Janus Aspen Aggressive Growth:
Service Shares............................... $25.04 $76.89 $131.24 $278.82
Janus Aspen Equity Income: Service Shares....... $30.98 $94.60 $160.52 $335.92
Janus Aspen International Growth:
Service Shares............................... $25.96 $79.66 $135.83 $287.91
Janus Aspen Capital Appreciation:
Service Shares............................... $25.24 $77.51 $132.26 $280.85
</TABLE>
This example assumes that all of the fixed charges of the Separate Account
and the investment advisory fees and other expenses of the Portfolios will
continue as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE MORE
OR LESS. The annual rate of return assumed in the examples isn't an estimate
or guarantee of future investment performance. The table also assumes an
estimated $40,000 average contract value, so that the administrative charge
per $1,000 of net asset value in the Separate Account is $0.75. This per
$1,000 charge would be higher for smaller Account Values and lower for higher
values.
The table and example above are to help you understand the various costs and
expenses that apply to your contract, directly or indirectly. This table
shows expenses of the Separate Account as well as those of the Portfolios.
Premium taxes may also apply when you receive a payout of your contributions.
CONSOLIDATED FINANCIAL INFORMATION IS FOUND IN APPENDIX A
6
<PAGE>
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Our principal executive office is in Louisville, Kentucky. We are authorized to
sell life insurance and annuities in 47 states and the District of Columbia. We
sell flexible premium annuity contracts with underlying investment options other
than the Portfolios, fixed single premium annuities, and flexible premium
annuities offering both traditional fixed guaranteed interest rates and fixed
equity indexed options. Integrity is a subsidiary of W&S, a mutual life
insurance company originally organized under the laws of the State of Ohio on
February 23, 1888.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account was established in 1986, and is maintained under the
insurance laws of the State of Ohio. It is a unit investment trust, which is a
type of investment company, registered with the Securities and Exchange
Commission (the SEC). SEC registration doesn't mean that the SEC is involved in
any way in supervising the management or investment policies of the Separate
Account. Each Variable Account Option invests in shares of a corresponding
Portfolio. We may establish additional Options from time to time. The Variable
Account Options currently available to you are listed in Part 3, "Your
Investment Options." Prior to September 3, 1991, the Portfolios invested in
shares of corresponding portfolios of Prism Investment Trust.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts participate in the
Separate Account in proportion to the amounts in their contracts. We can't use
the Separate Account's assets supporting the variable portion of these variable
contracts to satisfy liabilities arising out of any of our other businesses.
Under certain unlikely circumstances, one Variable Account Option may be liable
for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may allow charges owed to us to
stay in the Separate Account, and in that way, we can participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer them
to our general account.
CHANGES IN HOW WE OPERATE
We can change how we or our Separate Account operate, subject to your approval
when required by the Investment Company Act of 1940 ("1940 ACT") or other
applicable law or regulation. We'll notify you if any changes result in a
material change in the underlying investments of a Variable Account Option. We
may:
- add Options to, or remove Options from, our Separate Account, combine two or
more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940 Act;
- operate our Separate Account under the direction of a committee or discharge
a committee at any time (the committee may be composed of a majority of
persons who are "interested persons" of Integrity under the 1940 Act);
- restrict or eliminate any voting rights of owners or others who have voting
rights that affect our Separate Account;
- cause one or more Option(s) to invest in a mutual fund other than or in
addition to the Portfolios;
- operate our Separate Account or one or more of the Options in any other form
the law allows, including a form that allows us to make direct investments.
We may make any legal investments we wish. In choosing these investments,
we'll rely on our own or outside counsel for advice.
7
<PAGE>
PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. Some of the Portfolios' investment advisors may
compensate us for providing administrative services in connection with the
Portfolios. This compensation is paid from the investment advisor's assets. FOR
A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION ON ANY PORTFOLIO, CALL OUR
ADMINISTRATIVE OFFICE TOLL-FREE AT 1-800-325-8583.
FIDELITY'S VARIABLE INSURANCE PRODUCT FUNDS
Each of Fidelity's VIP Funds is an open-end diversified management investment
company registered with the SEC.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP MONEY MARKET PORTFOLIO seeks to earn a high level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
VIP HIGH INCOME PORTFOLIO seeks a high current income, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks, and convertible securities,
with an emphasis on lower-quality debt securities.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
that exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
VIP GROWTH PORTFOLIO seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth may
be measured by factors such as earnings or revenue. Companies with high growth
potential tend to be companies with higher than average price/earnings (P/E)
ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities or have a strong
industry or market position. The stocks of these companies are often called
"growth" stocks.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income
as is consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
VIP II ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
VIP II INDEX 500 PORTFOLIO seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the Portfolio
may invest include
8
<PAGE>
companies experiencing positive fundamental change such as a new management team
or product launch, a significant cost-cutting initiative, a merger or
acquisition, or a reduction in industry capacity that should lead to improved
pricing; companies whose earning potential has increased or is expected to
increase more than generally perceived; companies that have enjoyed recent
market popularity but which appear to have temporarily fallen out of favor for
reasons that are considered non-recurring or short-term; and companies that are
undervalued in relation to securities of other companies in the same industry.
VIP II ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund that seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
---------- -----------
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds,
which may be lower-quality debt securities.
VIP III BALANCED PORTFOLIO seeks both income and growth of capital by investing
approximately 65% of assets in stocks and other equity securities, and the
remainder in bonds and other debt securities, including lower-quality debt
securities, when its outlook is neutral.
VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III MID CAP PORTFOLIO. FMR normally invests the VIP III Mid Cap Portfolio's
assets primarily in common stocks. FMR normally invests at least 65% of the
Portfolio's total assets in securities of companies with medium market
capitalizations. Medium market capitalization companies are those whose market
capitalization is similar to the capitalization of companies in the S&P Mid Cap
400 at the time of the investment. Companies whose capitalization no longer
meets this definition after purchase continue to be considered to have a medium
market capitalization for purposes of the 65% policy.
JANUS ASPEN SERIES
Each portfolio of the Janus Aspen Series is a mutual fund registered with the
SEC. Janus Capital Corporation serves as the investment adviser to each
Portfolio.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
goals of the Portfolios of the Janus Aspen Series. There are no guarantees that
these objectives will be met. YOU SHOULD READ THE JANUS ASPEN SERIES
PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. It is
a non-diversified portfolio that pursues its objective by normally investing at
least 50% of its equity assets in securities issued by medium-sized companies.
Medium-sized companies are those whose market capitalizations fall within the
range of companies in the S&P MidCap 400 Index. Market capitalization is a
commonly used measure of the size and value of a company. The market
capitalizations within the Index will vary, but as of December 31, 1999, they
ranged from approximately $170 million to $37 billion.
9
<PAGE>
JANUS ASPEN 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 primarily in common stocks selected for their
growth potential. Although the Portfolio can invest in companies of any size, it
generally invests in larger, more established companies.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of capital. It
is a non-diversified portfolio that pursues its objective by investing primarily
in common stocks selected for their growth potential. The Portfolio may invest
in companies of any size, from larger, well-established companies to smaller,
emerging growth companies.
JANUS ASPEN EQUITY INCOME PORTFOLIO seeks current income and long-term growth of
capital. It normally emphasizes investments in common stocks, and growth
potential is a significant investment consideration. The Portfolio tries to
provide a lower level of volatility than the S&P 500 Index. Normally, it invests
at least 65% of its assets in income-producing equity securities including
common and preferred stocks, warrants and securities that are convertible to
common or preferred stocks.
JANUS ASPEN INTERNATIONAL GROWTH PORTFOLIO seeks long-term growth of capital. It
normally invests at least 65% of its total assets in securities of issuers from
at least five different countries, excluding the United States. Although the
Portfolio intends to invest substantially all of its assets in issuers located
outside the United States, it may invest in U.S. issuers and it may at times
invest all of its assets in fewer than five countries, or even a single country.
MFS FUNDS
Each portfolio of the MFS Variable Insurance Trust is a diversified mutual fund
registered with the SEC. Massachusetts Financial Services Company is the
investment adviser to the MFS Funds.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the MFS Funds. There is no guarantee that these
objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR MFS VARIABLE
INSURANCE TRUST CAREFULLY BEFORE INVESTING.
MFS CAPITAL OPPORTUNITIES PORTFOLIO seeks capital appreciation by normally
investing at least 65% of its total assets in common stocks and related
securities. The Portfolio focuses on companies that MFS believes have favorable
growth prospects and attractive valuations based on current and expected
earnings or cash flow.
MFS EMERGING GROWTH PORTFOLIO seeks long term growth of capital by normally
investing at least 65% of its total assets in common stocks and related
securities of emerging growth companies. Emerging growth companies are companies
that MFS believes are either (1) early in their life cycle but which have the
potential to become major enterprises, or (2) major enterprises whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment. Emerging growth companies may be of any
size, and MFS would expect these companies to have products, technologies,
management, markets and opportunities that will facilitate earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation.
MFS GROWTH WITH INCOME PORTFOLIO seeks to provide reasonable current income and
long-term growth of capital and income by normally investing at least 65% of its
total assets in common stocks and related securities. While the Portfolio may
invest in companies of any size, it generally focuses on companies with larger
market capitalizations that MFS believes have sustainable growth prospects and
attractive valuations based on current and expected earnings or cash flow. The
Portfolio will also seek to generate gross income equal to approximately 90% of
the dividend yield on the Standard & Poor's 500 Composite Index.
MFS MID CAP GROWTH PORTFOLIO seeks long term growth of capital by normally
investing at least 65% of its total assets in common stocks and related
securities of companies with medium market capitalization that MFS believes have
above-average growth potential. Medium market capitalization companies are
defined by the Portfolio as companies with market capitalizations equaling or
exceeding $250 million but not exceeding the top of the Russell Midcap Growth
Index range at the time of the Portfolio's investment. Companies whose market
capitalizations fall
10
<PAGE>
below $250 million or exceed the top of the Russell Midcap Growth Index range
after purchase continue to be considered medium-capitalization companies for
purposes of the Portfolio's 65% investment policy. As of February 29, 2000, the
top of the Russell Midcap Growth Index range was $59.6 billion.
MFS NEW DISCOVERY PORTFOLIO seeks capital appreciation by normally investing at
least 65% of its total assets in common stocks and related securities of
emerging growth companies. Emerging growth companies are companies that MFS
believes offer superior prospects for growth and are either (1) early in their
life cycle but which have the potential to become major enterprises, or (2)
major enterprises whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment. While
emerging growth companies may be of any size, the Portfolio will generally focus
on smaller cap emerging growth companies that are early in their life cycle. MFS
would expect these companies to have products, technologies, management, markets
and opportunities that will facilitate earnings growth over time that is well
above the growth rate of the overall economy and the rate of inflation.
MFS GROWTH PORTFOLIO seeks to provide long-term growth of capital and future
income rather than current income by investing, under normal market conditions,
at least 80% of its total assets in common stocks and related securities, such
as preferred stocks, convertible securities and depositary receipts for those
securities, of companies which MFS believes offer better than average prospects
for long-term growth. MFS looks particularly for companies which demonstrate:
(1) a strong franchise, strong cash flows and a recurring revenue stream; (2) a
strong industry position where there is potential for high profit margins or
substantial barriers to new entry in the industry; (3) a strong management with
a clearly defined strategy; and (4) new products or services.
MFS TOTAL RETURN PORTFOLIO seeks mainly to provide above-average income
(compared to a portfolio invested entirely in equity securities) consistent with
the prudent employment of capital, and secondarily to provide a reasonable
opportunity for growth of capital and income. The Portfolio invests in a
combination of equity and fixed income securities. Under normal market
conditions, the Portfolio invests (1) at least 40%, but not more than 75%, of
its net assets in common stocks and related securities such as preferred stock,
bonds, warrants or rights convertible into stock, and depositary receipts for
those securities; and (2) at least 25% of its net assets in non-convertible
fixed income securities. The Portfolio may vary the percentage of its assets
invested in any one type of security, within the limits described above, in
accordance with MFS's interpretation of economic and money market conditions,
fiscal and monetary policy and underlying security values.
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, INTERESTS IN CONTRACTS ATTRIBUTABLE TO FIXED ACCOUNTS
HAVEN'T BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), OR THE
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). THUS, NEITHER THESE CONTRACTS NOR
OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE
CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933
ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT. DISCLOSURES
REGARDING THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO
CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING
TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of two, three, five, seven and ten years. We can
change the durations available from time to time. When you put money in a GRO,
that locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select. The duration of your GRO Account is
the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new
GRO Account for the duration you choose at the then-current Guaranteed Interest
Rate we declare. We won't declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. All contributions you make to a GRO are placed in a
non-unitized separate account. Values and benefits under your contract
attributable to GROs are guaranteed by the reserves in our GRO separate account
as well as by our General Account.
11
<PAGE>
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be
guaranteed for the Guaranteed Period's first year and declared at the time of
purchase. We can declare and credit additional interest based on Contribution,
Account Value, withdrawal dates, economic conditions or on any other lawful,
nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional
Interest credited to your GRO Account will be separate from the Guaranteed
Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED
RATE OR ADDITIONAL INTEREST MAY NOT BE AVAILABLE IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO, even though they may have different
maturity dates.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
The ten-year GRO isn't available in Oregon.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. You will receive the Guaranteed Interest Rate that is in
effect on that date. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10 years
and when it expires, we don't offer a 10-year GRO, but we do offer a seven-year
GRO, your new one will be for seven years. If you want something different, you
can tell us within 30 days before the GRO Account expires. You can't choose, and
we won't renew a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Guarantee Period. In addition, we won't make a Market
Value Adjustment for a death benefit. The market adjusted value may be higher or
lower than the GRO Value, but will never be less than the MINIMUM VALUE. Minimum
Value is an amount equal to your contributions to the GRO Account, less previous
withdrawals from the GRO Account and administrative charges, plus 3% interest,
compounded annually. The administrative expense charge can invade the Minimum
Value.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
MVA = GRO Value x [(1 + A) TO THE POWER OF N/12 / (1 + B + .0025) TO THE
POWER OF N N/12 - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
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B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a GRO
Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if that
remaining period isn't equal to an exact period for which we have declared a
new Guaranteed Interest Rate, B will be determined by a formula that finds a
value between the Guaranteed Interest Rates for GRO Accounts of the next
highest and next lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then to determine B we will
use the yield to maturity of United States Treasury Notes with the same
remaining term as your GRO Account, using a formula when necessary, in place of
the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions made to the STO Account during the calendar quarter for which
the rate has been declared. You MUST transfer all STO contributions into other
Investment Options within one year of your most recent STO contribution.
Transfers will be made automatically in approximately equal quarterly or monthly
installments of not less than $1,000 each. You can't transfer from other
Investment Options into the STO. We guarantee that the STO's effective annual
yield will never be less than 3%. See "Systematic Transfer Program" in Part 8
for details on this program. This option may not be available in some states.
PART 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts a daily expense amount from the Unit Value equal to an
effective annual rate of 1.45% of your Account Value in the Variable Account
Options. We can't increase this daily expense rate without your consent. Of the
1.45% total charge, .15% is used to reimburse us for administrative expenses not
covered by the annual administrative charge described below. We deduct the
remaining 1.30% for assuming the expense risk (.95%) and the mortality risk
(.35%) under the contract. The expense risk is the risk that our actual expenses
of administering the contracts will exceed the annual administrative expense
charge. Mortality risk, as used here, refers to the risk Integrity takes that
annuitants, as a class of persons, will live longer than estimated and we will
be required to pay out more annuity benefits than anticipated. The relative
proportion of the mortality and expense risk charge may be changed, but the
total 1.30% effective annual risk charge can't be increased.
Integrity may realize a gain from these daily charges if they aren't needed to
meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, we charge an annual administrative charge of $30.
This charge is deducted pro-rata from your Account Value and reduces the number
of Units we credit to you. The part of the charge deducted from the Fixed
Accounts is withdrawn in dollars. The annual administrative charge is pro-rated
in the event of the Annuitant's retirement, death, annuitization, or contract
termination during a contract year.
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REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if we anticipate expense savings. We may do
this based on the size and type of the group and the amount of the
contributions. We won't unlawfully discriminate against any person or group if
we reduce or eliminate these charges.
PORTFOLIO CHARGES
The Separate Account buys shares of the Portfolios at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without the approval of the
shareholders.
STATE PREMIUM TAX DEDUCTION
Integrity won't deduct state premium taxes from your contributions before
investing them in the Investment Options, unless required by your state law. If
the Annuitant elects an annuity benefit, we'll deduct any applicable state
premium taxes from the amount available for an annuity benefit. State premium
taxes currently range up to 4%.
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) the Callan Asset
Allocation and Rebalancing Program, or (iv) under systematic transfers from the
STO, nor will such transfers count towards the twelve free transfers you may
make in a contract year.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment performance of the Variable Account
Options.
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000
($3,000 in Pennsylvania and South Carolina ). We'll accept contributions of at
least $50 for salary allotment programs. We have special rules for minimum
contribution amounts for tax-favored retirement programs. See "Tax-Favored
Retirement Programs" in the SAI.
We may limit the total contributions under a contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach nine years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by Integrity for
all Annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have RECEIVED (as defined below) both the contribution and instructions
for allocation among the Investment Options at our Administrative Office,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining the nine Investment Options, each of your GRO Accounts
counts as one Investment Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are
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deemed received on the next Business Day. Contributions by check or mail are
deemed received when they are delivered in good order to our Administrative
Office.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that accompanies it and for all future contributions. We can also
accept changes by telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Market Value Adjustments, if applicable, are made as of the effective date of
the transaction. Charges against our Separate Account are reflected daily. Any
amount allocated to a Variable Account Option will go up or down in value
depending on the investment experience of that Option. The value of
contributions made to the Variable Account Options isn't guaranteed. The value
of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase Units. On any
given day, the value you have in a Variable Account Option is the Unit Value
multiplied by the number of Units credited to you in that Option.
The Units of each Variable Account Option have different Unit Values.
The number of Units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
Unit Value, calculated as of the close of business that day. The number of Units
for a Variable Account Option at any time is the number of Units purchased less
the number of Units redeemed. The value of Units fluctuates with the investment
performance of the corresponding Portfolios, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as their expenses. The Unit Values also change because of
deductions and charges we make to our Separate Account. The number of Units
credited to you, however, won't vary because of changes in Unit Values. Units of
a Variable Account Option are purchased when you make new contributions or
transfer contributions you made to a different Option into that Option. Units
are redeemed when you make withdrawals or transfer amounts out of a Variable
Account Option into a different Option. We also redeem Units to pay the death
benefit when the Annuitant dies and to pay the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine Unit Values for each Variable Account Option at 4 p.m. Eastern Time
on each Business Day. The Unit Value of each Variable Account Option for any
Business Day is equal to the Unit Value for the previous Business Day multiplied
by the net investment factor for that Option on the current day. We determine a
NET INVESTMENT FACTOR for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by the
Portfolios.
- Next, we add any dividends or capital gains distributions by the Portfolio
on that day.
- Then we charge or credit for any taxes or amounts set aside as a reserve for
taxes.
- Then we divide this amount by the value of the amounts in the Option at the
close of business on the last day on which a Unit Value was determined
(after giving effect to any transactions on that day).
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- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a Unit Value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is equal to an effective annual rate of 1.45%. This charge is for the
mortality risk, administrative expenses and expense risk we assume under the
contract.
Generally, this means that we adjust Unit Values to reflect what happens to the
Portfolios and for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's transfer restrictions. You can't make a transfer
into the STO. Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Transfers you make from a GRO Account, except within
30 days before your GRO Account expires, are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. Transfers from GROs, will
be made according to the order in which money was originally allocated to the
GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing Program or systematic transfer programs, described in Part 8.
You may request a transfer by writing to our Administrative Office. Each request
for a transfer must specify the contract number, the amounts to be transferred
and the Investment Options to and from which the amounts are to be transferred.
Transfers may also be arranged through our telephone transfer service if you
have established a Personal Identification Number (PIN CODE). We'll honor
telephone transfer instructions from any person who provides correct identifying
information. We aren't responsible for any fraudulent telephone transfers that
we believe to be genuine in accordance with these procedures. You bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it. A transfer request doesn't change the allocation of current or
future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' Unit Values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m. Eastern Time (or the close of the New York Stock Exchange, if earlier) will
be processed using Unit Values as of the close of business on the next Business
Day after the day you call. All transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed no later than the next Business Day after
our Administrative Office receives the requests.
EXCESSIVE TRADING
We reserve the right to limit the number of transfers in any contract year or to
refuse any transfer request for an owner or certain owners if we believe in our
sole discretion that (a) excessive trading by the owner or owners or a specific
transfer request or group of transfer requests may have a detrimental effect on
Unit Values or the share prices of the underlying mutual funds; or (b) we are
informed by one or more of the underlying mutual funds that the purchase or
redemption of shares is to be restricted because of excessive trading, or that a
specific transfer or group of transfers is expected to have a detrimental effect
on share prices of affected underlying mutual funds. We also have the right,
which may be exercised in our sole discretion, to prohibit transfers occurring
on consecutive Business Days.
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We will notify you or your designated representative if your requested transfer
is not made. Current SEC rules preclude us from processing your request at a
later date if it is not made when initially requested. ACCORDINGLY, YOU WILL
NEED TO SUBMIT A NEW TRANSFER REQUEST IN ORDER TO MAKE A TRANSFER THAT WAS NOT
MADE BECAUSE OF THESE LIMITATIONS.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be for at
least $300. The money will be taken from your Investment Options, pro-rata, in
the same proportion that their value bears to your total Account Value. For
example, if your Account Value is divided in equal 25% shares among four
Investment Options, when you make a withdrawal, 25% of the money withdrawn will
come from each of your Investment Options. You can tell us if you want your
withdrawal handled differently.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any Market Value
Adjustments. The total amount that you receive will be the total amount that you
requested. Most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty. If your contract is part of a tax-favored
plan, the plan may limit your withdrawals. See Part 7, "Tax Aspects of the
Contract." Residents of Pennsylvania and South Carolina are required to keep a
$3,000 minimum account balance after any withdrawals.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
consequences. See Part 7, "Tax Aspects of the Contract." We won't be bound by an
assignment unless it is in writing and our Administrative Office has received it
in a form acceptable to us.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the contract
Account Value at the end of the Business Day when we receive proof of death.
Similarly, if the Contract was issued on or after the youngest Annuitant's 86th
birthday, the death benefit is the Account Value at the end of the Business Day
when we receive proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the highest of:
(a) your highest Account Value on any contract anniversary before
age 81, plus subsequent contributions and minus subsequent
withdrawals (after being adjusted for associated charges and
adjustments);
(b) total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); and
(c) your current Account Value.
The reductions in the death benefit described in (a) and (b) above for
subsequent withdrawals will be calculated on a pro-rata basis with respect to
Account Value at the time of withdrawal.
Death benefits and benefit distributions required because of a separate owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
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The owner selects the beneficiary of the death benefit. An owner may change
beneficiaries by sending the appropriate form to the Administrative Office. If
an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit
is generally paid to the Annuitant's estate. A death benefit won't be paid after
the Annuitant's death if there is a contingent Annuitant. In that case, the
contingent Annuitant becomes the new Annuitant under the contract.
The maximum issue age for the Annuitant is 85 years old.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 98th birthday or earlier, if required by law. Contract
terms that apply to the various retirement programs, along with the federal tax
laws, establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time. A lump sum
payment will provide the Annuitant with the Cash Value under the contract
shortly after the Retirement Date. The amount applied toward the purchase of an
annuity benefit will be the Adjusted Account Value, less any pro-rata annual
administrative charge, except that the Cash Value will be the amount applied
instead if the annuity benefit doesn't have a life contingency and either the
term is less than five years or the annuity can be commuted to a lump sum
payment.
ANNUITIES
Annuity benefits can provide for fixed payments, which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must be
at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually.
If you haven't already selected a form of annuity, within six months prior to
your Retirement Date we'll send you a notice form. You can tell us on the form
the type of annuity you want or confirm to us that we're to provide the normal
form of annuity, which is the LIFE AND TEN YEARS CERTAIN ANNUITY. However, if we
don't receive a completed form from you on or before your Retirement Date, we'll
extend the Retirement Date until we receive your written instructions at our
Administrative Office. During this extension, the values under your contract in
the various Investment Options will remain invested in those options and amounts
remaining in Variable Account Options will continue to be subject to the
associated investment risks. However, your Retirement Date can't be extended
beyond your 98th birthday or earlier, if required by law. You'll receive a lump
sum benefit if you don't make an election by then.
We currently offer the following types of annuities:
A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10
years of payments guaranteed, funded through our general account.
A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period you select when you select the type of annuity you want. If the Annuitant
dies before the end of the period selected, the Annuitant's beneficiary can
choose to receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant or the lives of the
Annuitant and another annuitant under a joint and survivor annuity. If the
Annuitant (or the Annuitant and the other annuitant under a joint and survivor
annuity) dies before the period selected ends, the remaining payments will go to
the Annuitant's beneficiary. The Annuitant's beneficiary can redeem the annuity
and receive the present value of future guaranteed payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
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ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the Annuitant's age (or
Annuitant and a joint annuitant in the case of a joint and survivor annuity) and
sex (except under most tax-favored retirement programs). If our annuity rates
then in effect would yield a larger payment, those rates will apply instead of
the contract rates.
If the age or sex of an annuitant has been misstated, any benefits will be those
that would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally apply your Adjusted Account Value to the purchase of an annuity
within seven days after we receive the required form at our Administrative
Office. We can defer our action, however, for any period during which:
(1) the New York Stock Exchange has been closed or trading on it is restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
(3) the SEC, by order, permits Integrity to defer action in order to protect
persons with interests in the Separate Account. Integrity can defer payment
of your Fixed Accounts for up to six months, and interest will be paid on
any such payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the cover page
of this prospectus. We can't honor your requests unless they are in proper and
complete form. Whenever possible, use one of our printed forms, which you can
get from our Administrative Office.
PART 6 - VOTING RIGHTS
VOTING RIGHTS
Integrity is the legal owner of the shares of the Portfolios held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Portfolios' Boards of Directors, to
ratify the selection of independent auditors for the Portfolios, and on any
other matters described in the Portfolios' current prospectus or requiring a
vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all owners, we'll vote shares in a
Portfolio for which we have not received instructions in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain Qualified Plans, your voting instructions must be
communicated to us indirectly, through your employer, but we aren't responsible
for any failure by your employer to ask for your instructions or to tell us what
your instructions are. We'll vote any Portfolio shares that we're entitled to
vote directly, because of amounts we have accumulated in our Separate Account,
in the same proportion that other owners vote. If the federal securities laws or
regulations or interpretations of them change so that we are permitted to vote
shares of the Portfolios in our own right or to restrict owner voting, we may do
so.
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HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
have been invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing the amount of your Account Value
allocated to that Option by the net asset value of one share of the
corresponding Portfolio as of the record date set by the Portfolios' Boards for
the shareholders' meeting. We count fractional shares. The record date for this
purpose can't be more than 60 days before the shareholders' meeting. After
annuity payments have begun, voting rights are calculated in a similar manner
based on the actuarially determined value of your interest in each Variable
Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by those companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by Integrity from its owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require owner approval. In that case,
you'll be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It
is based upon our understanding of the present federal income tax laws as
currently interpreted by the Internal Revenue Service (IRS) and various courts.
We cannot guarantee that the IRS or the courts will not change their views on
the treatment of these contracts. Future legislation may affect annuity
contracts adversely. Moreover, we have not attempted to consider any applicable
state or other tax laws. Because of the complexity of the tax laws and the fact
that tax results will vary according to the particular circumstances, any one
considering buying a contract, or selecting annuity payments under the contract,
or receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS,
FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars.
Earnings under the contract generally will not be taxed until you make a
withdrawal. An individual (or employer) may also purchase the annuity to fund a
tax-favored retirement program (contributions are with pre-tax dollars), such as
an IRA or qualified plan. Finally, an individual (or employer) may buy the
Annuity to fund a Roth IRA (contributions are with after-tax dollars and
earnings are excluded from taxable income at distribution).
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This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules that apply to an annuity purchased to fund a tax-favored retirement
program, (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits to qualify for its special treatment under the federal tax law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) will not be taxed when you receive those amounts back in a
distribution. Also, an owner is not generally taxed on the annuity's earnings
until some form of withdrawal or distribution is made under the contract.
However, under certain circumstances, the increase in value may be subject to
current federal income tax. For example, corporations, partnerships, and other
non-natural persons can't defer tax on the annuity's income unless an exception
applies. In addition, if an owner transfers an annuity as a gift to someone
other than a spouse (or former spouse), all increases in its value are taxed at
the time of transfer. The assignment or pledge of any portion of the value of a
contract will be treated as a distribution of that portion of the value of the
contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for each
type of distribution. Section 72 of the Code states that the proceeds of a full
or partial withdrawal from a contract before annuity payments begin are first
treated as taxable income, but only to the extent of the increase of the Account
Value. The rest of the withdrawal, representing your basis in the annuity, isn't
taxable. Generally, the investment or basis in the contract equals the
contributions made by or on your behalf, minus any amounts previously withdrawn
that were not treated as taxable income. Special rules may apply if the contract
includes contributions made prior to August 14, 1982 that were rolled over to
the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is determined using a ratio of the owner's investment to
his or her expected return under the contract (exclusion Ratio). The rest of
each payment will be ordinary income. That means that part of your payment is
tax-free and part of it is taxable. When all of these tax-free portions add up
to your investment in the annuity, future payments are entirely ordinary income.
If the Annuitant dies before recovering the total investment, a deduction for
the remaining basis will generally be allowed on the owner's final federal
income tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notifies us of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, you may be subject to a tax penalty
of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59 1/2;
(2) as a result of the owner's death;
(3) part of a series of substantially equal periodic payments (paid at least
annually) for the life (or life expectancy) of the taxpayer or joint lives
(or joint life expectancies) of the taxpayer and beneficiary;
(4) a result of the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the Code);
(7) purchased by an employer on termination of certain types of qualified plans
and held by the employer until the employee separates from service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) for the purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses; or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
21
<PAGE>
Any withdrawal provisions of your contract will also apply. See "Withdrawals" in
Part 5.
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under Section 72(s) of the Code, to be treated as an annuity, a contract must
provide the following distribution rules: (a) if any owner dies on or after the
Retirement Date and before the entire interest in the contract has been
distributed, then the rest of that annuity must be distributed at least as
quickly as the method in effect when the owner died; and (b) if any owner dies
before the Retirement Date, the entire interest in the contract must be
distributed within five years. However, any interest that is payable to a
beneficiary may be annuitized over the life of that beneficiary or over a period
not extending beyond the life expectancy of that beneficiary, so long as
distributions begin within one year after the owner's death. If the beneficiary
is the owner's spouse, the contract (along with the deferred tax status) may be
continued in the spouse's name as the owner.
DIVERSIFICATION STANDARDS
Integrity manages the investments in the annuities under Section 817(h) of the
Code to ensure that they will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An owner can use this annuity with certain types of retirement plans that
receive favorable tax treatment under the Code. Numerous tax rules apply to the
participants in qualified plans and to the contracts used in connection with
those qualified plans. These tax rules vary according to the type of plan and
the terms and conditions of the plan itself. 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,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loans must be repaid. (owners
should always consult their tax advisors and retirement plan fiduciaries before
taking any loans from the plan.) Special rules also apply to the time at which
distributions must begin and the form in which the distributions must be paid.
THE SAI CONTAINS GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS
TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON INTEGRITY
The contracts allow Integrity to charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
22
<PAGE>
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract prior to your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is to be
made. You may specify a dollar amount for each withdrawal or an annual
percentage to be withdrawn. The minimum systematic withdrawal currently is $100.
Residents of Pennsylvania and South Carolina are required to keep a $3,000
minimum account balance. You may also specify an account for direct deposit of
your systematic withdrawals. To enroll in our systematic withdrawal program,
send the appropriate form to our Administrative Office. Withdrawals may begin as
soon as one Business Day after we receive the form. You may terminate your
participation in the program upon one day's prior written notice, and we may
terminate or change the systematic withdrawal program at any time. If on any
withdrawal date you don't have enough money in your Account to make all of the
withdrawals you have specified, no withdrawal will be made and your enrollment
in the program will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't make a Market Value Adjustment. AMOUNTS
WITHDRAWN FROM YOUR GRO ACCOUNT UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN
EXCESS OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A MARKET VALUE
ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO THE 10% FEDERAL TAX
PENALTY FOR EARLY WITHDRAWAL AND TO INCOME TAXATION. See Part 7, "Tax Aspects of
the Contract."
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59 1/2. You won't have to pay any tax
penalty for these withdrawals, but they will be subject to ordinary income tax.
See "Taxation of Annuities Generally," in Part 7. Once you begin receiving
distributions, they shouldn't be changed or stopped until the later of:
- - the date you reach age 59 1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions before you reached age 59 1/2 made under the Income Plus
Withdrawal Program plus interest.
You can choose the Income Plus Withdrawal Program any time before you reach age
59 1/2. You can elect this option by sending the election form to our
Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We'll
calculate the amount of the distribution under a method you select, subject to a
minimum, which is currently $100. You must also specify an account for direct
deposit of your withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Withdrawals may begin as soon as one Business Day
after we receive the form. You may end your participation in the program upon
seven Business Days prior written notice, and we may terminate or change the
Income Plus Withdrawal Program at any time. If on any withdrawal date you don't
have enough money in your Accounts to make all of the withdrawals you have
specified, no withdrawal will be made and your enrollment in the program will be
ended. This program isn't available in connection with the Systematic Withdrawal
Program, Dollar Cost Averaging, Systematic Transfer Option or Asset Allocation
and Rebalancing Program.
AMOUNTS WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE
WITHDRAWAL AMOUNT WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT IF APPLICABLE.
23
<PAGE>
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
that you have made to the VIP Money Market Option on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must tell us how much you want to be transferred into each Variable Account
Option. The current minimum transfer to each Option is $250. We won't charge a
transfer charge under our dollar cost averaging program and these transfers
won't count towards your twelve free transfers.
To enroll in our dollar cost averaging program, send the appropriate form to our
Administrative Office. You may terminate your participation in the program upon
one day's prior written notice, and we may terminate or change the dollar cost
averaging program at any time. If you don't have enough money in the VIP Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis to one or more
other Investment Options that you select. We'll transfer your STO contributions
in equal installments of not less than $1,000 over a one-year period. If you
don't have enough money in the STO to transfer to each Option specified, a final
transfer will be made on a pro-rata basis and your enrollment in the program
will be ended. Any money remaining in the STO at the end of the year during
which transfers are required to be made will be transferred on a pro-rata basis
at the end of that year to the Options you have chosen for this program. We
won't charge a transfer charge for transfers under our systematic transfer
program, and these transfers won't count towards your twelve free transfers.
To enroll in our systematic transfer program, send the appropriate form to our
Administrative Office. We can terminate the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a Customized Asset Rebalancing program that allows you to determine how
often rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will
automatically be rebalanced by transfers among your Investment Options, and you
will receive a confirmation notice after each rebalancing. Transfers will occur
only to and from those Variable Account Options where you have current
contribution allocations. We won't charge a transfer charge for transfers under
our Customized Asset Rebalancing program, and they won't count towards your
twelve free transfers.
Fixed Accounts aren't eligible for the Customized Asset Rebalancing program.
To enroll in our Customized Asset Rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, as well as transfers and withdrawals
that you make, may not work with the Customized Asset Rebalancing program. You
should, therefore, monitor your use of other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. You may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or change the Customized Asset Rebalancing program at any
time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates. Callan Associates is an independent research and
consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contribution you are making will initially be allocated among
the Options established for each Model. If we change the Model, your account
values will be
24
<PAGE>
automatically reallocated accordingly unless you have terminated your
participation. You and your financial representative also have the option to
design a program that is tailored to your specific retirement needs.
When you select this program, your account values will be allocated and your
variable portfolios will automatically be rebalanced at least annually. The
program automatically applies to all contributions made to your annuity contract
while you are still participating. You will receive a confirmation notice after
each rebalancing. We won't charge a transfer charge for transfers made under the
Asset Allocation and Rebalancing Program. These transfers won't count toward
your twelve free transfers.
In each Asset Allocation Rebalancing Model, a part of each contribution is
allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to
the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. If you withdraw or transfer your GRO funds, they may be subject to a
Market Value Adjustment that may increase or decrease your account value.
To enroll in the Asset Allocation and Rebalancing Program, complete the
appropriate form and send it to our Administrative Office. You should be aware
that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work with the Customized Asset
Rebalancing program. If, after selecting one of the five models, you request a
transaction that results in a reallocation outside one of the Models, your
participation in the Model program automatically ends. You should, therefore,
monitor your use of other programs, transfers, and withdrawals while the
Customized Asset Rebalancing program is in effect. This program isn't available
with the Customized Asset Rebalancing program. We can terminate or change this
program in whole or in part, or restrict contributions to the program. This
program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. This performance data is based only the performance of a
hypothetical investment in that Option during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame. It
shouldn't be considered as a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply. Total returns
also may be shown that don't take into account the annual administrative charge
that is applied when the Account Value is less than $50,000 at the end of the
contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually several years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would produce the same cumulative total return
if the Investment Option experienced exactly the same return each year for the
entire period shown. Because performance will fluctuate on a year-by-year basis,
the average annual total returns tend to show a smooth result that won't mirror
actual performance, even though the end result will be the same.
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses.
The VIP Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in that Option over
a specified seven-day period. Effective yield is calculated in a similar manner
except that it assumes that the income earned is reinvested, and the income on
the reinvested
25
<PAGE>
amount is included. The VIP II Investment Grade Bond and VIP High Income Option
may advertise a 30-day yield which reflects the income generated by an
investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
PART 9 - PRIOR CONTRACTS
INVESTMENT OPTIONS FOR CONTRACTS ISSUED PRIOR TO MAY 1, 1999
For contracts issued prior to May 1, 1999, the VIP III Mid Cap Portfolio is not
yet available.
SEPARATE ACCOUNT ANNUAL EXPENSES
For contracts issued prior to May 1, 1999, the Mortality and Expense Risk Fees
are 1.20%, Administrative Expenses are .15% and Total Separate Account Annual
Expenses are 1.35%.
FUND ANNUAL EXPENSES
For contracts issued prior to May 1, 1999, the 0.10% charge imposed by certain
of the Portfolios pursuant to a Rule 12b-1 Plan doesn't apply. (This charge is
reflected in the "Other Expenses" column of the underlying mutual funds in the
Table of Annual Fees and Expenses).
GUARANTEED RATE OPTION
For contracts issued prior to May 1, 1999, the two-year GRO was not available.
TABLE OF ANNUAL FEES AND EXPENSES FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
<TABLE>
<CAPTION>
Owner Transaction Expenses
- --------------------------
<S> <C>
Sales Load on Purchases........................................................................... $0
Exchange Fee (1).................................................................................. $0
<CAPTION>
Annual Administrative Charge
- ----------------------------
<S> <C>
Annual Administrative Charge* ................................................................... $30
* This charge applies only if the Account Value is less than $50,000 at the end of any
contract year prior to your Retirement Date. See "Annual Administrative Charge" in
Part 4.
<CAPTION>
Separate Account Annual Expenses
(as a percentage of separate account value) (2)
- -----------------------------------------------
<S> <C>
Mortality and Expense Risk Fees................................................................ 1.20%
Administrative Expenses........................................................................ .15%
-----
Total Separate Account Annual Expenses......................................................... 1.35%
-----
-----
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Portfolio Annual Expenses After Reimbursement
(as a percentage of average net assets) (3)
- -------------------------------------------
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market: Initial Class................. .18% .09% .27%
VIP High Income: Initial Class.................. .58% .11% .69%
VIP Equity-Income: Initial Class................ .48% .08% .56% (3)
VIP Growth: Initial Class....................... .58% .07% .65% (3)
VIP Overseas: Initial Class..................... .73% .14% .87% (3)
VIP II Investment Grade Bond: Initial Class..... .43% .11% .54%
VIP II Asset Manager: Initial Class............. .53% .09% .62% (3)
VIP II Index 500: Initial Class................. .24% .04% .28% (4)
VIP II Contrafund: Initial Class................ .58% .07% .65% (3)
VIP II Asset Manager: Growth: Initial Class..... .58% .12% .70% (3)
VIP III Balanced: Initial Class................. .43% .12% .55% (3)
VIP III Growth Opportunities: Initial Class..... .58% .10% .68% (3)
VIP III Growth & Income: Initial Class.......... .48% .11% .59% (3)
</TABLE>
- -------------------------
1) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers.
2) See "Deductions and Charges - Separate Account Charges" in Part 4.
3) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce Portfolio expenses. In addition, through arrangements with certain
Portfolios, or through Fidelity Research & Management (FMR) on behalf of
certain Portfolio's custodians, credits realized as a result of uninvested
cash balances were used to reduce a portion of each applicable Portfolio's
expenses. Without these reductions, the Total Annual Expenses presented
above would have been .57% for VIP Equity-Income Portfolio, .66% for VIP
Growth Portfolio, .91% for VIP Overseas Portfolio, .63% for VIP II Asset
Manager Portfolio, .67% for VIP II Contrafund Portfolio, .71% for VIP II
Asset Manager: Growth Portfolio, .57% for VIP III Balanced Portfolio, .69%
for VIP III Growth Opportunities Portfolio, .60% for VIP III Growth & Income
Portfolio.
4) FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been .10% and the Total Annual Expenses would have
been .34%.
27
<PAGE>
EXAMPLE FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
The example below shows the expenses on a $1,000 investment, assuming a $40,000
average contract value and a 5% annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT WHETHER YOU ELECT TO ANNUITIZE, SURRENDER OR
CONTINUE YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $17.35 $53.67 $ 92.28 $199.81
VIP High Income: Initial Class.................. $21.65 $66.72 $114.25 $244.80
VIP Equity-Income: Initial Class................ $20.32 $62.70 $107.49 $231.08
VIP Growth: Initial Class....................... $21.24 $65.48 $112.18 $240.59
VIP Overseas: Initial Class..................... $23.50 $72.28 $123.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $20.12 $62.07 $106.45 $228.95
VIP II Asset Manager: Initial Class............. $20.94 $64.56 $110.62 $237.43
VIP II Index 500: Initial Class................. $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund: Initial Class................ $21.24 $65.48 $112.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $21.76 $67.03 $114.77 $245.84
VIP III Balanced: Initial Class................. $20.22 $62.39 $106.97 $230.01
VIP III Growth Opportunities: Initial Class..... $21.55 $66.41 $113.73 $243.75
VIP III Growth & Income: Initial Class.......... $20.63 $63.63 $109.06 $234.26
</TABLE>
This example assumes that all of the fixed charges of the Separate Account and
of the investment advisory fees and other expenses of the Portfolios will
continue as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE MORE OR
LESS. The annual rate of return assumed in the example isn't an estimate or
guarantee of future investment performance. The table also assumes an estimated
$40,000 average contract value, so that the administrative charge per $1,000 of
net asset value in the Separate Account is $0.75. This per $1,000 charge would
be higher for smaller Account Values and lower for higher values.
The table and example above are to help you understand the various costs and
expenses that apply to your contract, directly or indirectly. This table shows
expenses of the Separate Account as well as those of the Portfolios. Premium
taxes may also apply when you receive a payout of your contributions.
28
<PAGE>
APPENDIX A
FINANCIAL INFORMATION
The table below shows the Unit Value for each Variable Account Option at
inception, the number of Units outstanding at December 31 of each year since
inception, and the Unit Value at the end of each period. The Unit Value at the
beginning of each period is the Unit Value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
SERVICE CLASS- SERVICE CLASS- SERVICE CLASS ASSET SERVICE CLASS- SERVICE CLASS SERVICE CLASS-GROWTH
ASSET MANAGER CONTRAFUND MANAGER: GROWTH BALANCED GROWTH & INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Date of Inception** $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1999 $10.39 $11.69 $10.45 $10.08 $10.54 $10.00
Number of Units 92.970 48,186 6,521 42,745 73,671 34,458
<CAPTION>
SERVICE CLASS- SERVICE CLASS-EQUITY SERVICE CLASS- SERVICE CLASS SERVICE CLASS-
HIGH INCOME INCOME GROWTH MID CAP OVERSEAS
DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Date of Inception** $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1999 $10.00 $9.74 $12.75 $13.79 $13.66
Number of Units 26,381 57,338 67,751 2,245 27,274
<CAPTION>
INITIAL CLASS- INITIAL CLASS- INITIAL CLASS-
MONEY MARKET INVESTMENT GRADE INDEX 500
DIVISION BOND DIVISION DIVISION
-------- ------------- --------
<S> <C> <C> <C>
Date of Inception** $10.00 $10.00 $10.00
December 31, 1999 $10.20 $9.99 $11.32
Number of Units 654,786 9,111 79,236
</TABLE>
**The date of inception is June 1, 1999 for the High Income Option-Service
Class, Equity-Income Option-Service Class, Growth Option-Service Class, Overseas
Option-Service Class, and the Contrafund Option-Service Class; June 2, 1999 for
the Growth & Income Option-Service Class; June 9, 1999 for the Growth
Opportunities Option-Service Class; June 14, 1999 for the Balanced
Option-Service Class and Mid Cap Option-Service Class; July 6, 1999 for the
Asset Manager Option-Service Class; and July 12, 1999 for the Asset
Manager:Growth Option-Service Class.
For contracts issued on and after May 1, 1999, the date of inception is June 21,
1999 for the Money Market Option-Initial Class, and June 1, 1999 for the
Investment Grade Bond Option-Initial Class and Index 500 Division-Initial Class.
For information on INITIAL CLASS OPTIONS HELD UNDER CONTRACTS ISSUED BEFORE MAY
1, 1999, see the tables provided on the following two pages.
For contracts issued on or after May 1, 2000, condensed financial information is
not provided for any of the MFS Divisions or the Janus Aspen Divisions because
as of May 1, 2000 those Divisions had not started operations. The Unit Value for
each of those Divisions at inception will be $10.00.
29
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
INITIAL CLASS- INITIAL CLASS- INITIAL CLASS INITIAL CLASS- INITIAL CLASS- INITIAL CLASS- SERVICE CLASS-
MONEY MARKET HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS INVESTMENT GRADE MIDCAP
DIVISION DIVISION DIVISION DIVISION DIVISION BOND DIVISION
-------- -------- -------- -------- -------- DIVISION --------
--------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $10.18 - $7.74 $7.51 $8.13 $10.21 -
Number of Units 1,952 - 25,560 50 7,250 26,988 -
December 31, 1988 $10.75 - $8.49 $7.48 $8.93 $10.69 -
Number of Units 2,062 - 8,962 2,043 2,019 45,789 -
December 31, 1989 $11.57 - $10.41 $10.45 $11.02 $12.20 -
Number of Units 43,299 - 8,517 2,284 1,937 4,372 -
December 31, 1990 $12.34 - $9.04 $11.04 $10.16 $12.82 -
Number of Units 2,427 - 29,446 2,060 1,779 3,350 -
December 31, 1991 $12.90 - $12.92 $17.96 $12.44 $14.38 -
Number of Units 1,422 - 7,198 1,777 945 1,160 -
December 31, 1992 $13.22 - $14.90 $19.36 $10.95 $15.13 -
Number of Units 68,139 - 124,911 129,511 35,346 80,734 -
December 31, 1993 $13.46 $11.45 $17.38 $22.80 $14.83 $16.57 -
Number of Units 346,644 615,289 748,436 444,077 480,406 330,360 -
December 31, 1994 $13.84 $11.12 $18.35 $22.49 $14.88 $15.73 -
Number of Units 1,363,372 989,407 1,206,683 988,674 1,272,218 454,358 -
December 31, 1995 $14.46 $13.23 $24.46 $30.03 $16.10 $18.20 -
Number of Units 1,823,146 2,238,450 2,264,897 1,665,857 1,308,440 627,020 -
December 31, 1996 $15.03 $14.88 $27.57 $33.98 $17.98 $18.53 -
Number of Units 1,839,938 2,871,483 2,977,144 2,311,771 1,792,964 807,207 -
December 31, 1997 $15.64 $17.27 $34.85 $41.39 $19.79 $19.93 -
Number of Units 2,298,303 3,057,834 3,512,365 2,026,809 2,066,717 834,294 -
December 31, 1998 $16.28 $16.30 $38.37 $56.96 $22.01 $21.40 -
Number of Units 3,190,762 3,293,280 3,398,759 1,942,238 1,813,403 1,235,812 -
December 31, 1999 $16.89 $17.40 $40.25 $77.23 $30.97 $20.89 $13.11
Number of Units 3,247,590 2,520,734 2,434,119 1,747,063 1,327,100 1,010,650 10,125
</TABLE>
*The Inception dates are: February 19, 1993 for the VIP High Income Option;
March 4, 1993 for the VIP II Index 500 Option; February 6, 1995 for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option; December 31, 1996
for the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP
III Growth & Income Option; September 24, 1999 for the VIP III Mid Cap Option -
Service Class. Inception dates for the remaining Options all were in the third
quarter of 1987. Prior to September 3, 1991, the Variable Account Options
invested in shares of corresponding portfolios of Prism Investment Trust, and
the VIP Money Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II
Investment Grade Bond and VIP II Asset Manager Options were known as the Money
Market, Common Stock, Aggressive Stock, Global, Bond, and Balanced Options,
respectively.
30
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
INITIAL CLASS- INITIAL CLASS- INITIAL CLASS- INITIAL CLASS- INITIAL CLASS- INITIAL CLASS- INITIAL
ASSET MANAGER INDEX 500 CONTRAFUND ASSET MANAGER BALANCED GROWTH CLASS-GROWTH
DIVISION DIVISION DIVISION GROWTH DIVISION & INCOME OPPORTUNITIES
-------- -------- -------- DIVISION -------- DIVISION DIVISION
-------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $8.00 - - - - - -
Number of Units 29,166 - - - - - -
December 31, 1988 $8.98 - - - - - -
Number of Units 11,300 - - - - - -
December 31, 1989 $11.16 - - - - - -
Number of Units 10,635 - - - - - -
December 31, 1990 $11.02 - - - - - -
Number of Units 12,194 - - - - - -
December 31, 1991 $13.60 - - - - - -
Number of Units 5,272 - - - - - -
December 31, 1992 $15.01 - - - - - -
Number of Units 309,292 - - - - - -
December 31, 1993 $17.92 $10.52 - - - - -
Number of Units 1,748,246 98,288 - - - - -
December 31, 1994 $16.60 $10.49 - - - - -
Number of Units 3,509,145 218,119 - - - - -
December 31, 1995 $19.15 $14.20 $13.50 $12.03 - - -
Number of Units 2,973,440 474,834 1,068,907 175,138 - - -
December 31, 1996 $21.65 $17.20 $16.15 $14.23 - - -
Number of Units 2,708,795 1,207,882 2,382,588 479,960 - - -
December 31, 1997 $25.77 $22.51 $19.78 $17.56 $11.33 $12.11 $11.90
Number of Units 2,687,060 2,028,663 2,782,642 695,464 124,495 412,889 458,320
December 31, 1998 $29.25 $28.50 $25.36 $20.37 $13.15 $15.48 $14.62
Number of Units 2,454,761 2,724,340 3,185,222 745,989 300,468 1,438,416 1,094,151
December 31, 1999 $32.05 $33.89 $31.09 $23.16 $13.56 $16,67 $15.04
Number of Units 1,723,306 2,467,236 2,827,810 642,566 366,568 1,477,124 1,043,627
</TABLE>
*The Inception dates are: February 19, 1993 for the VIP High Income Option;
March 4, 1993 for the VIP II Index 500 Option; February 6, 1995 for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option; December 31, 1996
for the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP
III Growth & Income Option; September 24, 1999 for the VIP III Mid Cap Option -
Service Class. Inception dates for the remaining Options all were in the third
quarter of 1987. Prior to September 3, 1991, the Variable Account Options
invested in shares of corresponding portfolios of Prism Investment Trust, and
the VIP Money Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II
Investment Grade Bond and VIP II Asset Manager Options were known as the Money
Market, Common Stock, Aggressive Stock, Global, Bond, and Balanced Options,
respectively.
31
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment may affect the
values of a contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate
is the same rate used in the Example under "Table of Annual Fees and Expenses"
in this Prospectus. In these examples, the withdrawal occurs at the end of the
three year period after the initial contribution. The Market Value Adjustment
operates in a similar manner for transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed for the purposes of these examples that no prior partial withdrawals or
transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next lower
number of complete months. If we do not declare a rate for the exact time
remaining, we will use a formula to find a rate using GRO Accounts of durations
closest to (next higher and next lower) the remaining period described above.
Three years after the initial contribution, there would have been four years
remaining in your GRO Account.
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 three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
Thus, the amount payable on a full withdrawal (the Market Adjusted Value) would
be:
$54,688.58 = $57,881.25 - $3,192.67
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
32
<PAGE>
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
Thus, the amount payable on a full withdrawal would be:
$59,564.96 = $57,881.25 + $1,683.71
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
33
<PAGE>
APPENDIX C
SAI TABLE OF CONTENTS
Part 1 - Integrity and Custodian...............................................1
Part 2 - Distribution of the Contracts.........................................1
Part 3 - Performance Information...............................................2
Part 4 - Determination of Accumulation Values..................................8
Part 5 - Tax-Favored Retirement Programs.......................................8
Traditional Individual Retirement Annuities..............................8
Roth Individual Retirement Annuities.....................................8
SIMPLE Individual Retirement Annuities...................................8
Tax Sheltered Annuities..................................................9
Simplified Employee Pensions.............................................9
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans...............................................9
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations...............................................9
Distributions Under Tax-Favored Retirement Programs......................9
Part 6 - Financial Statements.................................................10
- --------------------------------------------------------------------------------
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account I (IQ)
Name:
-----------------------------------------------
Address:
--------------------------------------------
City: State: Zip:
--------------------- ------- --------
34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
FOR
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
Page
Part 1 - Integrity and Custodian...............................................1
Part 2 - Distribution of the Contracts.........................................1
Part 3 - Performance Information...............................................2
Part 4 - Determination of Accumulation Values..................................8
Part 5 - Tax Favored Retirement Programs.......................................8
Traditional Individual Retirement Annuities................................8
Roth Individual Retirement Annuities.......................................8
SIMPLE Individual Retirement Annuities.....................................8
Tax Sheltered Annuities....................................................8
Simplified Employee Pensions...............................................9
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit
Sharing Plans............................................................9
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations.................................................9
Distributions Under Tax Favored Retirement Programs........................9
Part 6 - Financial Statements.................................................10
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 2000.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity, the depositor of Separate Account I, is a wholly owned subsidiary of
The Western and Southern Life Insurance Company ("W&S"), a mutual life insurance
company originally organized under the laws of the State of Ohio on February 23,
1888.
Until March 3, 2000, Integrity was an indirect wholly owned subsidiary of ARM
Financial Group, Inc. ("ARM"). ARM provided substantially all of the services
required to be performed on behalf of the Separate Account. Total fees paid to
ARM by Integrity for management services in 1997 were $19,307,552, in 1998 were
$27,158,002, and in 1999 were $32,545,976 including services applicable to the
Registrant.
Integrity is the custodian for the shares of the Funds owned by the Separate
Account. The Funds' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company, Moody's
Investor Service, Standard & Poor's Corporation, Duff & Phelps Corporation, or
other recognized rating services. Integrity is currently rated "A" (Excellent)
by A.M. Best Company, "AAA" (Extremely Strong) by Standard & Poor's Corporation,
"Aa2" (Excellent) by Moody's Investors Service, Inc., and "AAA" (Highest) by
Duff and Phelps Credit Rating Company. However, Integrity doesn't guarantee the
investment performance of the portfolios, and these ratings don't reflect
protection against investment risk.
During 1999, prior to acquisition by W&S, the following actions were taken by
state insurance departments: 1) Integrity's Hawaii certificate of authority was
cancelled September 16, 1999 and was reinstated during the fourth quarter of
1999; 2) Integrity agreed effective September 8, 1999 that it would not accept
new applications from residents of the state of Colorado without the approval of
the Commissioner of the Colorado Division of Insurance; 3) Integrity agreed
effective January 20, 2000 that it would not write any general account or
guaranteed separate account business in the State of California, and that upon
the closing of the W&S acquisition that Integrity would request the consent of
the California Insurance Commissioner prior to resumption of writing such
business in California; 4) Integrity's certificate of authority was suspended in
the State of Nevada effective September 21, 1999, however, the Nevada Division
of Insurance advised of the rescission of such Order on March 10, 2000 and a
formal Order rescinding such suspension is expected; 5) Integrity agreed
effective January 7, 2000 that it would not write any general account business
in the State of Florida until the closing of the acquisition by W&S and upon
meeting certain statutory surplus requirements; (6) Integrity's North Carolina
certificate of authority was restricted to "no new business" effective September
29, 1999. Integrity expects all such remaining restrictions to be lifted once
the state insurance departments involved have completed their review of the W&S
acquisition of Integrity.
TAX STATUS OF INTEGRITY
Integrity is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate
Account isn't a separate entity from Integrity and its operations form a part of
Integrity, it isn't taxed separately as a "regulated investment company" under
Subchapter M of the Code. Investment income and realized capital gains on the
assets of the Separate Account are reinvested and taken into account in
determining the accumulation value. Under existing federal income tax law, the
Separate Account's investment income, including realized net capital gains,
isn't taxed to Integrity. Integrity can make a tax deduction if federal tax laws
change to include these items in our taxable income.
PART 2 - DISTRIBUTION OF THE CONTRACTS
Touchstone Securities, Inc. ("Touchstone Securities"), 311 Pike Street,
Cincinnati, Ohio 45202, and indirect subsidiary of W&S and an affiliate of
Integrity, is the principal underwriter of the contracts. Touchstone Securities
is registered with the SEC as a broker-dealer and is a member in good standing
of the National Association of Securities Dealers, Inc. The contracts are
offered through Touchstone Securities on a continuous basis.
We generally pay a maximum distribution allowance of 7.5% of initial
contribution and 7% of additional contributions, plus .50% trail commission paid
on Account Value after the 8th Contract Year. The amount of distribution
allowances paid was $2,933,356 for the year ended December 31, 1999, $7,795,349
for the year ended December 31, 1998, and $6,750,503 for the year ended December
31, 1997. Distribution allowances weren't retained by ARM Securities
Corporation, the principal underwriter for the contracts prior to March 3, 2000,
during these years. Integrity may from time to time pay or allow additional
promotional incentives, in the form of cash or other compensation, to
broker-dealers
1
<PAGE>
that sell contracts. In some instances, those types of incentives
may be offered only to certain broker-dealers that sell or are expected to sell
certain minimum amounts of the contracts during specified time periods.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and we can't guarantee that any historical results will
continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all charges
that apply to the Option on an annual basis, including mortality risk and
expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of contract
values, an average account value of $40,000 has been used. Quotations also will
assume a termination (surrender) at the end of the particular period and reflect
the deductions of the contingent withdrawal charge, if they would apply. Any
total return calculation will be based upon the assumption that the Option
corresponding to the investment portfolio was in existence throughout the stated
period and that the applicable contractual charges and expenses of the Option
during the stated period were equal to those that currently apply under the
contract. Total returns may be shown at the same time that do not take into
account deduction of the contingent withdrawal charge, and/or the annual
administrative charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Option over certain
periods, including 1, 3, 5, and 10 years (up to the life of the Option), and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. Investors should realize that the Option's performance
is not constant over time, but changes from year to year, and that the average
annual returns represent the averages of historical figures as opposed to the
actual historical performance of an Option during any portion of the period
shown. Average annual returns are calculated pursuant to the following formula:
n
P(1+T) = ERV, where P is a hypothetical initial payment of $1,000, T is the
average annual total return, n is the number of years, and ERV is the withdrawal
value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or any contingent
withdrawal charge. Yields are annualized and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
2
<PAGE>
For the period ending: 12/31/99
All figures are unaudited.
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
VARIABLE SEC STANDARDIZED
ACCOUNT AVERAGE ANNUAL RETURN (1)
INCEPTION -------------------------------------------------------
VARIABLE OPTIONS DATE (2) 1 YEAR 5 YEAR 10 YEAR LIFE OF ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VIP II Asset Manager: Initial Class 9/3/91 2.52% 7.65% n/a 11.24%
VIP II Asset Manager: Growth:
Initial Class 2/8/95 6.63% n/a n/a 18.23%
VIP III Balanced: Initial Class 2/19/97 - 3.94% n/a n/a 10.00%
VIP II Contrafund: Initial Class 2/8/95 15.50% n/a n/a 25.68%
VIP Equity-Income: Initial Class 9/3/91 - 2.18% 16.61% n/a 15.13%
VIP Growth: Initial Class 9/3/91 31,33% 39.76% n/a 20.67%
VIP III Growth & Income:
Initial Class 2/14/97 0.62% n/a n/a 18.13%
VIP III Growth Opportunities: 2/19/97 -4.21% n/a n/a 14.19%
Initial Class
VIP High Income: Initial Class 2/19/93 - 0.38% 8.86% n/a 8.33%
VIP II Index 500: Initial Class 3/4/93 11.81 26.12% n/a 19.45%
VIP II Investment Grade Bond:
Initial Class 9/3/91 -9.46% 5.29% n/a 5.32%
VIP Mid Cap: Service Class 12/28/98 39.86% n/a n/a 23.77%
---------------------------------------------------------------------------------------------------
VIP Overseas: Initial Class 9/3/91 33.63% 15.38% n/a 11.94%
---------------------------------------------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that would
apply if an owner terminated the policy at the end of the period, but
exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
3
<PAGE>
For the period ending: 12/31/99
All figures are unaudited.
NON STANDARDIZED RETURNS
RETURNS WITHOUT SURRENDER CHARGES (1)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
FUND --------------------------------------------------------------------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VIP II Asset Manager: 9/6/89 48.05 93.10 200.08 201.23 9.59 13.97 14.07 11.62 11.28
Initial Class
VIP II Asset Manager: 1/3/95 62.72 n/a n/a 133.85 13.70 17.62 n/a n/a 18.56
Growth: Initial Class
VIP III Balanced: 1/3/95 44.28 n/a n/a 75.92 3.14 13.00 n/a n/a 11.98
Initial Class
VIP II Contrafund: 1/3/95 92.49 n/a n/a 217.30 22.58 24.40 n/a n/a 26.03
Initial Class
VIP Equity-Income: 10/9/86 45.99 119.32 237.76 361.15 4.90 13.44 17.01 12.94 12.25
Initial Class
VIP Growth: Initial 10/9/86 127.28 243.40 437.58 713.22 35.58 31.48 27.99 18.32 17.17
Class
VIP III Growth & 12/31/96 n/a n/a n/a 76.70 7.70 n/a n/a n/a 20.91
Income: Initial Class
VIP III Growth 1/3/95 62.12 n/a n/a 147.31 2.87 17.47 n/a n/a 19.89
Opportunities:
Initial Class
VIP High Income: 9/19/85 16.89 56.43 151.25 94.86 6.70 5.34 9.36 9.65 4.78
Initial Class
VIP II Index 500: 8/27/92 97.02 223.05 n/a 268.86 18.89 25.36 26.43 n/a 19.45
Initial Class
VIP II Investment 12/5/88 12.77 32.85 60.94 61.16 -2.38 4.09 5.85 4.87 4.41
Grade Bond: Initial
Class
VIP III Mid Cap: 12/28/98 n/a n/a n/a 51.48 46.94 n/a n/a n/a 51.01
Service Class
- -----------------------------------------------------------------------------------------------------------------------------------
VIP Overseas: Initial 1/28/87 72.24 108.11 157.54 219.81 40.71 19.87 15.79 9.92 9.41
Class
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CALENDAR YEAR RETURN(2)
-------------------------------------------------------------------
VARIABLE OPTIONS 1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VIP II Asset Manager: -7.42 15.38 13.04 19.02 13.50 9.59
Initial Class
VIP II Asset Manager: n/a 21.49 18.30 23.38 15.98 13.70
Growth: Initial Class
VIP III Balanced: n/a n/a 12.40 8.48 20.54 3.14
Initial Class
VIP II Contrafund: n/a 37.76 19.66 22.47 28.23 22.58
Initial Class
VIP Equity-Income: 5.48 33.27 12.73 26.38 10.12 4.90
Initial Class
VIP Growth: Initial -1.16 33.54 13.14 21.82 37.61 35.58
Class
VIP III Growth & n/a n/a n/a 28.34 27.84 7.70
Income: Initial Class
VIP III Growth n/a 30.76 16.67 28.20 22.93 2.87
Opportunities:
Initial Class
VIP High Income: -2.80 18.98 12.48 16.08 -5.62 6.70
Initial Class
VIP II Index 500: -.79 35.34 21.15 30.91 26.60 18.89
Initial Class
VIP II Investment -5.14 15.74 1.78 7.59 7.38 -2.38
Grade Bond: Initial
Class
VIP III Mid Cap: n/a n/a n/a n/a n/a 46.94
Service Class
- --------------------------------------------------------------------------------------------
VIP Overseas: Initial 35.21 .48 8.20 11.67 10.05 40.71
Class
- --------------------------------------------------------------------------------------------
</TABLE>
1) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration. Non-standard performance is
since the portfolio inception date, which may predate the separate account.
2) Italicized returns are calculated from the inception date through year-end.
3) Represents the inception date of the underlying funds. Performance data for
periods prior to the actual inception of the variable account options is
hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
4
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
5
<PAGE>
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted issues
are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/ CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between one
and 9.99 years. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
6
<PAGE>
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation. Savings and
Loan Historical Interest Rates as published in the United States Savings & Loan
League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by Integrity or any
of the Sub-Advisers derived from such indices or averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
7
<PAGE>
PART 4 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as of
the close of business on the New York Stock Exchange, which currently is
4:00 p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options, the accumulation unit value is computed by dividing
the value of the securities held by the Option plus any cash or other assets,
less its liabilities, by the number of outstanding units. Securities are valued
using the amortized cost method of valuation, which approximates market value.
Under this method of valuation, the difference between the acquisition cost and
value at maturity is amortized by assuming a constant (straight-line) accretion
of a discount or amortization of a premium to maturity. Cash, receivables and
current payables are generally carried at their face value.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with certain
tax-favored retirement programs, for groups and individuals. Following are brief
descriptions of various types of qualified plans in connection with which
Integrity may issue a contract. Integrity reserves the right to change its
administrative rules, such as minimum contribution amounts, as needed to comply
with the Code as to tax-favored retirement programs.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may begin. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract that apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may begin. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose of
complying with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are
excluded from the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee
8
<PAGE>
should obtain competent tax advice as to the tax treatment and suitability of
such an investment. Your contract will be issued with a rider outlining the
special terms that apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with these
plans should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. Plans in existence on
August 20, 1996, should have established a trust, custodial account, or annuity
contract by January 1, 1999. Loans to employees may be permitted under such
plans; however, a Section 457 plan is not required to allow loans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions.
Participants in qualified plans, with the exception of five-percent owners, must
begin receiving distributions by April 1 of the calendar year following the
later of either (i) the year in which the employee reaches age 70-1/2 or (ii)
the calendar year in which the employee retires. Participants in Traditional
IRAs must begin receiving distributions by April 1 of the calendar year
following the year in which the employee reaches age 70-1/2. Additional
distribution rules apply after the participant's death. If you don't take
mandatory distributions you may owe a 50% penalty tax on any difference between
the required distribution amount and the amount distributed. Owners of
traditional IRAs and five percent owners must begin distributions by age 70-1/2.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408(a) Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional IRA;
or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding
9
<PAGE>
unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP is our independent auditor and serves as independent auditor
of the Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1999, and
for the periods indicated in the financial statements and the statutory basis
financial statements of Integrity as of and for the years ended December 31,
1999 and 1998 included in this SAI have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
10
<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
<PAGE>
Financial Statements
Separate Account I
of
Integrity Life Insurance Company
DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Financial Statements
December 31, 1999
CONTENTS
Report of Independent Auditors..............................................1
Audited Financial Statements
Statement of Assets and Liabilities ........................................2
Statement of Operations.....................................................4
Statements of Changes in Net Assets.........................................6
Notes to Financial Statements..............................................10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of
Separate Account I of Integrity Life Insurance Company (comprising,
respectively, the Initial Class Money Market (Grandmaster-TM-), Money Market
(IQ Annuity-TM-), High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond (Grandmaster-TM-), Investment Grade Bond (IQ Annuity-TM-), Asset
Manager, Index 500 (Grandmaster-TM-), Asset Manager: Growth, Contrafund,
Growth Opportunities, Balanced, Growth & Income, Service Class Mid Cap
(Grandmaster-TM-), Mid Cap (IQ Annuity-TM-), High Income, Equity-Income,
Growth, Overseas, Asset Manager, Asset Manager: Growth, Contrafund, Growth
Opportunities, Balanced, and Growth & Income Divisions) as of December 31,
1999, the related statement of operations for the year then ended 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 securities owned in Variable Insurance
Products Fund, Variable Insurance Products Fund II and Variable Insurance
Products Fund III (collectively the "Fidelity VIP Funds") as of December 31,
1999, by correspondence with the transfer agent of the Fidelity VIP Funds. 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 I of Integrity Life Insurance Company at
December 31, 1999, and 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 I of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------------------
MONEY MARKET MONEY MARKET EQUITY-
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) HIGH INCOME INCOME
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 54,839,927 $ 6,679,410 $ 43,849,754 $ 97,981,536
Receivable from (payable to) the general
account of Integrity 11,868 (593) 11,018 (8,246)
---------------------------------------------------------------------------
NET ASSETS $ 54,851,795 $ 6,678,817 $ 43,860,772 $ 97,973,290
===========================================================================
UNIT VALUE $ 16.89 $ 10.20 $ 17.40 $ 40.25
===========================================================================
UNITS OUTSTANDING 3,247,590 654,786 2,520,734 2,434,119
===========================================================================
<CAPTION>
INITIAL CLASS SHARES
----------------------------------------------------------------------------
INVESTMENT INVESTMENT
GRADE BOND GRADE BOND
GROWTH OVERSEAS (GRANDMASTER-TM-) (IQ ANNUITY-TM-)
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) 134,920,635 $41,096,592 $ 21,116,755 $ 91,012
Receivable from (payable to) the general
account of Integrity 5,040 3,695 (4,276) 7
---------------------------------------------------------------------------
NET ASSETS $134,925,675 $41,100,287 $ 21,112,479 $ 91,019
===========================================================================
UNIT VALUE $ 77.23 $ 30.97 $ 20.89 $ 9.99
===========================================================================
UNITS OUTSTANDING 1,747,063 1,327,100 1,010,650 9,111
===========================================================================
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------------------
ASSET
ASSET INDEX 500 INDEX 500 MANAGER
MANAGER (GRANDMASTER-TM-) (IQ ANNUITY-TM-) GROWTH
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 55,237,440 $83,603,661 $ 896,828 $ 14,883,082
Receivable from (payable to) the general
account of Integrity (5,483) 10,967 124 (1,253)
---------------------------------------------------------------------------
NET ASSETS $ 55,231,957 $83,614,628 $ 896,952 $ 14,881,829
===========================================================================
UNIT VALUE $ 32.05 $ 33.89 $ 11.32 $ 23.16
===========================================================================
UNITS OUTSTANDING 1,723,306 2,467,236 79,236 642,566
===========================================================================
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------------------
GROWTH GROWTH &
CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 87,913,506 $15,699,810 $ 4,970,594 $ 24,626,950
Receivable from (payable to) the general
account of Integrity 3,107 (3,660) 68 (3,293)
---------------------------------------------------------------------------
NET ASSETS $ 87,916,613 $15,696,150 $ 4,970,662 $ 24,623,657
===========================================================================
UNIT VALUE $ 31.09 $ 15.04 $ 13.56 $ 16.67
===========================================================================
UNITS OUTSTANDING 2,827,810 1,043,627 366,568 1,477,124
===========================================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------
MID CAP MID CAP
(GRANDMASTER-TM-) (IQ ANNUITY-TM-)
DIVISION DIVISION
---------------------------------------
<S> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 132,753 $ 30,956
Receivable from (payable to) the general
account of Integrity (14) 3
-----------------------------------
NET ASSETS $ 132,739 $ 30,959
===================================
UNIT VALUE $ 13.11 $ 13.79
===================================
UNITS OUTSTANDING 10,125 2,245
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statment of Assets and Liabilities (continued)
December 31, 1999
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------------------------------------------
EQUITY
HIGH INCOME INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 263,678 $ 558,719 $ 838,048 $ 372,452
Receivable from (payable to) the general
account of Integrity 132 (247) 277 111
-------------------------------------------------------------------------
NET ASSETS $ 263,810 $ 558,472 $ 838,325 $ 372,563
=========================================================================
UNIT VALUE $ 10.00 $ 9.74 $ 12.75 $ 13.66
=========================================================================
UNITS OUTSTANDING 26,381 57,338 65,751 27,274
=========================================================================
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------------------------------------------
ASSET
ASSET MANAGER: GROWTH
MANAGER GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 966,246 $ 68,114 $ 563,114 $ 344,446
Receivable from (payable to) the general
account of Integrity (288) 30 180 134
---------------------------------------------------------------------------
NET ASSETS $ 965,958 $ 68,144 $ 563,294 $ 344,580
===========================================================================
UNIT VALUE $ 10.39 $ 10.45 $ 11.69 $ 10.00
===========================================================================
UNITS OUTSTANDING 92,970 6,521 48,186 34,458
===========================================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------------
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
---------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 430,795 $ 776,435 $668,962,589
Receivable from (payable to) the general
account of Integrity 75 57 22,844
-----------------------------------------------------
NET ASSETS $ 430,870 $ 776,492 $668,985,433
=====================================================
UNIT VALUE $ 10.08 $ 10.54
=================================
UNITS OUTSTANDING 42,745 73,671
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
MONEY MARKET MONEY MARKET
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) HIGH INCOME
DIVISION DIVISION (1) DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 2,905,357 $ 86,189 $4,916,893
EXPENSES
Mortality and expense risk and
administrative charges 780,513 23,912 598,618
---------------------------------------------------
Net investment income (loss) 2,124,844 62,277 4,318,275
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments - - (1,271,083)
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 18 - (12,812)
End of period 37 (18) 1,192,825
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 19 (18) 1,205,637
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 19 (18) (65,446)
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,124,863 $ 62,259 $4,252,829
==================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
EQUITY-
INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 6,164,420 $12,847,052 $ 1,559,458
EXPENSES
Mortality and expense risk and
administrative charges 1,668,144 1,649,935 520,022
---------------------------------------------------
Net investment income (loss) 4,496,276 11,197,117 1,039,436
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 11,931,143 13,237,102 4,046,708
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 22,145,621 22,738,024 1,188,625
End of period 11,418,044 34,354,711 9,369,463
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (10,727,577) 11,616,687 8,180,838
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 1,203,566 24,853,789 12,227,546
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 5,699,842 $36,050,906 $13,266,982
===================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
INVESTMENT INVESTMENT GRADE
GRADE BOND BOND ASSET
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) MANAGER
DIVISION DIVISION (2) DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,334,121 $ - $5,336,891
EXPENSES
Mortality and expense risk and
administrative charges 332,705 471 931,099
---------------------------------------------------
Net investment income (loss) 1,001,416 (471) 4,405,792
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (86,789) 44 5,415,250
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 746,542 - 10,891,110
End of period (756,411) 464 6,529,077
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (1,502,953) 464 (4,362,033)
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (1,589,742) 508 1,053,217
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ (588,326) $ 37 $5,459,009
===================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
ASSET
INDEX 500 INDEX 500 MANAGER:
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) GROWTH
DIVISION DIVISION (2) DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,300,999 $ - $ 977,133
EXPENSES
Mortality and expense risk and
administrative charges 1,185,909 5,149 210,084
---------------------------------------------------
Net investment income (loss) 115,090 (5,149) 767,049
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 12,538,937 2,579 882,504
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 16,445,939 - 1,819,433
End of period 18,158,659 84,084 2,105,947
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 1,712,720 84,084 286,514
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 14,251,657 86,663 1,169,018
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $14,366,747 $ 81,514 $1,936,067
===================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------------------------
GROWTH GROWTH &
CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 3,344,703 $ 498,801 $ 201,890 $ 417,462
EXPENSES
Mortality and expense risk and
administrative charges 1,176,089 235,080 67,756 350,414
---------------------------------------------------------------------
Net investment income (loss) 2,168,614 263,721 134,134 67,048
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 9,737,249 982,789 96,383 1,874,881
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 18,005,189 2,083,100 312,289 3,175,916
End of period 23,098,523 1,246,534 207,197 3,025,579
---------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 5,093,334 (836,566) (105,092) (150,337)
---------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 14,830,583 146,223 (8,709) 1,724,544
---------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $16,999,197 $ 409,944 $ 125,425 $ 1,791,592
=====================================================================
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------
MID CAP MID CAP
(GRANDMASTER-TM-) (IQ ANNUITY-TM-)
DIVISION (5) DIVISION (5)
-------------------------------------
<S>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 505 $ 222
EXPENSES
Mortality and expense risk and
administrative charges 147 133
---------------------------------
Net investment income (loss) 358 89
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 19 67
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - -
End of period 15,388 7,188
---------------------------------
Change in net unrealized appreciation/
depreciation during the period 15,388 7,188
---------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 15,407 7,255
---------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 15,765 $ 7,344
=================================
</TABLE>
(1) For the period June 21, 1999 (commencement of operations) to December 31,
1999
(2) For the period June 2, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
4
<PAGE>
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------
EQUITY-
HIGH INCOME INCOME GROWTH
DIVISION (1) DIVISION (1) DIVISION (1)
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 1,571 3,559 4,449
-------------------------------------------------
Net investment income (loss) (1,571) (3,559) (4,449)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (178) (1,949) 22,418
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - - -
End of period 2,812 (12,844) 149,950
-------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 2,812 (12,844) 149,950
-------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 2,634 (14,793) 172,368
--------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,063 $ (18,352) $ 167,919
=================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------
ASSET
ASSET MANAGER:
OVERSEAS MANAGER GROWTH
DIVISION (1) DIVISION (2) DIVISION (3)
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 20,907 5,076 356
-------------------------------------------------
Net investment income (loss) (20,907) (5,076) (356)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 1,376,575 67 (76)
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - - -
End of period 5,304 69,135 5,614
-------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 5,304 69,135 5,614
-------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 1,381,879 69,202 5,538
-------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,360,972 $ 64,126 $ 5,182
=================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------
GROWTH
CONTRAFUND OPPORTUNITIES BALANCED
DIVISION (1) DIVISION (4) DIVISION (5)
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 2,881 1,573 2,139
-------------------------------------------------
Net investment income (loss) (2,881) (1,573) (2,139)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 543 (655) (1,544)
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - - -
End of period 67,567 6,698 9,810
-------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 67,567 6,698 9,810
-------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 68,110 6,043 8,266
-------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 65,229 $ 4,470 $ 6,127
=================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------
GROWTH &
INCOME
DIVISION (6) TOTAL
---------------------------------
<S> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ 41,892,096
EXPENSES
Mortality and expense risk and
administrative charges 3,476 9,782,167
--------------------------------
Net investment income (loss) (3,476) 32,109,929
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 598 60,783,582
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - 99,538,994
End of period 34,929 110,396,266
--------------------------------
Change in net unrealized appreciation/
depreciation during the period 34,929 10,857,272
--------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 35,527 71,640,854
--------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 32,051 $103,750,783
================================
</TABLE>
(1) For the period June 2, 1999 (commencement of operations) to
December 31, 1999
(2) For the period July 7, 1999 (commencement of operations) to
December 31, 1999
(3) For the period July 13, 1999 (commencement of operations) to
December 31, 1999
(4) For the period June 10, 1999 (commencement of operations) to
December 31, 1999
(5) For the period June 15, 1999 (commencement of operations) to
December 31, 1999
(6) For the period June 3, 1999 (commencement of operations) to
December 31, 1999
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INITIAL CLASS SHARES
--------------------------------------------------------------
MONEY MONEY
MARKET MARKET EQUITY
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) HIGH INCOME INCOME
DIVISION DIVISION (1) DIVISION DIVISION
--------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 2,124,844 $ 62,277 $ 4,318,275 $ 4,496,276
Net realized gain (loss) on sales of investments - - (1,271,083) 11,931,143
Change in net unrealized appreciation/depreciation
during the period 19 (18) 1,205,637 (10,727,577)
--------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,124,863 62,259 4,252,829 5,699,842
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 3,817,318 740,151 911,552 5,029,460
Contract terminations and benefits (27,672,383) (102,099) (7,516,166) (28,852,976)
Net transfers among investment options 24,636,392 5,978,506 (7,467,907) (14,313,419)
--------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions 781,327 6,616,558 (14,072,521) (38,136,935)
--------------------------------------------------------------
Increase (decrease) in net assets 2,906,190 6,678,817 (9,819,692) (32,437,093)
Net assets, beginning of year 51,945,605 - 53,680,464 130,410,383
--------------------------------------------------------------
Net assets, end of year $ 54,851,795 $ 6,678,817 $43,860,772 $ 97,973,290
==============================================================
UNIT TRANSACTIONS
Contributions 231,566 73,710 53,299 124,423
Terminations and benefits (1,662,717) (10,117) (439,141) (723,939)
Net transfers 1,487,979 591,193 (386,704) (365,124)
--------------------------------------------------------------
Net increase (decrease) in units 56,828 654,786 (772,546) (964,640)
==============================================================
<CAPTION>
INITIAL CLASS SHARES
-------------------------------------------------------------
INVESTMENT INVESTMENT
GRADE BOND GRADE BOND
GROWTH OVERSEAS (GRANDMASTER-TM-)(IQ ANNUITY-TM-)
DIVISION DIVISION DIVISION DIVISION (2)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 11,197,117 $ 1,039,436 $ 1,001,416 $ (471)
Net realized gain (loss) on sales of investments 13,237,102 4,046,708 (86,789) 44
Change in net unrealized appreciation/depreciation
during the period 11,616,687 8,180,838 (1,502,953) 464
------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 36,050,906 13,266,982 (588,326) 37
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 6,385,976 864,570 724,033 75,171
Contract terminations and benefits (31,409,934) (8,992,259) (7,683,893) (6,507)
Net transfers among investment options 13,268,851 (3,952,006) 2,214,288 22,318
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions (11,755,107) (12,079,695) (4,745,572) 90,982
------------------------------------------------------------
Increase (decrease) in net assets 24,295,799 1,187,287 (5,333,898) 91,019
Net assets, beginning of year 110,629,876 39,913,000 26,446,377 -
------------------------------------------------------------
NET ASSETS, END OF YEAR $ 134,925,675 $ 41,100,287 $ 21,112,479 $ 91,019
============================================================
UNIT TRANSACTIONS
Contributions 102,072 37,101 34,485 7,522
Terminations and benefits (482,926) (358,045) (365,953) (651)
Net transfers 185,679 (165,359) 106,306 2,240
------------------------------------------------------------
Net increase (decrease) in units (195,175) (486,303) (225,162) 9,111
============================================================
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------
ASSET
ASSET INDEX 500 INDEX 500 MANAGER:
MANAGER (GRANDMASTER-TM-)(IQ ANNUITY-TM-) GROWTH
DIVISION DIVISION DIVISION (2) DIVISION
<S> ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS <C> <C> <C> <C>
Net investment income (loss)
Net realized gain (loss) on sales of investments $ 4,405,792 $ 115,090 $ (5,149) $ 767,049
Change in net unrealized appreciation/depreciation 5,415,250 12,538,937 2,579 882,504
during the period
(4,362,033) 1,712,720 84,084 286,514
Net increase (decrease) in net assets ------------------------------------------------------------
resulting from operations
5,459,009 14,366,747 81,514 1,936,067
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,485,962 9,070,887 680,029 590,779
Contract terminations and benefits (22,411,183) (17,251,494) (45,987) (2,113,413)
Net transfers among investment options (1,103,590) (215,231) 181,396 (727,400)
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions (22,028,811) (8,395,838) 815,438 (2,250,034)
------------------------------------------------------------
Increase (decrease) in net assets (16,569,802) 5,970,909 896,952 (313,967)
Net assets, beginning of year 71,801,759 77,643,719 - 15,195,796
------------------------------------------------------------
NET ASSETS, END OF YEAR $ 55,231,957 $ 83,614,628 $ 896,952 $ 14,881,829
============================================================
UNIT TRANSACTIONS
Contributions 49,612 300,118 68,021 28,066
Terminations and benefits (745,494) (562,267) (6,172) (98,430)
Net transfers (35,573) 5,044 17,387 (33,059)
------------------------------------------------------------
Net increase (decrease) in units (731,455) (257,105) 79,236 (103,423)
============================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------------------
GROWTH GROWTH &
CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION
<S> ---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS <C> <C> <C> <C>
Net investment income (loss)
Net realized gain (loss) on sales of investments $ 2,168,614 $ 263,721 $ 134,134 $ 67,048
Change in net unrealized appreciation/depreciation 9,737,249 982,789 96,383 1,874,881
during the period
5,093,334 (836,566) (105,092) (150,337)
Net increase (decrease) in net assets ---------------------------------------------------------------
resulting from operations
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT 16,999,197 409,944 125,425 1,791,592
RELATED TRANSACTIONS
Contributions from contract holders
Contract terminations and benefits 6,273,981 2,225,557 579,550 3,110,890
Net transfers among investment options (16,827,289) (2,461,455) (686,420) (3,664,816)
693,494 (474,384) 1,000,953 1,119,311
Net increase (decrease) in net assets ---------------------------------------------------------------
from contract related transactions
(9,859,814) (710,282) 894,083 565,385
INCREASE (DECREASE) IN NET ASSETS ---------------------------------------------------------------
Net assets, beginning of year 7,139,383 (300,338) 1,019,508 2,356,977
80,777,230 15,996,488 3,951,154 22,266,680
NET ASSETS, END OF YEAR ---------------------------------------------------------------
$ 87,916,613 $ 15,696,150 $ 4,970,662 $24,623,657
UNIT TRANSACTIONS ===============================================================
Contributions
Terminations and benefits 233,414 150,604 43,079 196,235
Net transfers (616,596) (168,324) (51,747) (229,616)
25,770 (32,804) 74,768 72,089
Net increase (decrease) in units ---------------------------------------------------------------
(357,412) (50,524) 66,100 38,708
===============================================================
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------
MID CAP MID CAP
(GRANDMASTER -TM-) (IQ ANNUITY -TM-)
DIVISION (5) DIVISION (5)
<S> -------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS <C> <C>
Net investment income (loss)
Net realized gain (loss) on sales of investments $ 358 $ 89
Change in net unrealized appreciation/depreciation 19 67
during the period
15,388 7,188
Net increase (decrease) in net assets -------------------------------------
resulting from operations
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT 15,765 7,344
RELATED TRANSACTIONS
Contributions from contract holders
Contract terminations and benefits 15 20,739
Net transfers among investment options - (967)
116,959 3,843
NET INCREASE (DECREASE) IN NET ASSETS -------------------------------------
from contract related transactions
116,974 23,615
Increase (decrease) in net assets -------------------------------------
Net assets, beginning of year 132,739 30,959
- -
NET ASSETS, END OF YEAR -------------------------------------
$ 132,739 $ 30,959
UNIT TRANSACTIONS =====================================
Contributions
Terminations and benefits 1 1,995
Net transfers - (92)
10,124 342
Net increase (decrease) in units -------------------------------------
10,125 2,245
=====================================
</TABLE>
(1) For the period June 21, 1999 (commencement of operations) to December 31,
1999
(2) For the period June 2, 1999 (commencement of operations) to December 31,
1999
6
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets (Continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
------------------------------------------
EQUITY-
HIGH INCOME INCOME GROWTH
DIVISION (1) DIVISION (1) DIVISION (1)
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (1,571) $ (3,559) $ (4,449)
Net realized gain (loss) on sales of investments (178) (1,949) 22,418
Change in net unrealized appreciation/depreciation
during the period 2,812 (12,844) 149,950
------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,063 (18,352) 167,919
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 216,707 539,735 616,550
Contract terminations and benefits (3,608) (19,343) (187,691)
Net transfers among investment options 49,648 56,432 241,547
------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions 262,747 576,824 670,406
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 263,810 558,472 838,325
Net assets, beginning of year - - -
------------------------------------------
NET ASSETS, END OF YEAR $ 263,810 $ 558,472 $ 838,325
==========================================
Unit transactions
Contributions 21,691 54,274 58,617
Terminations and benefits (366) (2,816) (15,819)
Net transfers 5,056 5,880 22,953
------------------------------------------
Net increase (decrease) in units 26,381 57,338 65,751
==========================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------
ASSET
OVERSEAS MANAGER
DIVISION (1) DIVISION (2)
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ (20,907) $ (5,076)
Net realized gain (loss) on sales of investments 1,376,575 67
Change in net unrealized appreciation/depreciation
during the period 5,304 69,135
---------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,360,972 64,126
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 5,276,593 765,251
Contract terminations and benefits (6,020) (450)
Net transfers among investment options (6,258,982) 137,031
---------------------------------------
Net increase (decrease) in net assets
from contract related transactions (988,409) 901,832
---------------------------------------
Increase (decrease) in net assets 372,563 965,958
Net assets, beginning of year - -
---------------------------------------
Net assets, end of year $ 372,563 $ 965,958
=======================================
Unit transactions
Contributions 498,928 78,554
Terminations and benefits (486) (45)
Net transfers (471,168) 14,461
---------------------------------------
Net increase (decrease) in units 27,274 92,970
=======================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------------------------
ASSET
MANAGER: GROWTH
GROWTH CONTRAFUND OPPORTUNITIES BALANCED
DIVISION (3) DIVISION (1) DIVISION (4) DIVISION (5)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (356) $ (2,881) $ (1,573) $ (2,139)
Net realized gain (loss) on sales of investments (76) 543 (655) (1,544)
Change in net unrealized appreciation/depreciation
during the period 5,614 67,567 6,698 9,810
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,182 65,229 4,470 6,127
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 49,298 374,717 182,696 326,101
Contract terminations and benefits - (32,594) (9,656) (33,953)
Net transfers among investment options 13,664 155,942 167,070 132,595
----------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 62,962 498,065 340,110 424,743
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 68,144 563,294 344,580 430,870
Net assets, beginning of year - - - -
----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 68,144 $ 563,294 $ 344,580 $ 430,870
================================================================
UNIT TRANSACTIONS
Contributions 5,085 36,538 18,335 32,815
Terminations and benefits - (3,129) (992) (3,530)
Net transfers 1,436 14,777 17,115 13,460
----------------------------------------------------------------
Net increase (decrease) in units 6,521 48,186 34,458 42,745
================================================================
<CAPTION>
SERVICE CLASS SHARES
--------------------------------
GROWTH &
INCOME
DIVISION (6) TOTAL
--------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (3,476) $ 32,109,929
Net realized gain (loss) on sales of investments 598 60,783,582
Change in net unrealized appreciation/depreciation
during the period 34,929 10,857,272
---------------------------------
Net increase (decrease) in net assets
resulting from operations 32,051 103,750,783
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 605,331 51,539,599
Contract terminations and benefits (9,360) (178,001,916)
Net transfers among investment options 148,470 15,825,791
---------------------------------
Net increase (decrease) in net assets
from contract related transactions 744,441 (110,636,526)
---------------------------------
INCREASE (DECREASE) IN NET ASSETS 776,492 (6,885,743)
Net assets, beginning of year - 700,658,531
---------------------------------
NET ASSETS, END OF YEAR $ 776,492 $ 693,772,788
=================================
UNIT TRANSACTIONS
Contributions 59,803
Terminations and benefits (1,011)
Net transfers 14,879
----------------
Net increase (decrease) in units 73,671
================
</TABLE>
(1) For the period June 2, 1999 (commencement of operations) to December 31,
1999
(2) For the period July 7, 1999 (commencement of operations) to December 31,
1999
(3) For the period July 13, 1999 (commencement of operations) to December 31,
1999
(4) For the period June 10, 1999 (commencement of operations) to December 31,
1999
(5) For the period June 15, 1999 (commencement of operations) to December 31,
1999
(6) For the period June 3, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,708,783 $ 6,077,369 $ 6,104,940 $ 10,530,591
Net realized gain (loss) on sales of investments - (2,935,271) 7,734,921 9,584,088
Change in net unrealized appreciation/depreciation
during the period 2 (4,139,551) (2,417,469) 10,671,604
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,708,785 (997,453) 11,422,392 30,786,283
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 6,820,438 7,712,118 13,317,643 5,126,080
Contract terminations and benefits (7,202,303) (5,434,572) (10,388,872) (7,372,947)
Net transfers among investment options 14,673,226 (408,422) (6,346,700) (1,799,165)
-------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 14,291,361 1,869,124 (3,417,929) (4,046,032)
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 16,000,146 871,671 8,004,463 26,740,251
Net assets, beginning of year 35,945,459 52,808,793 122,405,920 83,889,625
-------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 51,945,605 $53,680,464 $ 130,410,383 $ 110,629,876
===================================================================
UNIT TRANSACTIONS
Contributions 428,066 442,610 361,197 108,613
Terminations and benefits (463,989) (315,672) (284,764) (156,864)
Net transfers 928,382 108,508 (190,039) (36,320)
-------------------------------------------------------------------
Net increase (decrease) in units 892,459 235,446 (113,606) (84,571)
===================================================================
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
-------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 2,452,485 $ 649,238 $ 7,719,996
Net realized gain (loss) on sales of investments 2,306,106 991,906 2,690,737
Change in net unrealized appreciation/depreciation
during the period (653,363) (125,383) (1,377,877)
-------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 4,105,228 1,515,761 9,032,856
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 2,478,365 1,816,248 3,645,976
Contract terminations and benefits (3,671,420) (2,241,407) (7,847,820)
Net transfers among investment options (3,899,502) 8,728,296 (2,274,789)
-------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (5,092,557) 8,303,137 (6,476,633)
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (987,329) 9,818,898 2,556,223
Net assets, beginning of year 40,900,329 16,627,479 69,245,536
-------------------------------------------------
NET ASSETS, END OF YEAR $ 39,913,000 $ 26,446,377 $ 71,801,759
=================================================
UNIT TRANSACTIONS
Contributions 113,240 88,240 135,739
Terminations and benefits (169,692) (109,343) (287,885)
Net transfers (196,862) 422,621 (80,153)
-------------------------------------------------
Net increase (decrease) in units (253,314) 401,518 (232,299)
=================================================
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets (Continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,103,543 $ 1,241,173 $ 2,311,332 $ 184,053
Net realized gain (loss) on sales of investments 4,749,457 742,938 4,541,199 404,631
Change in net unrealized appreciation/depreciation
during the period 8,599,375 2,449 9,669,661 1,767,710
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 14,452,375 1,986,560 16,522,192 2,356,394
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 17,005,436 1,633,701 10,028,589 5,240,215
Contract terminations and benefits (3,561,323) (655,361) (4,498,873) (450,989)
Net transfers among investment options 4,082,027 18,548 3,684,663 3,396,860
--------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 17,526,140 996,888 9,214,379 8,186,086
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 31,978,515 2,983,448 25,736,571 10,542,480
Net assets, beginning of year 45,665,204 12,212,348 55,040,659 5,454,008
--------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 77,643,719 $ 15,195,796 $ 80,777,230 $ 15,996,488
====================================================================
UNIT TRANSACTIONS
Contributions 678,848 88,384 460,454 404,468
Terminations and benefits (144,074) (35,109) (205,879) (35,136)
Net transfers 160,904 (2,750) 148,005 266,499
--------------------------------------------------------------------
Net increase (decrease) in units 695,678 50,525 402,580 635,831
====================================================================
<CAPTION>
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 71,776 $ (138,971) $ 40,016,308
Net realized gain (loss) on sales of investments 69,364 544,038 31,424,114
Change in net unrealized appreciation/depreciation
during the period 265,314 2,980,189 25,242,661
------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 406,454 3,385,256 96,683,083
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,348,464 7,724,587 83,897,860
Contract terminations and benefits (264,441) (689,902) (54,280,230)
Net transfers among investment options 1,050,149 6,846,653 27,751,844
------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 2,134,172 13,881,338 57,369,474
------------------------------------------------
Increase (decrease) in net assets 2,540,626 17,266,594 154,052,557
Net assets, beginning of year 1,410,528 5,000,086 546,605,974
------------------------------------------------
NET ASSETS, END OF YEAR $ 3,951,154 $22,266,680 $ 700,658,531
================================================
UNIT TRANSACTIONS
Contributions 111,678 574,277
Terminations and benefits (20,972) (51,837)
Net transfers 85,267 503,087
-------------------------------
Net increase (decrease) in units 175,973 1,025,527
===============================
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<PAGE>
Separate Account I
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 I
(the "Separate Account") on May 19, 1986, for the purpose of issuing flexible
premium variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended. 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"), were
acquired by the Western and Southern Life Insurance Company ("W&S.") (See Note 4
of Notes to Financial Statements.)
Contract holders may allocate or transfer their account values to one or more of
the Separate Account's investment divisions, or for certain contract holders, to
a guaranteed interest division provided by Integrity, or both. Certain contract
holders may also allocate or transfer a portion or all of their account values
to one or more fixed guaranteed rate options of Integrity's Separate Account
GPO. Certain contract holders may also allocate new contributions to a
Systematic Transfer Option ("STO") which accumulates interest at a fixed rate.
All STO contributions must be transferred to other investment divisions or to a
guaranteed rate option within one year of the contribution.
The Separate Account investment divisions are invested in shares of
corresponding investment portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series"
type mutual funds managed by Fidelity Management and Research Company ("Fidelity
Management"). The contract holder's account value in a Separate Account division
will vary depending on the performance of the corresponding portfolio. The
Separate Account currently has fourteen investment divisions available, each
with corresponding initial class shares and service class shares. 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 operative
portfolios of the Fidelity VIP Funds at December 31, 1999 for this Separate
Account.
10
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MONEY MARKET PORTFOLIO seeks to earn as high a level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
HIGH INCOME PORTFOLIO seeks a high current income while also considering growth
of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks and convertible securities,
with an emphasis on lower-quality debt securities.
EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities compromising S&P 500. It
normally invests at least 65% of the Portfolio's assets in income-producing
equity securities.
GROWTH PORTFOLIO seeks capital appreciation. It invests in companies that are
believed to have above-average growth potential. These companies tend to have
higher than average price/earnings (P/E) ratios. Companies with strong growth
potential often have new products, technologies, distribution channels or other
opportunities for a strong industry or market position. The stocks of these
companies are often called "growth" stocks.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as is
consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over the
long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to the
total return (i.e., the combination of capital changes and income) of common
stocks publicly traded in the United States. In seeking this objective, the
Portfolio attempts to duplicate the composition and total return of the Standard
& Poor's 500 Composite Stock Price Index while keeping transaction costs and
other expenses low.
11
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks, bonds
and short-term money market instruments. The Portfolio has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The approximate neutral mix for stocks, bonds and short-term
instruments is 70%, 25% and 5%, respectively.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation by investing assets
primarily in common stocks. The Portfolio invests assets in securities of
companies whose value may not fully be recognized by the public. The types of
companies in which the Portfolio may invest include companies experiencing
positive fundamental change such as a new management team or product launch, a
significant cost-cutting initiative, a merger or acquisition, or a reduction in
industry capacity that should lead to improved pricing; companies whose earning
potential has increased or is expected to increase more than generally
perceived; companies that have enjoyed recent market popularity but which appear
to have temporarily fallen out of favor for reasons that are considered
non-recurring or short-term; and companies that are undervalued in relation to
securities of other companies in the same industry.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks. The Portfolio has the ability to purchase other
types of securities, including bonds which may be lower-quality debt securities.
BALANCED PORTFOLIO seeks both income and growth of capital by investing
approximately 65% of assets in stocks and other equity securities, and the
remainder in bonds and other debt securities including lower-quality debt
securities, when its outlook is neutral.
GROWTH & INCOME PORTFOLIO seeks high total return through a combination of
current income and capital appreciation by investing mainly in common stocks
with a focus on those that pay current dividends and show potential for capital
appreciation. Investments may also include bonds, including lower-quality debt
securities, as well as stocks that are not currently paying dividends, but offer
prospects for future income or capital appreciation.
MID CAP PORTFOLIO invests primarily in common stocks with at least 65% of the
Portfolio's total assets in securities of companies with medium market
capitalizations. Medium market capitalization companies are those whose
market capitalization is similar to the capitalization of companies in the
S&P Mid Cap 400 at the time of the investment. Companies whose capitalization
no longer meets this definition after purchase continue to be considered to
have a medium market capitalization for purposes of the 65% policy.
12
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The assets of the Separate Account are owned by Integrity. The portion of the
Separate Account's assets supporting the contracts may not be used to satisfy
liabilities arising out of any other business of Integrity.
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 Fidelity VIP Funds 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.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Fidelity VIP Fund
portfolios are reinvested in the respective portfolios and are reflected in the
unit value of the divisions of the Separate Account.
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.
13
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
14
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during 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>
INITIAL CLASS:
Money Market (Grandmaster-TM-) $ 176,812,526 $ 173,883,903 $ 54,839,890
Money Market (IQ Annuity -TM-) 161,318,964 154,639,536 6,679,428
High Income 104,301,298 114,042,760 42,656,929
Equity-Income 13,529,515 47,171,222 86,563,492
Growth 51,656,767 52,196,376 100,565,924
Overseas 34,331,979 45,382,719 31,727,129
Investment Grade Bond (Grandmaster-TM-) 9,761,670 13,503,713 21,873,166
Investment Grade Bond (IQ Annuity-TM-) 99,132 8,628 90,548
Asset Manager 14,475,074 32,066,535 48,708,363
Index 500 (Grandmaster-TM-) 23,684,705 31,969,497 65,445,002
Index 500 (IQ Annuity-TM-) 891,734 81,569 812,744
Asset Manager: Growth 2,771,358 4,258,859 12,777,135
Contrafund 19,605,781 27,417,925 64,814,983
Growth Opportunities 5,962,714 6,407,082 14,453,276
Balanced 2,615,717 1,538,167 4,763,397
Growth & Income 9,526,441 8,829,222 21,601,371
SERVICE CLASS:
Mid Cap (Grandmaster-TM-) 117,478 132 117,365
Mid Cap (IQ Annuity-TM-) 24,777 1,076 23,768
High Income 275,278 14,234 260,866
Equity-Income 603,668 30,156 571,563
Growth 854,399 188,719 688,098
Overseas 164,517,941 165,527,368 367,148
Asset Manager 905,270 8,226 897,111
Asset Manager: Growth 63,777 1,201 62,500
Contrafund 546,418 51,414 495,547
Growth Opportunities 363,397 24,994 337,748
Balanced 472,645 50,116 420,985
Growth & Income 764,712 23,804 741,506
------------------
$ 583,356,982
------------------
------------------
</TABLE>
15
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES
Integrity assumes mortality and expense risks and incurs certain administrative
expenses related to the operations of the Separate Account and deducts a charge
from the assets of the Separate Account at an annual rate. There are two
contracts currently offered by the Separate Account: GrandMaster III
("Grandmaster") and IQ the SmartAnnuity ("IQ"). Grandmaster has a deferred sales
load charge and lower mortality and expense annual rate. IQ has no sales load
charges on its contracts and carries a higher mortality and expense annual rate.
Grandmaster charges 1.20% and 0.15% and IQ charges 1.30% and 0.15% for mortality
and expense risks and administrative expenses, respectively. For all contracts,
an annual charge of $30 per contract is assessed if the participant's account
value is less than $50,000 at the end of any participation year prior to the
participant's retirement date (as defined by the participant's contract).
4. EVENTS RELATING TO INTEGRITY AND ARM
On July 29, 1999, ARM announced that it was restructuring its institutional
business (the Company had no 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.
16
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
FOR
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
Page
Part 1 - Integrity and Custodian...............................................1
Part 2 - Distribution of the Contracts.........................................1
Part 3 - Performance Information...............................................2
Part 4 - Determination of Accumulation Values..................................8
Part 5 - Tax Favored Retirement Programs.......................................8
Traditional Individual Retirement Annuities................................8
Roth Individual Retirement Annuities.......................................8
SIMPLE Individual Retirement Annuities.....................................8
Tax Sheltered Annuities....................................................9
Simplified Employee Pensions...............................................9
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit
Sharing Plans.............................................................9
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations..................................................9
Distributions Under Tax Favored Retirement Programs........................9
Part 6 - Financial Statements.................................................10
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 2000.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity, the depositor of Separate Account I, is a wholly owned subsidiary of
The Western and Southern Life Insurance Company ("W&S"), a mutual life insurance
company originally organized under the laws of the State of Ohio on February 23,
1888.
Until March 3, 2000, Integrity was an indirect wholly owned subsidiary of ARM
Financial Group, Inc. ("ARM"). ARM provided substantially all of the services
required to be performed on behalf of the Separate Account. Total fees paid to
ARM by Integrity for management services in 1997 were $19,307,552, in 1998 were
$27,158,002, and in 1999 were $32,545,978 including services applicable to the
Registrant.
Integrity is the custodian for the shares of the Funds owned by the Separate
Account. The Funds' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company, Moody's
Investor Service, Standard & Poor's Corporation, Duff & Phelps Corporation, or
other recognized rating services. Integrity is currently rated "A" (Excellent)
by A.M. Best Company, "AAA" (Extremely Strong) by Standard & Poor's Corporation,
"Aa2" (Excellent) by Moody's Investors Service, Inc., and "AAA" (Highest) by
Duff and Phelps Credit Rating Company. However, Integrity doesn't guarantee the
investment performance of the portfolios, and these ratings don't reflect
protection against investment risk.
During 1999, prior to acquisition by W&S, the following actions were taken by
state insurance departments: 1) Integrity's Hawaii certificate of authority was
cancelled September 16, 1999 and was reinstated during the fourth quarter of
1999; 2) Integrity agreed effective September 8, 1999 that it would not accept
new applications from residents of the state of Colorado without the approval of
the Commissioner of the Colorado Division of Insurance; 3) Integrity agreed
effective January 20, 2000 that it would not write any general account or
guaranteed separate account business in the State of California, and that upon
the closing of the W&S acquisition that Integrity would request the consent of
the California Insurance Commissioner prior to resumption of writing such
business in California; 4) Integrity's certificate of authority was suspended in
the State of Nevada effective September 21, 1999, however, the Nevada Division
of Insurance advised of the rescission of such Order on March 10, 2000 and a
formal Order rescinding such suspension is expected; 5) Integrity agreed
effective January 7, 2000 that it would not write any general account business
in the State of Florida until the closing of the acquisition by W&S and upon
meeting certain statutory surplus requirements; (6) Integrity's North Carolina
certificate of authority was restricted to "no new business" effective September
29, 1999. Integrity expects all such remaining restrictions to be lifted once
the state insurance departments involved have completed their review of the W&S
acquisition of Integrity.
TAX STATUS OF INTEGRITY
Integrity is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate
Account isn't a separate entity from Integrity and its operations form a part of
Integrity, it isn't taxed separately as a "regulated investment company" under
Subchapter M of the Code. Investment income and realized capital gains on the
assets of the Separate Account are reinvested and taken into account in
determining the accumulation value. Under existing federal income tax law, the
Separate Account's investment income, including realized net capital gains,
isn't taxed to Integrity. Integrity can make a tax deduction if federal tax laws
change to include these items in our taxable income.
PART 2 - DISTRIBUTION OF THE CONTRACTS
Touchstone Securities, Inc. ("Touchstone Securities"), 311 Pike Street,
Cincinnati, Ohio 45202, and indirect subsidiary of W&S and an affiliate of
Integrity, is the principal underwriter of the contracts. Touchstone Securities
is registered with the SEC as a broker-dealer and is a member in good standing
of the National Association of Securities Dealers, Inc. The contracts are
offered through Touchstone Securities on a continuous basis.
We generally pay a maximum distribution allowance of 7.5% of initial
contribution and 7% of additional contributions, plus .50% trail commission paid
on Account Value after the 8th Contract Year. The amount of distribution
allowances paid was $2,933,356 for the year ended December 31, 1999, $7,795,349
for the year ended December 31, 1998, and $6,750,503 for the year ended December
31, 1997. Distribution allowances weren't
1
<PAGE>
retained by ARM Securities Corporation, the principal underwriter for the
contracts prior to March 3, 2000, during these years. Integrity may from time to
time pay or allow additional promotional incentives, in the form of cash or
other compensation, to broker-dealers that sell contracts. In some instances,
those types of incentives may be offered only to certain broker-dealers that
sell or are expected to sell certain minimum amounts of the contracts during
specified time periods.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and we can't guarantee that any historical results will
continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all charges
that apply to the Option on an annual basis, including mortality risk and
expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of contract
values, an average account value of $40,000 has been used. Quotations also will
assume a termination (surrender) at the end of the particular. Any total return
calculation will be based upon the assumption that the Option corresponding to
the investment portfolio was in existence throughout the stated period and that
the applicable contractual charges and expenses of the Option during the stated
period were equal to those that currently apply under the contract. Total
returns may be shown at the same time that do not take into account deduction of
the annual administrative charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Option over certain
periods, including 1, 3, 5, and 10 years (up to the life of the Option), and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. Investors should realize that the Option's performance
is not constant over time, but changes from year to year, and that the average
annual returns represent the averages of historical figures as opposed to the
actual historical performance of an Option during any portion of the period
shown. Average annual returns are calculated pursuant to the following formula:
P(1+T) TO THE POWER OF n = ERV, where P is a hypothetical initial payment of
$1,000, T is the average annual total return, n is the number of years, and
ERV is the withdrawal value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses. Yields are annualized
and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
2
<PAGE>
For the period ending: 12/31/99
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
VARIABLE SEC STANDARDIZED
ACCOUNT AVERAGE ANNUAL RETURN (1)
INCEPTION --------------------------------------------------------
VARIABLE OPTIONS DATE (2) 1 YEAR 5 YEAR 10 YEAR LIFE OF ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VIP II Asset Manager: Service Class 7/7/99 n/a n/a n/a 8.21
VIP II Asset Manager: Growth: 7/13/99 n/a n/a n/a 9.69
Service Class
VIP III Balanced: Service Class 6/15/99 n/a n/a n/a 1.37
VIP II Contrafund: Service Class 6/2/99 n/a n/a n/a 30.72
VIP Equity-Income: Service Class 6/2/99 n/a n/a n/a -4.44
VIP Growth: Service Class 6/2/99 n/a n/a n/a 51.82
VIPIII Growth & Income: 6/3/99 n/a n/a n/a 9.44
Service Class
VIP III Growth Opportunities: 6/10/99 n/a n/a n/a -0.14
Service Class
VIP High Income: Service Class 6/2/99 n/a n/a n/a -0.16
VIP II Index 500: Initial Class 6/2/99 n/a n/a n/a 23.72
VIP II Investment Grade Bond: 6/2/99 n/a n/a n/a -0.26
Initial Class
VIP III Mid Cap: Service Class 6/15/99 n/a n/a n/a 80.21
----------------------------------------------------------------------------------------------------
VIP Overseas: Service Class 6/2/99 n/a n/a n/a 70.99
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on
a $1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.45%. They also reflect any withdrawal charges that would
apply if an owner terminated the policy at the end of the period, but
exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
3
<PAGE>
For the period ending: 12/31/99
NON-STANDARDIZED RETURNS
RETURNS WITHOUT SURRENDER CHARGES (1) All figures are unaudited.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
FUND -------------------------------------------------------------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VIP II Asset Manager: 9/6/89 46.91 90.84 193.61 194.55 9.40 13.68 13.80 11.37 11.04
Service Class
VIP II Asset Manager: 1/3/95 61.27 n/a n/a 130.86 13.47 17.27 n/a n/a 18.25
Growth: Service Class
VIP III Balanced: 1/3/95 43.21 n/a n/a 73.92 2.92 12.72 n/a n/a 11.73
Service Class
VIP II Contrafund: 1/3/95 91.45 n/a n/a 214.32 22.35 24.17 n/a n/a 25.79
Service Class
VIP Equity-Income: 10/9/86 45.15 118.46 231.09 349.10 4.72 13.22 16.92 12.72 12.03
Service Class
VIP Growth: Service 10/9/86 125.91 239.96 426.88 691.84 35.30 31.21 27.73 18.08 16.93
Class
VIP III Growth & 12/31/96 75.57 n/a n/a 75.57 7.48 20.65 n/a n/a 20.65
Income: Service Class
VIP III Growth 1/3/95 61.21 n/a n/a 144.93 2.67 17.25 n/a n/a 19.66
Opportunities:
Service Class
VIP High Income: 9/19/85 16.15 54.96 146.17 89.26 6.42 5.12 9.16 9.43 4.57
Service Class
VIP II Index 500: 8/27/92 96.43 221.44 n/a 266.17 18.77 25.24 26.30 n/a 19.33
Initial Class
VIP II Investment 12/5/88 12.43 32.20 59.26 59.61 -2.47 3.98 5.74 4.76 4.31
Grade Bond: Initial
Class
VIP III Mid Cap: 12/28/98 N/a N/a N/a 51.32 46.79 N/a N/a N/a 50.85
Service Class
- -------------------------------------------------------------------------------------------------------------------------
VIP Overseas: Service 1/28/87 71.20 106.03 152.42 211.60 40.33 19.63 15.55 9.70 9.19
Class
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CALENDAR YEAR RETURN(2)
----------------------------------------------------
VARIABLE OPTIONS 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VIP II Asset Manager: -7.54 15.15 12.82 18.67 13.15 9.4
Service Class
VIP II Asset Manager: n/a 21.14 18.16 23.08 15.46 13.47
Growth: Service Class
VIP III Balanced: n/a 14.59 8.26 20.40 8.55 2.92
Service Class
VIP II Contrafund: n/a 37.76 19.33 22.18 28.07 22.35
Service Class
VIP Equity-Income: 4.66 33.78 12.50 26.09 9.93 4.72
Service Class
VIP Growth: Service -1.56 33.28 12.91 21.56 37.36 35.30
Class
VIP III Growth & n/a n/a n/a 28.10 27.40 7.48
Income: Service Class
VIP III Growth n/a 30.06 17.47 27.68 25.63 2.67
Opportunities:
Service Class
VIP High Income: -3.08 18.85 12.25 15.78 -5.73 6.42
Service Class
VIP II Index 500: -.79 35.34 21.15 30.91 26.60 18.77
Initial Class
VIP II Investment -5.14 15.74 1.78 7.59 7.38 -2.47
Grade Bond: Initial
Class
VIP III Mid Cap: N/a N/a N/a N/a N/a 46.79
Service Class
- -----------------------------------------------------------------------------
VIP Overseas: Service .28 8.05 11.38 9.85 11.06 40.33
Class
- -----------------------------------------------------------------------------
</TABLE>
1) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.45%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration. Non-standard performance is
since the portfolio inception date, which may predate the separate account.
2) Italicized returns are calculated from the inception date through year-end.
3) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
4
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
5
<PAGE>
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted issues
are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/ CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between one
and 9.99 years. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
6
<PAGE>
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by Integrity or any
of the Sub-Advisers derived from such indices or averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a
single Option or a group of Options; (vi) a market risk/reward scatter chart
showing the historical risk/reward relationship of one or
7
<PAGE>
more mutual funds or Options to one or more indices and a broad category of
similar anonymous variable annuity subaccounts; and (vii) Option data sheets
showing various information about one or more Options (such as information
concerning total return for various periods, fees and expenses, standard
deviation, alpha and beta, investment objective, inception date and net
assets). We reserve the right to republish figures independently provided by
Morningstar or any similar agency or service.
PART 4 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as of
the close of business on the New York Stock Exchange, which currently is 4:00
p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options, the accumulation unit value is computed by dividing
the value of the securities held by the Option plus any cash or other assets,
less its liabilities, by the number of outstanding units. Securities are valued
using the amortized cost method of valuation, which approximates market value.
Under this method of valuation, the difference between the acquisition cost and
value at maturity is amortized by assuming a constant (straight-line) accretion
of a discount or amortization of a premium to maturity. Cash, receivables and
current payables are generally carried at their face value.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with certain
tax-favored retirement programs, for groups and individuals. Following are brief
descriptions of various types of qualified plans in connection with which
Integrity may issue a contract. Integrity reserves the right to change its
administrative rules, such as minimum contribution amounts, as needed to comply
with the Code as to tax-favored retirement programs.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may begin. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract that apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may begin. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose of
complying with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
8
<PAGE>
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are
excluded from the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms that apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with these
plans should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. Plans in existence on
August 20, 1996, should have established a trust, custodial account, or annuity
contract by January 1, 1999. Loans to employees may be permitted under such
plans; however, a Section 457 plan is not required to allow loans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions.
Participants in qualified plans, with the exception of five-percent owners, must
begin receiving distributions by April 1 of the calendar year following the
later of either (i) the year in which the employee reaches age 70-1/2 or (ii)
the calendar year in which the employee retires. Participants in Traditional
IRAs must begin receiving distributions by April 1 of the calendar year
following the year in which the employee reaches age 70-1/2. Additional
distribution rules apply after the participant's death. If you don't take
mandatory distributions you may owe a 50% penalty tax on any difference between
the required distribution amount and the amount distributed. Owners of
traditional IRAs and five percent owners must begin distributions by age 70-1/2.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth
9
<PAGE>
IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408(a) Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional IRA;
or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP is our independent auditor and serves as independent auditor
of the Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1999, and
for the periods indicated in the financial statements and the statutory basis
financial statements of Integrity as of and for the years ended December 31,
1999 and 1998 included in this SAI have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
10
<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
<PAGE>
Financial Statements
Separate Account I
of
Integrity Life Insurance Company
DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Financial Statements
December 31, 1999
CONTENTS
Report of Independent Auditors..............................................1
Audited Financial Statements
Statement of Assets and Liabilities ........................................2
Statement of Operations.....................................................4
Statements of Changes in Net Assets.........................................6
Notes to Financial Statements..............................................10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of
Separate Account I of Integrity Life Insurance Company (comprising,
respectively, the Initial Class Money Market (Grandmaster-TM-), Money Market
(IQ Annuity-TM-), High Income, Equity-Income, Growth, Overseas, Investment
Grade Bond (Grandmaster-TM-), Investment Grade Bond (IQ Annuity-TM-), Asset
Manager, Index 500 (Grandmaster-TM-), Asset Manager: Growth, Contrafund,
Growth Opportunities, Balanced, Growth & Income, Service Class Mid Cap
(Grandmaster-TM-), Mid Cap (IQ Annuity-TM-), High Income, Equity-Income,
Growth, Overseas, Asset Manager, Asset Manager: Growth, Contrafund, Growth
Opportunities, Balanced, and Growth & Income Divisions) as of December 31,
1999, the related statement of operations for the year then ended 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 securities owned in Variable Insurance
Products Fund, Variable Insurance Products Fund II and Variable Insurance
Products Fund III (collectively the "Fidelity VIP Funds") as of December 31,
1999, by correspondence with the transfer agent of the Fidelity VIP Funds. 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 I of Integrity Life Insurance Company at
December 31, 1999, and 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 I of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------------------
MONEY MARKET MONEY MARKET EQUITY-
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) HIGH INCOME INCOME
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 54,839,927 $ 6,679,410 $ 43,849,754 $ 97,981,536
Receivable from (payable to) the general
account of Integrity 11,868 (593) 11,018 (8,246)
---------------------------------------------------------------------------
NET ASSETS $ 54,851,795 $ 6,678,817 $ 43,860,772 $ 97,973,290
===========================================================================
UNIT VALUE $ 16.89 $ 10.20 $ 17.40 $ 40.25
===========================================================================
UNITS OUTSTANDING 3,247,590 654,786 2,520,734 2,434,119
===========================================================================
<CAPTION>
INITIAL CLASS SHARES
----------------------------------------------------------------------------
INVESTMENT INVESTMENT
GRADE BOND GRADE BOND
GROWTH OVERSEAS (GRANDMASTER-TM-) (IQ ANNUITY-TM-)
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) 134,920,635 $41,096,592 $ 21,116,755 $ 91,012
Receivable from (payable to) the general
account of Integrity 5,040 3,695 (4,276) 7
---------------------------------------------------------------------------
NET ASSETS $134,925,675 $41,100,287 $ 21,112,479 $ 91,019
===========================================================================
UNIT VALUE $ 77.23 $ 30.97 $ 20.89 $ 9.99
===========================================================================
UNITS OUTSTANDING 1,747,063 1,327,100 1,010,650 9,111
===========================================================================
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------------------
ASSET
ASSET INDEX 500 INDEX 500 MANAGER
MANAGER (GRANDMASTER-TM-) (IQ ANNUITY-TM-) GROWTH
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 55,237,440 $83,603,661 $ 896,828 $ 14,883,082
Receivable from (payable to) the general
account of Integrity (5,483) 10,967 124 (1,253)
---------------------------------------------------------------------------
NET ASSETS $ 55,231,957 $83,614,628 $ 896,952 $ 14,881,829
===========================================================================
UNIT VALUE $ 32.05 $ 33.89 $ 11.32 $ 23.16
===========================================================================
UNITS OUTSTANDING 1,723,306 2,467,236 79,236 642,566
===========================================================================
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------------------
GROWTH GROWTH &
CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 87,913,506 $15,699,810 $ 4,970,594 $ 24,626,950
Receivable from (payable to) the general
account of Integrity 3,107 (3,660) 68 (3,293)
---------------------------------------------------------------------------
NET ASSETS $ 87,916,613 $15,696,150 $ 4,970,662 $ 24,623,657
===========================================================================
UNIT VALUE $ 31.09 $ 15.04 $ 13.56 $ 16.67
===========================================================================
UNITS OUTSTANDING 2,827,810 1,043,627 366,568 1,477,124
===========================================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------
MID CAP MID CAP
(GRANDMASTER-TM-) (IQ ANNUITY-TM-)
DIVISION DIVISION
---------------------------------------
<S> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 132,753 $ 30,956
Receivable from (payable to) the general
account of Integrity (14) 3
-----------------------------------
NET ASSETS $ 132,739 $ 30,959
===================================
UNIT VALUE $ 13.11 $ 13.79
===================================
UNITS OUTSTANDING 10,125 2,245
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statment of Assets and Liabilities (continued)
December 31, 1999
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------------------------------------------
EQUITY
HIGH INCOME INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 263,678 $ 558,719 $ 838,048 $ 372,452
Receivable from (payable to) the general
account of Integrity 132 (247) 277 111
-------------------------------------------------------------------------
NET ASSETS $ 263,810 $ 558,472 $ 838,325 $ 372,563
=========================================================================
UNIT VALUE $ 10.00 $ 9.74 $ 12.75 $ 13.66
=========================================================================
UNITS OUTSTANDING 26,381 57,338 65,751 27,274
=========================================================================
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------------------------------------------
ASSET
ASSET MANAGER: GROWTH
MANAGER GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 966,246 $ 68,114 $ 563,114 $ 344,446
Receivable from (payable to) the general
account of Integrity (288) 30 180 134
---------------------------------------------------------------------------
NET ASSETS $ 965,958 $ 68,144 $ 563,294 $ 344,580
===========================================================================
UNIT VALUE $ 10.39 $ 10.45 $ 11.69 $ 10.00
===========================================================================
UNITS OUTSTANDING 92,970 6,521 48,186 34,458
===========================================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------------
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
---------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $583,356,982) $ 430,795 $ 776,435 $668,962,589
Receivable from (payable to) the general
account of Integrity 75 57 22,844
-----------------------------------------------------
NET ASSETS $ 430,870 $ 776,492 $668,985,433
=====================================================
UNIT VALUE $ 10.08 $ 10.54
=================================
UNITS OUTSTANDING 42,745 73,671
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
MONEY MARKET MONEY MARKET
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) HIGH INCOME
DIVISION DIVISION (1) DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 2,905,357 $ 86,189 $4,916,893
EXPENSES
Mortality and expense risk and
administrative charges 780,513 23,912 598,618
---------------------------------------------------
Net investment income (loss) 2,124,844 62,277 4,318,275
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments - - (1,271,083)
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 18 - (12,812)
End of period 37 (18) 1,192,825
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 19 (18) 1,205,637
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 19 (18) (65,446)
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,124,863 $ 62,259 $4,252,829
==================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
EQUITY-
INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 6,164,420 $12,847,052 $ 1,559,458
EXPENSES
Mortality and expense risk and
administrative charges 1,668,144 1,649,935 520,022
---------------------------------------------------
Net investment income (loss) 4,496,276 11,197,117 1,039,436
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 11,931,143 13,237,102 4,046,708
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 22,145,621 22,738,024 1,188,625
End of period 11,418,044 34,354,711 9,369,463
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (10,727,577) 11,616,687 8,180,838
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 1,203,566 24,853,789 12,227,546
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 5,699,842 $36,050,906 $13,266,982
===================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
INVESTMENT INVESTMENT GRADE
GRADE BOND BOND ASSET
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) MANAGER
DIVISION DIVISION (2) DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,334,121 $ - $5,336,891
EXPENSES
Mortality and expense risk and
administrative charges 332,705 471 931,099
---------------------------------------------------
Net investment income (loss) 1,001,416 (471) 4,405,792
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (86,789) 44 5,415,250
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 746,542 - 10,891,110
End of period (756,411) 464 6,529,077
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (1,502,953) 464 (4,362,033)
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (1,589,742) 508 1,053,217
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ (588,326) $ 37 $5,459,009
===================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------
ASSET
INDEX 500 INDEX 500 MANAGER:
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) GROWTH
DIVISION DIVISION (2) DIVISION
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,300,999 $ - $ 977,133
EXPENSES
Mortality and expense risk and
administrative charges 1,185,909 5,149 210,084
---------------------------------------------------
Net investment income (loss) 115,090 (5,149) 767,049
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 12,538,937 2,579 882,504
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 16,445,939 - 1,819,433
End of period 18,158,659 84,084 2,105,947
---------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 1,712,720 84,084 286,514
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 14,251,657 86,663 1,169,018
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $14,366,747 $ 81,514 $1,936,067
===================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------------------------
GROWTH GROWTH &
CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 3,344,703 $ 498,801 $ 201,890 $ 417,462
EXPENSES
Mortality and expense risk and
administrative charges 1,176,089 235,080 67,756 350,414
---------------------------------------------------------------------
Net investment income (loss) 2,168,614 263,721 134,134 67,048
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 9,737,249 982,789 96,383 1,874,881
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 18,005,189 2,083,100 312,289 3,175,916
End of period 23,098,523 1,246,534 207,197 3,025,579
---------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 5,093,334 (836,566) (105,092) (150,337)
---------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 14,830,583 146,223 (8,709) 1,724,544
---------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $16,999,197 $ 409,944 $ 125,425 $ 1,791,592
=====================================================================
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------
MID CAP MID CAP
(GRANDMASTER-TM-) (IQ ANNUITY-TM-)
DIVISION (5) DIVISION (5)
-------------------------------------
<S>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 505 $ 222
EXPENSES
Mortality and expense risk and
administrative charges 147 133
---------------------------------
Net investment income (loss) 358 89
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 19 67
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - -
End of period 15,388 7,188
---------------------------------
Change in net unrealized appreciation/
depreciation during the period 15,388 7,188
---------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 15,407 7,255
---------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 15,765 $ 7,344
=================================
</TABLE>
(1) For the period June 21, 1999 (commencement of operations) to December 31,
1999
(2) For the period June 2, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
4
<PAGE>
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------
EQUITY-
HIGH INCOME INCOME GROWTH
DIVISION (1) DIVISION (1) DIVISION (1)
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 1,571 3,559 4,449
-------------------------------------------------
Net investment income (loss) (1,571) (3,559) (4,449)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (178) (1,949) 22,418
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - - -
End of period 2,812 (12,844) 149,950
-------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 2,812 (12,844) 149,950
-------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 2,634 (14,793) 172,368
--------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,063 $ (18,352) $ 167,919
=================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------
ASSET
ASSET MANAGER:
OVERSEAS MANAGER GROWTH
DIVISION (1) DIVISION (2) DIVISION (3)
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 20,907 5,076 356
-------------------------------------------------
Net investment income (loss) (20,907) (5,076) (356)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 1,376,575 67 (76)
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - - -
End of period 5,304 69,135 5,614
-------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 5,304 69,135 5,614
-------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 1,381,879 69,202 5,538
-------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,360,972 $ 64,126 $ 5,182
=================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------
GROWTH
CONTRAFUND OPPORTUNITIES BALANCED
DIVISION (1) DIVISION (4) DIVISION (5)
---------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 2,881 1,573 2,139
-------------------------------------------------
Net investment income (loss) (2,881) (1,573) (2,139)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 543 (655) (1,544)
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - - -
End of period 67,567 6,698 9,810
-------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 67,567 6,698 9,810
-------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 68,110 6,043 8,266
-------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 65,229 $ 4,470 $ 6,127
=================================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------
GROWTH &
INCOME
DIVISION (6) TOTAL
---------------------------------
<S> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ - $ 41,892,096
EXPENSES
Mortality and expense risk and
administrative charges 3,476 9,782,167
--------------------------------
Net investment income (loss) (3,476) 32,109,929
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 598 60,783,582
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - 99,538,994
End of period 34,929 110,396,266
--------------------------------
Change in net unrealized appreciation/
depreciation during the period 34,929 10,857,272
--------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 35,527 71,640,854
--------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 32,051 $103,750,783
================================
</TABLE>
(1) For the period June 2, 1999 (commencement of operations) to
December 31, 1999
(2) For the period July 7, 1999 (commencement of operations) to
December 31, 1999
(3) For the period July 13, 1999 (commencement of operations) to
December 31, 1999
(4) For the period June 10, 1999 (commencement of operations) to
December 31, 1999
(5) For the period June 15, 1999 (commencement of operations) to
December 31, 1999
(6) For the period June 3, 1999 (commencement of operations) to
December 31, 1999
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INITIAL CLASS SHARES
--------------------------------------------------------------
MONEY MONEY
MARKET MARKET EQUITY
(GRANDMASTER-TM-) (IQ ANNUITY-TM-) HIGH INCOME INCOME
DIVISION DIVISION (1) DIVISION DIVISION
--------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 2,124,844 $ 62,277 $ 4,318,275 $ 4,496,276
Net realized gain (loss) on sales of investments - - (1,271,083) 11,931,143
Change in net unrealized appreciation/depreciation
during the period 19 (18) 1,205,637 (10,727,577)
--------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,124,863 62,259 4,252,829 5,699,842
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 3,817,318 740,151 911,552 5,029,460
Contract terminations and benefits (27,672,383) (102,099) (7,516,166) (28,852,976)
Net transfers among investment options 24,636,392 5,978,506 (7,467,907) (14,313,419)
--------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions 781,327 6,616,558 (14,072,521) (38,136,935)
--------------------------------------------------------------
Increase (decrease) in net assets 2,906,190 6,678,817 (9,819,692) (32,437,093)
Net assets, beginning of year 51,945,605 - 53,680,464 130,410,383
--------------------------------------------------------------
Net assets, end of year $ 54,851,795 $ 6,678,817 $43,860,772 $ 97,973,290
==============================================================
UNIT TRANSACTIONS
Contributions 231,566 73,710 53,299 124,423
Terminations and benefits (1,662,717) (10,117) (439,141) (723,939)
Net transfers 1,487,979 591,193 (386,704) (365,124)
--------------------------------------------------------------
Net increase (decrease) in units 56,828 654,786 (772,546) (964,640)
==============================================================
<CAPTION>
INITIAL CLASS SHARES
-------------------------------------------------------------
INVESTMENT INVESTMENT
GRADE BOND GRADE BOND
GROWTH OVERSEAS (GRANDMASTER-TM-)(IQ ANNUITY-TM-)
DIVISION DIVISION DIVISION DIVISION (2)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 11,197,117 $ 1,039,436 $ 1,001,416 $ (471)
Net realized gain (loss) on sales of investments 13,237,102 4,046,708 (86,789) 44
Change in net unrealized appreciation/depreciation
during the period 11,616,687 8,180,838 (1,502,953) 464
------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 36,050,906 13,266,982 (588,326) 37
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 6,385,976 864,570 724,033 75,171
Contract terminations and benefits (31,409,934) (8,992,259) (7,683,893) (6,507)
Net transfers among investment options 13,268,851 (3,952,006) 2,214,288 22,318
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions (11,755,107) (12,079,695) (4,745,572) 90,982
------------------------------------------------------------
Increase (decrease) in net assets 24,295,799 1,187,287 (5,333,898) 91,019
Net assets, beginning of year 110,629,876 39,913,000 26,446,377 -
------------------------------------------------------------
NET ASSETS, END OF YEAR $ 134,925,675 $ 41,100,287 $ 21,112,479 $ 91,019
============================================================
UNIT TRANSACTIONS
Contributions 102,072 37,101 34,485 7,522
Terminations and benefits (482,926) (358,045) (365,953) (651)
Net transfers 185,679 (165,359) 106,306 2,240
------------------------------------------------------------
Net increase (decrease) in units (195,175) (486,303) (225,162) 9,111
============================================================
<CAPTION>
INITIAL CLASS SHARES
------------------------------------------------------------
ASSET
ASSET INDEX 500 INDEX 500 MANAGER:
MANAGER (GRANDMASTER-TM-)(IQ ANNUITY-TM-) GROWTH
DIVISION DIVISION DIVISION (2) DIVISION
<S> ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS <C> <C> <C> <C>
Net investment income (loss)
Net realized gain (loss) on sales of investments $ 4,405,792 $ 115,090 $ (5,149) $ 767,049
Change in net unrealized appreciation/depreciation 5,415,250 12,538,937 2,579 882,504
during the period
(4,362,033) 1,712,720 84,084 286,514
Net increase (decrease) in net assets ------------------------------------------------------------
resulting from operations
5,459,009 14,366,747 81,514 1,936,067
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,485,962 9,070,887 680,029 590,779
Contract terminations and benefits (22,411,183) (17,251,494) (45,987) (2,113,413)
Net transfers among investment options (1,103,590) (215,231) 181,396 (727,400)
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions (22,028,811) (8,395,838) 815,438 (2,250,034)
------------------------------------------------------------
Increase (decrease) in net assets (16,569,802) 5,970,909 896,952 (313,967)
Net assets, beginning of year 71,801,759 77,643,719 - 15,195,796
------------------------------------------------------------
NET ASSETS, END OF YEAR $ 55,231,957 $ 83,614,628 $ 896,952 $ 14,881,829
============================================================
UNIT TRANSACTIONS
Contributions 49,612 300,118 68,021 28,066
Terminations and benefits (745,494) (562,267) (6,172) (98,430)
Net transfers (35,573) 5,044 17,387 (33,059)
------------------------------------------------------------
Net increase (decrease) in units (731,455) (257,105) 79,236 (103,423)
============================================================
<CAPTION>
INITIAL CLASS SHARES
---------------------------------------------------------------
GROWTH GROWTH &
CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION
<S> ---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS <C> <C> <C> <C>
Net investment income (loss)
Net realized gain (loss) on sales of investments $ 2,168,614 $ 263,721 $ 134,134 $ 67,048
Change in net unrealized appreciation/depreciation 9,737,249 982,789 96,383 1,874,881
during the period
5,093,334 (836,566) (105,092) (150,337)
Net increase (decrease) in net assets ---------------------------------------------------------------
resulting from operations
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT 16,999,197 409,944 125,425 1,791,592
RELATED TRANSACTIONS
Contributions from contract holders
Contract terminations and benefits 6,273,981 2,225,557 579,550 3,110,890
Net transfers among investment options (16,827,289) (2,461,455) (686,420) (3,664,816)
693,494 (474,384) 1,000,953 1,119,311
Net increase (decrease) in net assets ---------------------------------------------------------------
from contract related transactions
(9,859,814) (710,282) 894,083 565,385
INCREASE (DECREASE) IN NET ASSETS ---------------------------------------------------------------
Net assets, beginning of year 7,139,383 (300,338) 1,019,508 2,356,977
80,777,230 15,996,488 3,951,154 22,266,680
NET ASSETS, END OF YEAR ---------------------------------------------------------------
$ 87,916,613 $ 15,696,150 $ 4,970,662 $24,623,657
UNIT TRANSACTIONS ===============================================================
Contributions
Terminations and benefits 233,414 150,604 43,079 196,235
Net transfers (616,596) (168,324) (51,747) (229,616)
25,770 (32,804) 74,768 72,089
Net increase (decrease) in units ---------------------------------------------------------------
(357,412) (50,524) 66,100 38,708
===============================================================
<CAPTION>
SERVICE CLASS SHARES
-------------------------------------
MID CAP MID CAP
(GRANDMASTER -TM-) (IQ ANNUITY -TM-)
DIVISION (5) DIVISION (5)
<S> -------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS <C> <C>
Net investment income (loss)
Net realized gain (loss) on sales of investments $ 358 $ 89
Change in net unrealized appreciation/depreciation 19 67
during the period
15,388 7,188
Net increase (decrease) in net assets -------------------------------------
resulting from operations
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT 15,765 7,344
RELATED TRANSACTIONS
Contributions from contract holders
Contract terminations and benefits 15 20,739
Net transfers among investment options - (967)
116,959 3,843
NET INCREASE (DECREASE) IN NET ASSETS -------------------------------------
from contract related transactions
116,974 23,615
Increase (decrease) in net assets -------------------------------------
Net assets, beginning of year 132,739 30,959
- -
NET ASSETS, END OF YEAR -------------------------------------
$ 132,739 $ 30,959
UNIT TRANSACTIONS =====================================
Contributions
Terminations and benefits 1 1,995
Net transfers - (92)
10,124 342
Net increase (decrease) in units -------------------------------------
10,125 2,245
=====================================
</TABLE>
(1) For the period June 21, 1999 (commencement of operations) to December 31,
1999
(2) For the period June 2, 1999 (commencement of operations) to December 31,
1999
6
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets (Continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
------------------------------------------
EQUITY-
HIGH INCOME INCOME GROWTH
DIVISION (1) DIVISION (1) DIVISION (1)
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (1,571) $ (3,559) $ (4,449)
Net realized gain (loss) on sales of investments (178) (1,949) 22,418
Change in net unrealized appreciation/depreciation
during the period 2,812 (12,844) 149,950
------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,063 (18,352) 167,919
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 216,707 539,735 616,550
Contract terminations and benefits (3,608) (19,343) (187,691)
Net transfers among investment options 49,648 56,432 241,547
------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
from contract related transactions 262,747 576,824 670,406
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 263,810 558,472 838,325
Net assets, beginning of year - - -
------------------------------------------
NET ASSETS, END OF YEAR $ 263,810 $ 558,472 $ 838,325
==========================================
Unit transactions
Contributions 21,691 54,274 58,617
Terminations and benefits (366) (2,816) (15,819)
Net transfers 5,056 5,880 22,953
------------------------------------------
Net increase (decrease) in units 26,381 57,338 65,751
==========================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------
ASSET
OVERSEAS MANAGER
DIVISION (1) DIVISION (2)
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ (20,907) $ (5,076)
Net realized gain (loss) on sales of investments 1,376,575 67
Change in net unrealized appreciation/depreciation
during the period 5,304 69,135
---------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,360,972 64,126
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 5,276,593 765,251
Contract terminations and benefits (6,020) (450)
Net transfers among investment options (6,258,982) 137,031
---------------------------------------
Net increase (decrease) in net assets
from contract related transactions (988,409) 901,832
---------------------------------------
Increase (decrease) in net assets 372,563 965,958
Net assets, beginning of year - -
---------------------------------------
Net assets, end of year $ 372,563 $ 965,958
=======================================
Unit transactions
Contributions 498,928 78,554
Terminations and benefits (486) (45)
Net transfers (471,168) 14,461
---------------------------------------
Net increase (decrease) in units 27,274 92,970
=======================================
<CAPTION>
SERVICE CLASS SHARES
---------------------------------------------------------------------
ASSET
MANAGER: GROWTH
GROWTH CONTRAFUND OPPORTUNITIES BALANCED
DIVISION (3) DIVISION (1) DIVISION (4) DIVISION (5)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (356) $ (2,881) $ (1,573) $ (2,139)
Net realized gain (loss) on sales of investments (76) 543 (655) (1,544)
Change in net unrealized appreciation/depreciation
during the period 5,614 67,567 6,698 9,810
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,182 65,229 4,470 6,127
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 49,298 374,717 182,696 326,101
Contract terminations and benefits - (32,594) (9,656) (33,953)
Net transfers among investment options 13,664 155,942 167,070 132,595
----------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 62,962 498,065 340,110 424,743
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 68,144 563,294 344,580 430,870
Net assets, beginning of year - - - -
----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 68,144 $ 563,294 $ 344,580 $ 430,870
================================================================
UNIT TRANSACTIONS
Contributions 5,085 36,538 18,335 32,815
Terminations and benefits - (3,129) (992) (3,530)
Net transfers 1,436 14,777 17,115 13,460
----------------------------------------------------------------
Net increase (decrease) in units 6,521 48,186 34,458 42,745
================================================================
<CAPTION>
SERVICE CLASS SHARES
--------------------------------
GROWTH &
INCOME
DIVISION (6) TOTAL
--------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (3,476) $ 32,109,929
Net realized gain (loss) on sales of investments 598 60,783,582
Change in net unrealized appreciation/depreciation
during the period 34,929 10,857,272
---------------------------------
Net increase (decrease) in net assets
resulting from operations 32,051 103,750,783
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 605,331 51,539,599
Contract terminations and benefits (9,360) (178,001,916)
Net transfers among investment options 148,470 15,825,791
---------------------------------
Net increase (decrease) in net assets
from contract related transactions 744,441 (110,636,526)
---------------------------------
INCREASE (DECREASE) IN NET ASSETS 776,492 (6,885,743)
Net assets, beginning of year - 700,658,531
---------------------------------
NET ASSETS, END OF YEAR $ 776,492 $ 693,772,788
=================================
UNIT TRANSACTIONS
Contributions 59,803
Terminations and benefits (1,011)
Net transfers 14,879
----------------
Net increase (decrease) in units 73,671
================
</TABLE>
(1) For the period June 2, 1999 (commencement of operations) to December 31,
1999
(2) For the period July 7, 1999 (commencement of operations) to December 31,
1999
(3) For the period July 13, 1999 (commencement of operations) to December 31,
1999
(4) For the period June 10, 1999 (commencement of operations) to December 31,
1999
(5) For the period June 15, 1999 (commencement of operations) to December 31,
1999
(6) For the period June 3, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,708,783 $ 6,077,369 $ 6,104,940 $ 10,530,591
Net realized gain (loss) on sales of investments - (2,935,271) 7,734,921 9,584,088
Change in net unrealized appreciation/depreciation
during the period 2 (4,139,551) (2,417,469) 10,671,604
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,708,785 (997,453) 11,422,392 30,786,283
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 6,820,438 7,712,118 13,317,643 5,126,080
Contract terminations and benefits (7,202,303) (5,434,572) (10,388,872) (7,372,947)
Net transfers among investment options 14,673,226 (408,422) (6,346,700) (1,799,165)
-------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 14,291,361 1,869,124 (3,417,929) (4,046,032)
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 16,000,146 871,671 8,004,463 26,740,251
Net assets, beginning of year 35,945,459 52,808,793 122,405,920 83,889,625
-------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 51,945,605 $53,680,464 $ 130,410,383 $ 110,629,876
===================================================================
UNIT TRANSACTIONS
Contributions 428,066 442,610 361,197 108,613
Terminations and benefits (463,989) (315,672) (284,764) (156,864)
Net transfers 928,382 108,508 (190,039) (36,320)
-------------------------------------------------------------------
Net increase (decrease) in units 892,459 235,446 (113,606) (84,571)
===================================================================
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
-------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 2,452,485 $ 649,238 $ 7,719,996
Net realized gain (loss) on sales of investments 2,306,106 991,906 2,690,737
Change in net unrealized appreciation/depreciation
during the period (653,363) (125,383) (1,377,877)
-------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 4,105,228 1,515,761 9,032,856
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 2,478,365 1,816,248 3,645,976
Contract terminations and benefits (3,671,420) (2,241,407) (7,847,820)
Net transfers among investment options (3,899,502) 8,728,296 (2,274,789)
-------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (5,092,557) 8,303,137 (6,476,633)
-------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (987,329) 9,818,898 2,556,223
Net assets, beginning of year 40,900,329 16,627,479 69,245,536
-------------------------------------------------
NET ASSETS, END OF YEAR $ 39,913,000 $ 26,446,377 $ 71,801,759
=================================================
UNIT TRANSACTIONS
Contributions 113,240 88,240 135,739
Terminations and benefits (169,692) (109,343) (287,885)
Net transfers (196,862) 422,621 (80,153)
-------------------------------------------------
Net increase (decrease) in units (253,314) 401,518 (232,299)
=================================================
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets (Continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,103,543 $ 1,241,173 $ 2,311,332 $ 184,053
Net realized gain (loss) on sales of investments 4,749,457 742,938 4,541,199 404,631
Change in net unrealized appreciation/depreciation
during the period 8,599,375 2,449 9,669,661 1,767,710
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 14,452,375 1,986,560 16,522,192 2,356,394
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 17,005,436 1,633,701 10,028,589 5,240,215
Contract terminations and benefits (3,561,323) (655,361) (4,498,873) (450,989)
Net transfers among investment options 4,082,027 18,548 3,684,663 3,396,860
--------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 17,526,140 996,888 9,214,379 8,186,086
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 31,978,515 2,983,448 25,736,571 10,542,480
Net assets, beginning of year 45,665,204 12,212,348 55,040,659 5,454,008
--------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 77,643,719 $ 15,195,796 $ 80,777,230 $ 15,996,488
====================================================================
UNIT TRANSACTIONS
Contributions 678,848 88,384 460,454 404,468
Terminations and benefits (144,074) (35,109) (205,879) (35,136)
Net transfers 160,904 (2,750) 148,005 266,499
--------------------------------------------------------------------
Net increase (decrease) in units 695,678 50,525 402,580 635,831
====================================================================
<CAPTION>
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 71,776 $ (138,971) $ 40,016,308
Net realized gain (loss) on sales of investments 69,364 544,038 31,424,114
Change in net unrealized appreciation/depreciation
during the period 265,314 2,980,189 25,242,661
------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 406,454 3,385,256 96,683,083
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,348,464 7,724,587 83,897,860
Contract terminations and benefits (264,441) (689,902) (54,280,230)
Net transfers among investment options 1,050,149 6,846,653 27,751,844
------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 2,134,172 13,881,338 57,369,474
------------------------------------------------
Increase (decrease) in net assets 2,540,626 17,266,594 154,052,557
Net assets, beginning of year 1,410,528 5,000,086 546,605,974
------------------------------------------------
NET ASSETS, END OF YEAR $ 3,951,154 $22,266,680 $ 700,658,531
================================================
UNIT TRANSACTIONS
Contributions 111,678 574,277
Terminations and benefits (20,972) (51,837)
Net transfers 85,267 503,087
-------------------------------
Net increase (decrease) in units 175,973 1,025,527
===============================
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<PAGE>
Separate Account I
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 I
(the "Separate Account") on May 19, 1986, for the purpose of issuing flexible
premium variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended. 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"), were
acquired by the Western and Southern Life Insurance Company ("W&S.") (See Note 4
of Notes to Financial Statements.)
Contract holders may allocate or transfer their account values to one or more of
the Separate Account's investment divisions, or for certain contract holders, to
a guaranteed interest division provided by Integrity, or both. Certain contract
holders may also allocate or transfer a portion or all of their account values
to one or more fixed guaranteed rate options of Integrity's Separate Account
GPO. Certain contract holders may also allocate new contributions to a
Systematic Transfer Option ("STO") which accumulates interest at a fixed rate.
All STO contributions must be transferred to other investment divisions or to a
guaranteed rate option within one year of the contribution.
The Separate Account investment divisions are invested in shares of
corresponding investment portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series"
type mutual funds managed by Fidelity Management and Research Company ("Fidelity
Management"). The contract holder's account value in a Separate Account division
will vary depending on the performance of the corresponding portfolio. The
Separate Account currently has fourteen investment divisions available, each
with corresponding initial class shares and service class shares. 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 operative
portfolios of the Fidelity VIP Funds at December 31, 1999 for this Separate
Account.
10
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MONEY MARKET PORTFOLIO seeks to earn as high a level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
HIGH INCOME PORTFOLIO seeks a high current income while also considering growth
of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks and convertible securities,
with an emphasis on lower-quality debt securities.
EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities compromising S&P 500. It
normally invests at least 65% of the Portfolio's assets in income-producing
equity securities.
GROWTH PORTFOLIO seeks capital appreciation. It invests in companies that are
believed to have above-average growth potential. These companies tend to have
higher than average price/earnings (P/E) ratios. Companies with strong growth
potential often have new products, technologies, distribution channels or other
opportunities for a strong industry or market position. The stocks of these
companies are often called "growth" stocks.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as is
consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over the
long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to the
total return (i.e., the combination of capital changes and income) of common
stocks publicly traded in the United States. In seeking this objective, the
Portfolio attempts to duplicate the composition and total return of the Standard
& Poor's 500 Composite Stock Price Index while keeping transaction costs and
other expenses low.
11
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks, bonds
and short-term money market instruments. The Portfolio has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The approximate neutral mix for stocks, bonds and short-term
instruments is 70%, 25% and 5%, respectively.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation by investing assets
primarily in common stocks. The Portfolio invests assets in securities of
companies whose value may not fully be recognized by the public. The types of
companies in which the Portfolio may invest include companies experiencing
positive fundamental change such as a new management team or product launch, a
significant cost-cutting initiative, a merger or acquisition, or a reduction in
industry capacity that should lead to improved pricing; companies whose earning
potential has increased or is expected to increase more than generally
perceived; companies that have enjoyed recent market popularity but which appear
to have temporarily fallen out of favor for reasons that are considered
non-recurring or short-term; and companies that are undervalued in relation to
securities of other companies in the same industry.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks. The Portfolio has the ability to purchase other
types of securities, including bonds which may be lower-quality debt securities.
BALANCED PORTFOLIO seeks both income and growth of capital by investing
approximately 65% of assets in stocks and other equity securities, and the
remainder in bonds and other debt securities including lower-quality debt
securities, when its outlook is neutral.
GROWTH & INCOME PORTFOLIO seeks high total return through a combination of
current income and capital appreciation by investing mainly in common stocks
with a focus on those that pay current dividends and show potential for capital
appreciation. Investments may also include bonds, including lower-quality debt
securities, as well as stocks that are not currently paying dividends, but offer
prospects for future income or capital appreciation.
MID CAP PORTFOLIO invests primarily in common stocks with at least 65% of the
Portfolio's total assets in securities of companies with medium market
capitalizations. Medium market capitalization companies are those whose
market capitalization is similar to the capitalization of companies in the
S&P Mid Cap 400 at the time of the investment. Companies whose capitalization
no longer meets this definition after purchase continue to be considered to
have a medium market capitalization for purposes of the 65% policy.
12
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The assets of the Separate Account are owned by Integrity. The portion of the
Separate Account's assets supporting the contracts may not be used to satisfy
liabilities arising out of any other business of Integrity.
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 Fidelity VIP Funds 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.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Fidelity VIP Fund
portfolios are reinvested in the respective portfolios and are reflected in the
unit value of the divisions of the Separate Account.
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.
13
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
14
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during 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>
INITIAL CLASS:
Money Market (Grandmaster-TM-) $ 176,812,526 $ 173,883,903 $ 54,839,890
Money Market (IQ Annuity -TM-) 161,318,964 154,639,536 6,679,428
High Income 104,301,298 114,042,760 42,656,929
Equity-Income 13,529,515 47,171,222 86,563,492
Growth 51,656,767 52,196,376 100,565,924
Overseas 34,331,979 45,382,719 31,727,129
Investment Grade Bond (Grandmaster-TM-) 9,761,670 13,503,713 21,873,166
Investment Grade Bond (IQ Annuity-TM-) 99,132 8,628 90,548
Asset Manager 14,475,074 32,066,535 48,708,363
Index 500 (Grandmaster-TM-) 23,684,705 31,969,497 65,445,002
Index 500 (IQ Annuity-TM-) 891,734 81,569 812,744
Asset Manager: Growth 2,771,358 4,258,859 12,777,135
Contrafund 19,605,781 27,417,925 64,814,983
Growth Opportunities 5,962,714 6,407,082 14,453,276
Balanced 2,615,717 1,538,167 4,763,397
Growth & Income 9,526,441 8,829,222 21,601,371
SERVICE CLASS:
Mid Cap (Grandmaster-TM-) 117,478 132 117,365
Mid Cap (IQ Annuity-TM-) 24,777 1,076 23,768
High Income 275,278 14,234 260,866
Equity-Income 603,668 30,156 571,563
Growth 854,399 188,719 688,098
Overseas 164,517,941 165,527,368 367,148
Asset Manager 905,270 8,226 897,111
Asset Manager: Growth 63,777 1,201 62,500
Contrafund 546,418 51,414 495,547
Growth Opportunities 363,397 24,994 337,748
Balanced 472,645 50,116 420,985
Growth & Income 764,712 23,804 741,506
------------------
$ 583,356,982
------------------
------------------
</TABLE>
15
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES
Integrity assumes mortality and expense risks and incurs certain administrative
expenses related to the operations of the Separate Account and deducts a charge
from the assets of the Separate Account at an annual rate. There are two
contracts currently offered by the Separate Account: GrandMaster III
("Grandmaster") and IQ the SmartAnnuity ("IQ"). Grandmaster has a deferred sales
load charge and lower mortality and expense annual rate. IQ has no sales load
charges on its contracts and carries a higher mortality and expense annual rate.
Grandmaster charges 1.20% and 0.15% and IQ charges 1.30% and 0.15% for mortality
and expense risks and administrative expenses, respectively. For all contracts,
an annual charge of $30 per contract is assessed if the participant's account
value is less than $50,000 at the end of any participation year prior to the
participant's retirement date (as defined by the participant's contract).
4. EVENTS RELATING TO INTEGRITY AND ARM
On July 29, 1999, ARM announced that it was restructuring its institutional
business (the Company had no 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.
16
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Condensed Financial Information for the Portfolios
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT I:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statements of Changes in Net Assets for the Years Ended December 31,
1999 and 1998
Notes to Financial Statements
INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1999 and 1998
Statements of Income (Statutory Basis) for the Years Ended December
31, 1999 and 1998 Statements of Changes in Capital and Surplus
(Statutory Basis) for the Years Ended December 31, 1999 and 1998
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1999 and 1998 Notes to Financial Statements (Statutory
Basis)
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of Integrity Life
Insurance Company (INTEGRITY) authorizing the establishment
of Separate Account I, the Registrant. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-8903), filed on September 19, 1986.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement between Integrity
and broker dealers. Incorporated by reference from
post-effective amendment no. 5 to Registrant's Form N-4
registration statement (File No. 33-8903), filed on
February 28, 1992.
3.(b) Form of Variable Contract Principal Underwriter Agreement
with Touchstone Securities, Inc. ("Touchstone Securities").
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's Form N-4 registration statement (File
No. 33-51268), filed on August 24, 1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference from pre-effective amendment no. 1 to
Registrant's Form N-4 registration statement (File
No. 33-51268), filed on November 9, 1992.
1
<PAGE>
4.(c) Form of variable annuity certificate. Incorporated by
reference from Registrant's Form S-1 registration
statement (File No. 33-51270), filed on August 24, 1992.
4.(d) Forms of riders to certificate for qualified plans.
Incorporated by reference from pre-effective amendment
no. 1 to Registrant's Form N-4 registration statement
(File No. 33-51268), filed on November 9, 1992.
4.(e) Form of individual variable annuity contract. Incorporated
by reference to pre-effective amendment no. 1 to
Registrant's Form S-1 registration statement (File
No. 33-51270), filed on November 10, 1992.
4.(f) Form of rider for use in certain states eliminating the
Guarantee Period Options. Incorporated by reference to
Registrant's Form N-4 registration statement filed on
December 31, 1992.
4.(g) Alternate form of variable annuity contract for use in
certain states. Incorporated by reference from Registrant's
Form N-4 registration statement (File No. 33-56654), filed
on May 1, 1996.
5. Form of application. Incorporated by reference to Form N-4
registration statement (File No. 33-56658), filed on
December 31, 1992.
6.(a) Certificate of Incorporation of Integrity. Incorporated by
reference to post-effective amendment no. 4 to Registrant's
Form N-4 registration statement (File No. 33-56654), filed
on April 28, 1995.
6.(b) By-Laws of Integrity. Incorporated by reference to
post-effective amendment no. 4 to Registrant's Form N-4
registration statement (File No. 33-56654), filed on
April 28, 1995.
7. Reinsurance Agreement between Integrity and Connecticut
General Life Insurance Company (CIGNA) effective January 1,
1995. Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-56654), filed on May 1,
1996.
8.(a) Participation Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation ("FDC") and
Integrity, dated November 20, 1990. Incorporated by
reference from post-effective amendment no. 5 to
Registrant's Form N-4 registration statement (File
No. 33-8903), filed on February 28, 1992.
8.(b) Participation Agreement Among Variable Insurance Products
Fund II, FDC and Integrity, dated November 20, 1990.
Incorporated by reference from post-effective amendment
no. 5 to Registrant's Form N-4 registration statement (File
No. 33-8903), filed on February 28, 1992.
8.(c) Amendment No. 1 to Participation Agreements Among Variable
Insurance Products Fund, Variable Insurance Products Fund
II, FDC, and Integrity. Incorporated by reference from
Registrant's Form N-4 registration statement (File
No. 33-56654), filed on May 1, 1996.
8.(d) Participation Agreement Among Variable Insurance Products
Fund III, FDC and Integrity, dated February 1, 1997.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-56658), filed on May 1,
1997.
9. Opinion and Consent of Kevin L. Howard. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56654), filed on May 1, 1997.
10. Consents of Ernst & Young LLP.
11. Not applicable.
12. Not applicable.
2
<PAGE>
13. Schedule for computation of performance quotations.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-56654), filed on May 1,
1996.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Set forth below is information regarding the directors and principal
officers of Integrity, the Depositor.
DIRECTORS:
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with Depositor
- ----------------------------------- -----------------------------------
<S> <C>
John F. Barrett Director
400 Broadway, Cincinnati, Ohio 45202
Dennis L. Carr* Director, Executive Vice President & Chief Actuary
John R. Lindholm* Director and President
Robert L. Walker Director
400 Broadway, Cincinnati, Ohio 45202
William J. Williams Director
400 Broadway, Cincinnati, Ohio 45202
Donald J. Wuebbling Director
400 Broadway, Cincinnati, Ohio 45202
<CAPTION>
SELECTED OFFICERS
Name and Principal Business Address Position and Offices with Depositor
- ----------------------------------- -----------------------------------
<S> <C>
John R. Lindholm* Director and President
Dennis L. Carr* Executive Vice President & Chief Actuary
James G. Kaiser Executive Vice President
333 Ludlow Street, Stamford, Connecticut 06902
Don W. Cummings* Senior Vice President & Chief Financial Officer
William F. Ledwin Senior Vice President & Chief Investment Officer
400 Broadway, Cincinnati, Ohio 45202
William H. Guth* Senior Vice President
Edward J. Haines* Senior Vice President
Kevin L. Howard* Senior Vice President
William J. Hrabik* Senior Vice President
Jill Keinsley* Senior Vice President
Scott Vincini Senior Vice President, National Sales Manager
333 Ludlow Street, Stamford, Connecticut 06902
James J. Vance Vice President & Treasurer
400 Broadway, Cincinnati, Ohio 45202
3
<PAGE>
<CAPTION>
<S> <C>
Joseph F. Vap* Director, Financial Operations
Edward J. Babbitt Secretary
400 Broadway, Cincinnati, Ohio 45202
</TABLE>
* Principal Business Address: 515 West Market Street, Louisville,
Kentucky 40202
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH INTEGRITY OR
REGISTRANT
The Western and Southern Life Insurance Company ("WSLIC"); Ohio corporation
Western-Southern Life Assurance Company ("WSLAC"); Ohio corporation;
100% owned by WSLIC
CourtyardNursing Care, Inc.; Ohio corporation; 100% owned by
WSLAC; ownership and operation of real estate.
IFS Financial Services, Inc. ("IFS"); Ohio corporation; 100%
owned by WSLAC; development and marketing of financial
products for distribution through financial
institutions.
IFS Systems, Inc.; Delaware corporation; 100% owned by
IFS; development, marketing and support of
software systems.
IFS Insurance Agency, Inc.; Ohio corporation; 99% owned
by IFS, 1% owned by William F. Ledwin;
general insurance agency.
Touchstone Securities, Inc.; Nebraska corporation; 100%
owned by IFS; securities broker-dealer.
Touchstone Advisors, Inc.; Ohio corporation; 100% owned
by IFS; registered investment adviser.
IFS Agency Services, Inc.; Pennsylvania corporation;
100% owned by IFS; general insurance agency.
IFS Agency, Inc.; Texas corporation; 100% owned by an
individual; general insurance agency.
IFS General Agency, Inc.; Pennsylvania corporation;
100% owned by William F. Ledwin; general
insurance agency.
Integrity Life Insurance Company; Ohio corporation; 100% owned by WSLIC.
National Integrity Life Insurance Company; New York corporation;
100% owned by Integrity Life Insurance Company.
Seasons Congregate Living, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership and operation of real estate.
Latitudes at the Moors, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
WestAd Inc.; Ohio corporation; 100% owned by WSLIC, general advertising,
book-selling and publishing.
Fort Washington Investment Advisors, Inc.; Ohio corporation; 100% owned
by WSLIC; registered investment adviser.
4
<PAGE>
Todd Investment Advisors, Inc.; Kentucky corporation; 100% owned
by Fort Washington Investment Advisors, Inc.;
registered investment adviser.
Countrywide Financial Services, Inc.; Ohio corporation; 100%
owned by Fort Washington Investment Advisors, Inc.
CountrywideInvestments, Inc.; Ohio corporation; 100%
owned by Countrywide Financial Services,
Inc.; registered investment advisor and
broker dealer.
CW Fund Distributors, Inc.; Ohio corporation; 100%
owned by Countrywide Finacial Services,
Inc.; registered broker dealer
CountrywideFund Services, Inc.; Ohio corporation; 100%
owned by Countrywide Financial Services,
Inc.
Columbus Life Insurance Company; Ohio corporation; 100% owned by
WSLIC; insurance.
Colmain Properties, Inc.; Ohio corporation; 100% owned by
Columbus Life Insurance Company; acquiring, owning,
managing, leasing, selling real estate.
Colpick, Inc.; Ohio corporation; 100% owned by Colmain
Properties, Inc.; acquiring, owning,
managing, leasing and selling real estate.
CAI Holding Company, Inc.; Ohio corporation; 100% owned by
Columbus Life Insurance Company; holding company.
Capital Analysts Incorporated; Delaware corporation;
100% owned by CAI Holding Company;
securities broker-dealer and registered
investment advisor.
Capital Analysts Agency, Inc.; Ohio corporation; 99%
owned by Capital Analysts Incorporated,
1% owned by William F. Ledwin; general
insurance agency.
Capital Analysts Agency, Inc.; Texas corporation; 100%
owned by an individual who is a resident
of Texas, but under contractual
association with Capital Analysts
Incorporated; general insurance agency.
Capital Analysts Insurance Agency, Inc.; Massachusetts
corporation; 100% owned by Capital
Analysts Incorporated; general insurance
agency.
CLIC Company I; Delaware corporation; 100% owned by Columbus
Life Insurance Company; holding company.
CLIC Company II; Delaware corporation; 100% owned by Columbus
Life Insurance Company; holding company.
Eagle Properties, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership, development and management of real estate.
Seasons Management Company; Ohio corporation; 100 % owned by
Eagle Properties, Inc.; management of real estate.
Waslic Company II; Delaware corporation; 100% owned by WSLIC;
holding company.
WestTax, Inc.; Ohio corporation, 100% owned by WSLIC;
preparation and electronic filing of tax returns.
Florida Outlet Marts, Inc.; Florida corporation; 100% owned by
WSLIC; ownership and operation of real estate.
5
<PAGE>
AM Concepts Inc.; Delaware corporation, 100% owned by WSLIC; venture
capital investment in companies engaged in alternative marketing
of financial products.
Western-Southern Agency, Inc.; Ohio corporation; 99% owned by WSLIC; 1%
owned by William F. Ledwin; general insurance agency.
Western-Southern Agency Services, Inc.; Pennsylvania corporation; 100%
owned by WSLIC; general insurance agency.
W-S Agency of Texas, Inc.; Texas corporation; 100% owned by an
individual; general insurance agency.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 1999 there were 8,989 contract owners of Separate
Account I of Integrity.
ITEM 28. INDEMNIFICATION
BY-LAWS OF INTEGRITY. Integrity's By-Laws provide, in Article V, as follows:
Section 5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS. To the extent permitted by the laws of the State of Ohio, subject
to all applicable requirements thereof:
(a) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, r proceeding,
whether civil, criminal, administrative, or investigative, other
than an action by or in the right of the Corporation, by reason of
the fact that he is or was a Director, officer, employee, or agent
of the Corporation or is or was serving at the request of the
Corporation as a Director, trustee, officer, employee, or agent of
another corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees ,judgements, fines, and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, or conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and
in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and, with respect to any criminal
action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
(b) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of
the fact that he is or was a Director, officer, employee, or agent
of the Corporation, or is or was serving at the request of the
Corporation as a Director, trustee, officer, employee, or agent of
another corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of
the Corporation, except that no indemnification shall be made in
respect to any of the following:
(1) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the
performance of his duty to the Corporation unless, and only
to the extent the court of common pleas or the court in
which such action or suit was brought determines upon
application that, despite the adjudication of liability, but
in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such
expenses as the court of common pleas or such other court
shall deem proper;
(2) Any action of suit in which the only liability asserted
against a Director is pursuant to Section 1701.95 of the
Ohio Revised Code.
6
<PAGE>
(c) To the extent that a Director, trustee, officer, employee, or
agent has been successful in the merits or otherwise in defense of
any action, suit, or proceeding referred to in division (a) and (b)
of this Article, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses, including attorney's fees,
actually and reasonably incurred by him in connection with the
action, suit, or proceeding.
(d) Any indemnification under divisions (a) and (b) of this Article,
unless ordered by a court, shall be made by the Corporation only as
authorized in the specific case upon the determination that
indemnification of the Director, officer, employee, or agent is
proper in the circumstances because he has met the applicable
standard of conduct set forth in divisions (a) and (b) of this
Article. Such determination shall be made as follows:
(1) By a majority vote of a quorum consisting of Directors
of the Corporation who were not and are not parties to or
threatened with any such action, suit, or proceeding;
(2) If the quorum described in division (d)(1) of this
Article is not obtainable or if a majority vote of a quorum
of disinterested Directors so directs, in a written opinion
by independent legal counsel other than an attorney, or a
firm having associated with it an attorney, who has been
retained by or who has performed services for the
Corporation or any person to be indemnified within the past
five years;
(3) By the Shareholders; or
(4) By the court of common pleas or the court in which such
action, suit or proceeding was brought.
Any determination made by the disinterested Directors
under Article (d)(1) or by independent legal counsel under
Article (d)(2) shall be promptly communicated to the person who
threatened or brought the action or suit by in the right of the
Corporation under (b) of this Article, and within ten days after
receipt of such notification, such person shall have the right to
petition the court of common pleas or the court in which such action
or suit was brought to review the reasonableness of such
determination.
(e)(1) Expenses, including attorney's fees, incurred by a Director in
defending the action, suit, or proceeding shall be paid by the
Corporation as they are incurred, in advance of the final disposition
of the action, suit, or proceeding upon receipt of an undertaking by
or on behalf of the Director in which he agrees to do both of the
following:
(i) Repay such amount if it is proved by clear and
convincing evidence in a court of competent jurisdiction
that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury
to the Corporation or undertaken with reckless disregard for
the best interests of the Corporation;
(ii) Reasonably cooperate with the Corporation concerning
the action, suit or proceeding.
(2) Expenses, including attorney's fees, incurred by a Director,
officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (a) and (b) of this Article, may
be paid by the Corporation as they are incurred, in advance of the
final disposition of the action, suit, or proceeding as authorized by
the Directors in the specific case upon receipt of an undertaking by
or on behalf of the Director, officer, employee, or agent to repay
such amount, if it ultimately is determined that he is not entitled
to be indemnified by the Corporation.
(f) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted
to those seeking indemnification under the Articles or the
Regulations for any agreement, vote of Shareholders or disinterested
Directors, or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a Director,
officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(g) The Corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters
of credit, or self insurance, on behalf of or for any person who is
or was a
7
<PAGE>
Director, officer, employee, or agent of the Corporation, or is or
was serving at the request of the Corporation as a Director, officer,
employee, or agent of another corporation, domestic or foreign,
non-profit or for profit, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him
against such liability under this section. Insurance may be purchased
from or maintained with a person in which the Corporation has a
financial interest.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Touchstone Securities is the principal underwriter for Separate
Account I. Touchstone Securities also serves as an underwriter for the contracts
issued under Integrity's Separate Accounts II, VUL and Ten; National Integrity
Life Insurance Company's Separate Accounts I, II, and VUL; contracts issued
under Western-Southern Life Assurance Company's Separate Accounts 1 and 2; The
Legends Fund, Inc.; and for the shares of several series (Funds) of Touchstone
Series Trust (formerly Select Advisors Trust A), Touchstone Strategic Trust,
Touchstone Investment Trust and Touchstone Tax-Free Trust; each of which is
affiliated with the Depositor. Integrity is the Depositor of Separate
Accounts I, II, Ten and VUL.
(b) The names and business addresses of the officers and directors of,
and their positions with, Touchstone Securities are as follows:
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with Touchstone Securities
- ----------------------------------- -----------------------------------------------
<S> <C>
James N. Clark* Director
Jill T. McGruder Director, Chief Executive Officer and President
311 Pike Street
Cincinnati, Ohio 45202
Edward S. Heenan* Director and Controller
William F. Ledwin* Director
Donald J. Wuebbling* Director
Richard K. Taulbee* Vice President
Robert F. Morand* Secretary
Patricia Wilson Chief Compliance Officer
311 Pike Street
Cincinnati, Ohio 45202
</TABLE>
*Principal Business Address: 400 Broadway, Cincinnati, Ohio 45202
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
are maintained by Integrity at 515 West Market Street, Louisville, Kentucky
40202.
ITEM 31. MANAGEMENT SERVICES
There are currently no management-related services provided to the Registrant.
8
<PAGE>
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) 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 16
months old for so long as payments under the variable annuity
contracts may be accepted;
(b) 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; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly
upon written or oral request.
Integrity represents that the aggregate charges under variable annuity
contracts described in this Registration Statement are reasonable in relation to
the services rendered, the expenses expected to be incurred, and the risks
assumed by Integrity.
9
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor certify that they meet all of the
requirements for effectiveness of this post-effective amendment to their
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and have duly caused this amendment to the Registration Statement to be signed
on their behalf, in the City of Louisville and State of Kentucky on this 26th
day of April, 2000.
SEPARATE ACCOUNT I OF
INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: Integrity Life Insurance Company
(Depositor)
By:/s/ John R. Lindholm
John R. Lindholm
President
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
John R. Lindholm
President
10
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Depositor has duly caused this amendment to the Registration Statement
to be signed on its behalf, in the City of Louisville and State of Kentucky on
this 26th day of April, 2000.
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
John R. Lindholm, President
Date: 4/26/2000
PRINCIPAL FINANCIAL OFFICER: /s/ Don W. Cummings
Don Cummings, Senior Vice President and
Chief Financial Officer
Date: 4/26/2000
PRINCIPAL ACCOUNTING OFFICER: /s/ Joseph F. Vap
Joseph F. Vap, Director, Financial Operations
Date: 4/26/2000
DIRECTORS:
/s/ John F. Barrett /s/ William J. Williams
John F. Barrett William J. Williams
Date: 4/26/2000 Date: 4/26/2000
/s/ Dennis L. Carr /s/ Donald J. Wuebbling
Dennis L. Carr Donald J. Wuebbling
Date: 4/26/2000 Date: 4/26/2000
/s/ John R. Lindholm
John R. Lindholm
Date: 4/26/2000
/s/ Robert L. Walker
Robert L. Walker
Date: 4/26/2000
11
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER
3.(b) Form of Variable Contract Principal Underwriter Agreement with
Touchstone Securities, Inc.
10. Consents of Ernst & Young LLP.
12
<PAGE>
VARIABLE CONTRACT PRINCIPAL UNDERWRITER AGREEMENT
THIS AGREEMENT made as of the 3RD day of MARCH , 2000, by and between
Integrity Life Insurance Company, an Ohio stock life insurance company (the
"Company") and Touchstone Securities, Inc., a Nebraska corporation and a
registered broker-dealer (the "Distributor").
WITNESSETH:
WHEREAS, the Distributor is registered as a broker-dealer with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934 (the "1934 Act") and is a member of the National Association of
Securities Dealers, Inc. (the "NASD");
WHEREAS, the Company and its Separate Accounts listed on Exhibit A as may
be amended from time to time (the "Accounts"), each a separate investment
account established by the Company pursuant to Section 3907.15 of the Ohio
Insurance Law AND A REGISTERED INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY
ACT OF 1940 (THE "1940 ACT") OF THE TYPE REFERRED TO AS A UNIT INVESTMENT TRUST,
propose to offer for sale certain variable annuity contracts (the "Contracts")
which may be deemed to be securities under the Securities Act of 1933 (the "1933
Act");
WHEREAS, each Account will invest solely in specified securities of the
underlying mutual funds offered within the Contracts;
WHEREAS, the parties desire to have the Distributor act as principal
underwriter for each Account and assume such supervisory responsibility as is
required by federal and state securities law and applicable requirements of the
NASD for the securities activities of any "person associated" (as that term is
defined in Section 3(a)(18) of the 1934 Act) with the Distributor, including
Company personnel engaged directly or indirectly in the Company's variable
annuity insurance operations (the "Associated Persons");
WHEREAS, the parties desire to have the Company perform certain services
in connection with the sale of the Contracts;
NOW, THEREFORE, in consideration of the covenants and mutual promises
herein contained, the Distributor and the Company agree as follows:
1. The Distributor will act as the principal underwriter of the
Contracts in each state or other jurisdiction where the Contracts may legally be
sold. The Company and the Distributor will from time to time enter into separate
written agreements ("Selling Agreements") on such terms and conditions as the
parties may determine not inconsistent with this Agreement, with one or more
individuals or organizations which agree to participate in the distribution of
the Contracts. Such individuals or organizations ("Dealers") shall be registered
as broker-dealers under the 1934 Act and members of the NASD. Each such Dealer
and its representatives
<PAGE>
soliciting applications for Contracts shall be duly and appropriately licensed
for the sale of the Contracts under the insurance law and any applicable
securities law of each state or other jurisdiction in which the Dealer or
representative is required to be so licensed. The Selling Agreements shall be in
such form as approved by the Company.
2. The Distributor will assume such supervisory responsibility for the
securities activities of, and for securities law compliance by, its Associated
Persons, as is required by applicable federal and state law and NASD
requirements, including the NASD Rules of Fair Practice. The Distributor will
have such responsibility as is contemplated by Section 15(b)(4)(E) of the 1934
Act in connection with the training, supervision and control of its Associated
Persons. The parties understand that certain sales literature and materials
intended for use in connection with the sale of Contracts may require filings
with and/or approvals from the SEC, NASD and other regulatory authorities. In
advance of using any such literature or materials, the Distributor will obtain
the approval of the Company and will make any such required regulatory filing or
seek any such required approval. The Distributor will provide appropriate
training materials for its Associated Persons, use its best efforts to prepare
them to complete satisfactorily any and all applicable NASD and state
qualification exams, register the Associated Persons as its registered
representatives before they engage in securities activities, and supervise them
in the performance of such activities. It is understood and agreed that the
office of the Distributor at 311 Pike Street, Cincinnati, Ohio 45202 will be
designated the Office of Supervisory Jurisdiction of the Distributor and will
perform such functions as are agreed to by the Company and the Distributor.
3. Distributor shall ensure that each Dealer supervises its registered
representatives. Dealers shall assume any legal responsibilities of Company for
the acts, omissions or defalcations of its registered representatives insofar as
they relate to the sale of the Contracts. Applications for Contracts solicited
by such Dealers through its registered representatives shall be transmitted
directly to the Company, and if received by Distributor, shall be forwarded to
Company. All payments under the Contracts received by the Distributor shall be
remitted promptly to Company.
4. The Company will bear the cost of all services and expenses,
including legal services and expenses and registration, filing and other fees,
in connection with (a) registering and qualifying the Accounts, the Contracts,
and (b) licensing the Associated Persons with federal and state regulatory
authorities and the NASD when applicable, and (c) printing and distributing all
of the Accounts' registration statements, prospectuses and statements of
additional information for the Contracts (including amendments), Contracts,
Account notices and periodic reports, proxy solicitation material, and Account
sales literature and advertising.
5. The Company will, in connection with the sale of the Contracts, pay
all amounts (including sales commissions) due to Dealers who sell Contracts
under Selling Agreements, in amounts specified in the Selling Agreements and
agreed to by the Company.
-2-
<PAGE>
6. The Distributor will be responsible for compliance with respect to
the maintenance and preservation in accordance with all applicable federal and
state securities laws and regulations, including Rules 17a-3 and 17a-4 under the
1934 Act, of all books and records required to be maintained in connection with
the offer and sale of the Contracts being distributed pursuant to this
Agreement. The Company shall maintain and preserve such books and records on
behalf of and as the agent for the Distributor in conformity with the
requirements of Rules 17a-3 and 17a-4 under the 1934 Act. Such books and records
shall be the property of the Distributor and shall at all times be subject to
inspection by the NASD and the SEC in accordance with Section 17(a) of the 1934
Act. The Company, acting as agent for the Distributor upon or prior to
completion of each transaction for which a confirmation is legally required,
will send a written confirmation for each such transaction reflecting the facts
of the transaction.
7. The Distributor will execute such papers and do such acts and things
as shall from time to time be reasonably requested by the Company for the
purpose of (a) maintaining the registration statements relating to the Contracts
under the 1933 Act and the 1940 Act, and (b) qualifying and maintaining
qualification of the Contracts for sale under the applicable laws of any state.
It will, however, remain the responsibility of the Company to obtain and
maintain all necessary approvals and registration of the Contracts with all
relevant regulatory authorities.
8. The Distributor is not authorized to give any information, or to
make any representations concerning the Contracts, Accounts or the Company other
than those contained in the current registration statements, prospectuses or
statements of additional information (as amended from time to time) for the
Contracts filed with the SEC or such sales literature and materials as may be
authorized by the Company.
9. The Company guarantees the performance of all of the Distributor's
obligations, imposed by any of Section 27(d) or 27(f) of the 1940 Act or
paragraph (b) of Rule 27d-2 adopted by the SEC under the 1940 Act, to the extent
applicable, to make refunds required of the principal underwriter of the
Contracts issued in connection with the Accounts. If, and to the extent that,
after notifying the Company of its intention to do so, the Distributor makes any
refund of any charges required under Section 27(d) or Section 27(f) of the 1940
Act or Rule 27d-2(b) thereunder, the Company will indemnify the Distributor for,
and hold it harmless against, the payment of such amount.
10. Each party hereto shall advise the other promptly of (a) any action
of the SEC or any authorities of any state or territory, of which it has
knowledge, affecting registration or qualifications of the Accounts or the
Contracts, or the right to offer the Contracts for sale, and (b) the happening
of any event which makes untrue any statement, or which requires the making of
any change in the registration statements or prospectuses or statements of
additional information in order to make the statements therein not misleading.
11. There shall be net no compensation for either the services provided
by the Distributor or the services provided by the Company in connection with
this Agreement.
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<PAGE>
12. The obligations of the Distributor under this Agreement relate
solely to its status as the principal underwriter of the Contracts and nothing
in this Agreement shall be construed as imposing or giving rise to any duty or
liability of the Distributor with respect to the sale, registration or
qualification of the Underlying Securities.
13. The services of the Distributor and the Company under this Agreement
are not deemed to be exclusive and the Distributor and the Company shall be free
to render similar services to others, including, without implied limitation,
such other separate investment accounts as are now or hereafter established by
the Company, the Distributor or any affiliate of the Distributor.
14. This Agreement shall continue in full force and effect until
terminated. This Agreement may be terminated at any time without penalty by 60
days written notice by either party.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of Ohio.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
INTEGRITY LIFE INSURANCE COMPANY
By:
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Title:
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TOUCHSTONE SECURITIES, INC.
By:
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Title:
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<PAGE>
EXHIBIT A
INTEGRITY LIFE INSURANCE COMPANY
Separate Accounts
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Separate Account I of Integrity Life Insurance Company
Separate Account II of Integrity Life Insurance Company
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<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post Effective Amendment No. 12 to the Registration Statement (Form N-4 No.
33-56654) and Amendment No. 21 to the Registration Statement (Form N-4 No.
811-4844) and related Prospectuses of Separate Account I of Integrity Life
Insurance Company and to the use of our reports (a) dated March 31, 2000, with
respect to the statutory basis financial statements of Integrity Life Insurance
Company, and (b) dated April 12, 2000, with respect to the financial statements
of Separate Account I of Integrity Life Insurance Company, both included in the
Registration Statement (Form N-4) for 1999 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 2000
