<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
December 31, 1995
With Report of Independent Auditors
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account I of National Integrity Life Insurance Company (comprising,
respectively, the Money Market, High Income, Equity-Income, Growth, Overseas,
Investment Grade Bond, Asset Manager, Index 500, Asset Manager: Growth and
Contrafund Divisions) as of December 31, 1995, and the related statements of
operations and 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned in Variable Insurance Products Fund and
Variable Insurance Products Fund II (Fidelity VIP Funds) as of December 31,
1995, 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 National Integrity Life Insurance
Company at December 31, 1995, and the results of their operations and changes in
their net assets for each of the periods indicated herein in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 19, 1996
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(cost of $133,484,015 in the aggregate) $20,184,099 $14,675,594 $33,968,982 $21,034,515 $7,517,725
Receivable from (payable to) the general account
of National Integrity 8,190 5,240 1,185 1,661 1,969
---------------------------------------------------------------------
TOTAL ASSETS $20,192,289 $14,680,834 $33,970,167 $21,036,176 $7,519,694
---------------------------------------------------------------------
NET ASSETS $20,192,289 $14,680,834 $33,970,167 $21,036,176 $7,519,694
==================================================================
Unit value $ 11.93 $ 12.97 $ 25.81 $ 31.99 $ 17.65
==================================================================
Units outstanding 1,692,564 1,131,907 1,316,163 657,586 426,045
==================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1995
<TABLE>
<CAPTION>
ASSET
INVESTMENT ASSET INDEX MANAGER: CONTRA-
GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at
value (cost of $133,484,015 in
the aggregate) $4,280,682 $27,685,519 $4,216,842 $1,023,587 $12,694,307 $147,281,852
Receivable from (payable to) the
general account of
National Integrity 675 (2,734) (167) (132) 3,925 19,812
---------------------------------------------------------------------------------------
TOTAL ASSETS 4,281,357 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
---------------------------------------------------------------------------------------
NET ASSETS $4,281,357 $27,682,785 $4,216,675 $1,023,455 $12,698,232 $147,301,664
=======================================================================================
Unit value $ 16.18 $ 18.95 $ 14.37 $ 12.02 $ 13.31
=========================================================================
Units outstanding 264,608 1,460,833 293,436 85,146 954,037
=========================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from Fidelity VIP Funds $719,617 $ 402,638 $1,063,825 $ 52,633 $ 55,495
EXPENSES
Mortality and expense risk
and administrative charges 172,445 136,037 286,767 202,049 100,968
-------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 547,172 266,601 777,058 (149,416) (45,473)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales of
investments - (28,970) 442,703 301,960 63,061
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - (127,266) 141,575 17,776 (88,040)
End of period - 1,197,030 4,753,760 3,418,140 497,261
-------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period - 1,324,296 4,612,185 3,400,364 585,301
-------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS - 1,295,326 5,054,888 3,702,324 648,362
-------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $547,172 $1,561,927 $5,831,946 $3,552,908 $602,889
==========================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
ASSET
INVESTMENT ASSET INDEX MANAGER: CONTRA-
GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION* DIVISION* TOTAL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from Fidelity VIP Funds $ 49,378 $ 575,823 $ 20,610 $43,770 $ 161,030 $ 3,144,819
EXPENSES
Mortality and expense risk
and administrative charges 35,015 380,213 29,892 5,263 70,765 1,419,414
--------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 14,363 195,610 (9,282) 38,507 90,265 1,725,405
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) on
sales of investments (1,976) 67,575 163,144 15,291 214,827 1,237,615
Net unrealized appreciation
(depreciation) of
investments:
Beginning of period (38,476) (1,287,181) (6,103) - - (1,387,715)
End of period 305,849 2,437,834 449,723 10,050 728,190 13,797,837
--------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation
during the period 344,325 3,725,015 455,826 10,050 728,190 15,185,552
--------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 342,349 3,792,590 618,970 25,341 943,017 16,423,167
--------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $356,712 $3,988,200 $609,688 $63,848 $1,033,282 $18,148,572
============================================================================================
</TABLE>
* For the period February 6, 1995 (commencement of operations) to December 31,
1995.
See accompanying notes.
5
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 547,172 $ 266,601 $ 777,058 $ (149,416) $ (45,473)
Net realized gain (loss) on sales
of investments - (28,970) 442,703 301,960 63,061
Change in net unrealized appreciation/
depreciation during the period - 1,324,296 4,612,185 3,400,364 585,301
-------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 547,172 1,561,927 5,831,946 3,552,908 602,889
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 11,544,874 8,116,206 16,693,537 7,825,282 1,952,404
Contract terminations and
benefits (623,106) (718,702) (1,866,020) (782,169) (437,957)
Net transfers among investment
options (209,586) 140,918 3,561,997 1,522,144 (1,651,330)
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets
derived from contract related
transactions 10,712,182 7,538,422 18,389,514 8,565,257 (136,883)
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 11,259,354 9,100,349 24,221,460 12,118,165 466,006
Net assets, beginning of year 8,932,935 5,580,485 9,748,707 8,918,011 7,053,688
-------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $20,192,289 $14,680,834 $33,970,167 $21,036,176 $7,519,694
=====================================================================================
UNIT TRANSACTIONS
Contributions 991,177 669,982 734,405 256,356 115,747
Terminations and benefits (53,116) (59,452) (77,244) (25,360) (25,091)
Net transfers (27,867) 9,279 155,599 54,283 (97,129)
-------------------------------------------------------------------------------------
Net increase (decrease) in units 910,194 619,809 812,760 285,279 (6,473)
=====================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
ASSET
INVESTMENT ASSET INDEX MANAGER: CONTRA-
GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION* DIVISION* TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 14,363 $ 195,610 $ (9,282) $ 38,507 $ 90,265 $ 1,725,405
Net realized gain (loss) on sales of investments (1,976) 67,575 163,144 15,291 214,827 1,237,615
Change in net unrealized appreciation/
depreciation during the period 344,325 3,725,015 455,826 10,050 728,190 15,185,552
----------------------------------------------------------------------------
Net increase in net assets resulting from operations 356,712 3,988,200 609,688 63,848 1,033,282 18,148,572
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 2,299,947 5,153,894 1,801,990 852,854 9,594,998 65,835,986
Contract terminations and benefits (76,202) (2,134,550) (154,064) (51,829) (235,829) (7,080,428)
Net transfers among investment options 337,449 (7,356,843) 897,468 158,582 2,305,781 (293,420)
----------------------------------------------------------------------------
Net increase(decrease) in net assets derived from
contract related transactions 2,561,194 (4,337,499) 2,545,394 959,607 11,664,950 58,462,138
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2,917,906 (349,299) 3,155,082 1,023,455 12,698,232 76,610,710
Net assets, beginning of year 1,363,451 28,032,084 1,061,593 - - 70,690,954
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $4,281,357 $27,682,785 $4,216,675 $1,023,455 $12,698,232 $147,301,664
============================================================================
UNIT TRANSACTIONS
Contributions 150,331 306,214 136,806 75,747 777,515
Terminations and benefits (4,694) (124,737) (11,135) (4,392) (17,708)
Net transfers 21,423 (427,236) 67,783 13,791 194,230
---------------------------------------------------------------
Net increase (decrease) in units 167,060 (245,759) 193,454 85,146 954,037
===============================================================
</TABLE>
* For the period February 6, 1995 (commencement of operations) to
December 31, 1995.
See accompanying notes.
7
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1994
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 151,127 $ 115,776 $ 270,066 $ 157,464
Net realized gain (loss) on sales of investments - (13,860) 62,711 18,286
Change in net unrealized appreciation/depreciation
during the period - (178,943) (2,174) (138,292)
-------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 151,127 (77,027) 330,603 37,458
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED
TRANSACTIONS
Contributions from contract holders 10,690,456 4,104,471 5,833,705 5,720,456
Contract terminations and benefits (97,113) (73,449) (290,905) (208,415)
Net transfers among investment options (3,029,273) 277,391 341,357 55,519
-------------------------------------------------------
Net increase in net assets derived from contract related
transactions 7,564,070 4,308,413 5,884,157 5,567,560
-------------------------------------------------------
INCREASE IN NET ASSETS 7,715,197 4,231,386 6,214,760 5,605,018
Net assets, beginning of year 1,217,738 1,349,099 3,533,947 3,312,993
-------------------------------------------------------
NET ASSETS, END OF YEAR $ 8,932,935 $5,580,485 $9,748,707 $8,918,011
=======================================================
UNIT TRANSACTIONS
Contributions 941,898 373,532 309,253 242,331
Terminations and benefits (8,687) (6,560) (15,183) (8,949)
Net transfers (260,526) 24,883 16,588 2,507
-------------------------------------------------------
Net increase in units 672,685 391,855 310,658 235,889
=======================================================
</TABLE>
See accompanying notes.
8
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
INVESTMENT ASSET INDEX
OVERSEAS GRADE BOND MANAGER 500
DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ (57,721) $ (13,429) $ 440,175 $ (7,758) $ 1,055,700
Net realized gain (loss) on sales of
investments 65,073 (26,076) 117,121 23,537 246,792
Change in net unrealized appreciation/
depreciation during the period (162,730) (14,694) (2,273,273) (7,335) (2,777,441)
---------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (155,378) (54,199) (1,715,977) 8,444 (1,474,949)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract
holders 5,451,022 944,454 17,484,315 830,734 51,059,613
Contract terminations and
benefits (271,298) (46,965) (488,107) (4,909) (1,481,161)
Net transfers among
investment options 442,137 (256,934) (446,639) 48,144 (2,568,298)
---------------------------------------------------------------------------------
Net increase in net assets derived from
contract related transactions 5,621,861 640,555 16,549,569 873,969 47,010,154
---------------------------------------------------------------------------------
INCREASE IN NET ASSETS 5,466,483 586,356 14,833,592 882,413 45,535,205
Net assets, beginning of year 1,587,205 777,095 13,198,492 179,180 25,155,749
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $7,053,688 $1,363,451 $28,032,084 $1,061,593 $70,690,954
=================================================================================
UNIT TRANSACTIONS
Contributions 325,374 65,291 1,019,863 80,833
Terminations and benefits (16,142) (3,281) (28,191) (443)
Net transfers 25,619 (17,249) (29,482) 2,771
-----------------------------------------------------------------
Net increase in units 334,851 44,761 962,190 83,161
=================================================================
</TABLE>
See accompanying notes.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity") established
Separate Account I (the "Separate Account") on May 19, 1986, under the insurance
laws of the State of New York for the purpose of issuing flexible payment
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. The operations of the Separate Account are
part of National Integrity.
National Integrity is a wholly owned subsidiary of Integrity Life Insurance
Company and their ultimate parent is ARM Financial Group, Inc. ("ARM"). ARM is a
financial services company focusing on the long-term saving and retirement
marketplace by providing retail and institutional products and services
throughout the United States.
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 National Integrity, or both. Certain
contract holders may also allocate or transfer a portion or all of their account
values to one or more fixed rate guaranteed period options of National
Integrity's Separate Account GPO. The Separate Account investment divisions are
invested in shares of corresponding investment portfolios of the Variable
Insurance Products Fund and Variable Insurance Products Fund II (collectively
the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series" type mutual funds
managed by Fidelity Management and Research Company ("Fidelity Management").
Prior to September 3, 1991, the Separate Account investment divisions then
offered were invested in shares of corresponding portfolios of Prism Investment
Trust. The contract holder's account value allocated to the investment divisions
of the Separate Account reflect the investment performance of the Fidelity VIP
Funds'
10
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
corresponding portfolios. The Separate Account currently has ten investment
divisions available. The investment objective of each division and its
corresponding portfolio are the same. Set forth below is a summary of the
investment objectives of the portfolios of the Fidelity VIP Funds.
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with 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 to obtain a high level of current income by
investing primarily in high-yielding, lower rated, fixed-income securities,
while also considering growth of capital. It normally invests at least 65% of
its total assets in income-producing debt securities and preferred stocks,
including convertible securities, and up to 20% in common stocks and other
equity securities.
Equity-Income Portfolio seeks reasonable income by investing primarily in
income producing equity securities, with the potential for capital
appreciation as a consideration. It normally invests at least 65% of its
assets in income-producing common or preferred stock and the remainder in
debt securities.
Growth Portfolio seeks to achieve capital appreciation, normally by purchase
of common stocks, although investments are not restricted to any one type of
security. Capital appreciation may also be found in other types of
securities, including bonds and preferred stocks.
Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests 65% of its assets in
securities from at least three countries outside North America.
Investment Grade Bond Portfolio seeks as high a level of current income as is
consistent with the preservation of capital by investing in a broad range of
investment-grade fixed-income securities. It will maintain a dollar-weighted
average portfolio maturity of ten years or less. For 80% of its assets, the
portfolio purchases
11
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
only securities rated A or better by Moody's Investors Service, Inc. or
Standard & Poor's Corporation or unrated securities judged by Fidelity
Management to be of equivalent quality.
Asset Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among stocks, bonds and short-term fixed-
income instruments. The expected "neutral" mix of assets, which will occur
when the investment adviser concludes there is minimal relative difference in
value between the three asset classes, is 40% in equities, 40% in
intermediate to long-term bonds and 20% in short-term fixed income
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 U.S. 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.
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 instruments. The fund has a neutral mix which
represents the general allocation of the fund's investments over the long
term. The approximate neutral mix for stocks, bonds and short-term
investments is 65%, 30% and 5%, respectively.
Contrafund Portfolio is a growth fund which seeks to increase the value of
the investment over the long term by investing in equity securities of
companies that are undervalued or out of favor. This approach focuses on
companies that are currently out of public favor but show potential for
capital appreciation. Contrafund Portfolio invests primarily in common stock
and securities convertible into common stock, but it has the flexibility to
invest in any type of security that may produce capital appreciation.
The Asset Manager Portfolio's relatively large investment in countries with
limited or developing capital markets may involve greater risks than investments
in more developed markets and the prices of such investments may be volatile.
12
<PAGE>
Separate Account I
of
National 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 National 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 National Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles 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 from the portfolios are reinvested in the 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
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
mortality and expense risk and administrative charges. Unit values are adjusted
daily for all activity in the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
National 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 existing federal
income tax law, no taxes are payable on the investment income or on the capital
gains of the Separate Account.
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1995 and the cost shares held at
December 31, 1995 for each division were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES COST
-----------------------------------------
<S> <C> <C> <C>
Money Market Division $19,103,765 $7,852,722 $20,184,099
High Income Division 9,771,299 1,971,593 13,478,564
Equity-Income Division 22,166,952 3,001,735 29,215,222
Growth Division 10,662,301 2,248,616 17,616,375
Overseas Division 2,477,126 2,661,754 7,020,464
Investment Grade Bond Division 2,924,001 349,121 3,974,833
Asset Manager Division 4,522,437 8,661,691 25,247,685
Index 500 Division 3,925,030 1,388,758 3,767,119
Asset Manager: Growth Division 1,307,560 309,314 1,013,537
Contrafund Division 12,764,240 1,012,950 11,966,117
</TABLE>
14
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES
National 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 of
1.20% and 0.15% of net assets, respectively, to cover these risks and expenses.
In addition, 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).
15
<PAGE>
Financial Statements
(Statutory Basis)
National Integrity Life
Insurance Company
Years Ended December 31, 1995 and 1994
with Report of Independent Auditors
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors............................................... 1
Audited Financial Statements
Balance Sheets (Statutory Basis)............................................. 3
Statements of Operations (Statutory Basis)................................... 5
Statements of Changes in Capital and Surplus (Statutory Basis)............... 6
Statements of Cash Flows (Statutory Basis)................................... 7
Notes to Financial Statements................................................ 9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheet of National
Integrity Life Insurance Company as of December 31, 1995 and 1994, 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the New York Insurance Department. The
variances between such practices and generally accepted accounting principles
and the effects on the accompanying financial statements are described in
Note 1.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of National
Integrity Life Insurance Company at December 31, 1995 and 1994, or the results
of its operations or its cash flows for the years then ended. However, in our
opinion, the supplementary information included in Note 1 presents fairly, in
all material respects, shareholder's equity at December 31, 1995 and 1994, and
net income for the years then ended in conformity with generally accepted
accounting principles.
1
<PAGE>
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Integrity Life
Insurance Company at December 31, 1995 and 1994, 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 New York Insurance
Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 23, 1996
2
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------------------
(In Thousands)
<S> <C> <C>
Admitted assets
Cash and invested assets:
Bonds $ 635,249 $ 560,165
Preferred stocks 14,428 13,355
Mortgage loans 5,318 6,644
Policy loans 22,606 19,730
Cash and short-term investments 20,268 21,071
Other invested assets 8,827 -
------------------------
Total cash and invested assets 706,696 620,965
Separate account assets 265,264 143,262
Broker balances receivable - 849
Accrued investment income 7,959 8,128
Federal income tax recoverable - 2,259
Other admitted assets - 66
------------------------
Total admitted assets $ 979,919 $ 775,529
========================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------------
(In Thousands)
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 671,322 $ 589,063
Unpaid claims 1,813 2,135
Deposits on policies to be issued - 716
-------------------------
Total policy and contract liabilities 673,135 591,914
Separate account liabilities 265,264 143,262
Accounts payable and accrued expenses 264 1,052
Transfers to Separate Accounts due or accrued, net (16,329) (9,563)
Reinsurance balances payable 98 1,138
Federal income taxes 1,005 -
Asset valuation reserve 1,969 698
Interest maintenance reserve 6,992 10,665
Broker balances payable 6,082 -
Other liabilities 2,300 806
-------------------------
Total liabilities 940,780 739,972
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued and outstanding 2,000 2,000
Paid-in capital 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (22,855) (26,437)
-------------------------
Total capital and surplus 39,139 35,557
-------------------------
Total liabilities and capital and surplus $ 979,919 $ 775,529
=========================
</TABLE>
See accompanying notes.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 1,262 $ 2,604
Deposit-type funds 261,378 154,851
Net investment income 46,548 43,751
Amortization of the interest maintenance reserve 823 1,564
Other income 3,913 2,191
---------------------
Total premiums and other revenues 313,924 204,961
Benefits paid or provided:
Death benefits 9,098 5,809
Annuity benefits 3,581 3,135
Surrender benefits 119,789 63,653
Payments on supplementary contracts 1,869 1,669
Increase in insurance and annuity reserves 80,945 9,953
Other benefits 1,492 112
---------------------
Total benefits paid or provided 216,774 84,331
Insurance and other expenses:
Commissions 4,809 5,275
General expenses 8,150 9,910
Taxes, licenses and fees 301 300
Net transfers to separate account 77,166 100,369
---------------------
Total insurance and other expenses 90,426 115,854
---------------------
Gain from operations before federal income taxes and net
realized capital losses 6,724 4,776
Federal income taxes 991 23
---------------------
Gain from operations before net realized capital losses 5,733 4,753
Net realized capital gains (losses), less capital gains
tax expense (benefit) (1995-$1,800,000;
1994-$(1,923,000)) and excluding net gains (losses)
transferred to the interest maintenance reserve
(1995-$(2,850,000); 1994-$(8,756,000)) (900) (800)
---------------------
Net income $ 4,833 $ 3,953
=====================
</TABLE>
See accompanying notes.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SPECIAL TOTAL
COMMON PAID-IN SURPLUS UNASSIGNED CAPITAL AND
STOCK SURPLUS FUNDS SURPLUS SURPLUS
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $2,000 $ 59,244 $ 750 $(29,735) $ 32,259
Net income 3,953 3,953
Increase in nonadmitted assets (4) (4)
Increase in asset valuation
reserve (651) (651)
----------------------------------------------------
Balance, December 31, 1994 2,000 59,244 750 (26,437) 35,557
Net income 4,833 4,833
Decrease in nonadmitted assets 20 20
Increase in asset valuation
reserve (1,271) (1,271)
----------------------------------------------------
Balance, December 31, 1995 $2,000 $ 59,244 $ 750 $(22,855) $ 39,139
====================================================
</TABLE>
See accompanying notes.
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
----------------------
(In Thousands)
<S> <C> <C>
Operations:
Premiums, policy proceeds, and other considerations
received $ 262,639 $ 157,455
Net investment income received 47,165 44,687
Commission and expense allowances received on
reinsurance ceded 906 36
Benefits paid (134,780) (74,154)
Insurance expenses paid (13,461) (15,299)
Other income received net of other expenses paid 166 173
Net transfers to separate account (89,932) (107,601)
Federal income taxes paid - (358)
---------------------
Net cash provided by operations 78,703 4,939
Proceeds from sales, maturities, or repayments of
investments:
Bonds 339,361 206,582
Preferred stocks 6,913 3,356
Subsidiary - 25
Mortgage loans 1,326 941
---------------------
Total investment proceeds 347,600 210,904
Taxes paid on capital gains - (2,468)
---------------------
Net proceeds from sales, maturities, or repayments of
investments 347,600 208,436
Other cash provided:
Other sources 7,899 662
---------------------
Total other cash provided 7,899 662
---------------------
Total cash provided 434,202 214,037
---------------------
</TABLE>
7
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Cost of investments acquired:
Bonds $ 416,110 $ 253,894
Preferred stocks 7,818 16,711
Other invested assets 8,841 -
----------------------
Total investments acquired 432,769 270,605
Other cash applied:
Other applications, net 2,236 9,324
----------------------
Total other cash applied 2,236 9,324
----------------------
Total cash used 435,005 279,929
----------------------
Net decrease in cash and short-term investments (803) (65,892)
Cash and short-term investments at beginning of year 21,071 86,963
----------------------
Cash and short-term investments at end of year $ 20,268 $ 21,071
======================
</TABLE>
See accompanying notes.
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1995
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity" or the
"Company") is a wholly owned subisidiary of Integrity Life Insurance Company
("Integrity") which is an indirect wholly owned subsidiary of ARM Financial
Group, Inc. ("ARM"). ARM acquired Integrity and the Company from The National
Mutual Life Association of Australasia Limited ("National Mutual"). The Company
is domiciled in the state of New York. The Company, currently licensed in eight
states and the District of Columbia, provides retail and institutional products
to the long-term savings and retirement marketplace.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the New York
Insurance Department. Such practices vary from generally accepted accounting
principles ("GAAP"); the more significant variances from GAAP are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or
market value based on their 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 market values. Mortgage loans on real
estate in good standing are reported at unpaid principal balances. 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 account. The Asset Valuation
Reserve is determined by an NAIC prescribed formula and is reported as a
liability rather than surplus. Under a formula prescribed by the
NAIC, National Integrity defers the portion of
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 based on 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 valuation allowances are
provided when there has been a decline in value deemed other than temporary,
in which case, the provision for such declines would be charged to income.
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 present value of expected gross profits from surrender charges and
investment, mortality, and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally agents' debit
balances, are excluded from the accompanying balance sheets and are charged
directly to unassigned surplus.
PREMIUMS
Revenues for investment-type products consist of the entire premium received
and benefits represent the death benefits paid and the change in policy
reserves. Under GAAP, such premiums received are accounted for as deposits
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.
BENEFIT RESERVES
Certain policy reserves are calculated using statutorily prescribed interest
and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 4,833 $ 3,953
Deferred policy acquisition costs, net of
amortization 7,614 10,350
Adjustments to policyholder deposits (3,669) (7,183)
Adjustments to invested asset carrying values at
acquisition date (180) (1,236)
Amortization of value of insurance in force (2,905) (1,556)
Amortization of interest maintenance reserve (823) (1,564)
Adjustments for realized investment gains (losses) (747) (10,807)
Adjustments for federal income tax benefit (expense) 564 (292)
Other 356 (1,331)
------------------------
Net income (loss), GAAP basis $ 5,043 $ (9,676)
========================
</TABLE>
11
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---------------------
(In Thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 39,139 $ 35,557
Adjustments to policyholder deposits (26,792) (23,123)
Adjustments to invested asset carrying values at
acquisition date (5,889) (4,962)
Asset valuation reserve and interest
maintenance reserve 20,567 20,119
Value of insurance in force 15,393 18,288
Deferred policy acquisition costs 18,541 10,927
Net unrealized gains (losses) on available-for-sale
investments 5,577 (31,571)
Other (246) (1,146)
---------------------
Shareholder's equity, GAAP basis $ 66,280 $ 24,089
=====================
</TABLE>
Other significant accounting practices are as follows:
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, anticipated prepayments are considered when determining
the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities were
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>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preferred stocks are reported at cost or amortized cost.
Mortgage loans and policy loans are reported at unpaid principal balances.
Short-term investments includes investments with maturities of less than one
year at the date of acquisition.
Realized capital gains and losses are determined using the specific
identification method.
BENEFITS
Insurance 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 New York Insurance Department. The Company waives
deduction of deferred fractional premiums on 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.
POLICY AND CONTRACT CLAIMS
Unpaid benefits and related expenses are established for estimates of payments
to be made on individual insurance claims that have been incurred and reported,
and estimates of losses which have occurred but have not been reported.
Management believes that its reserve estimate for policy and contract claims is
adequate.
13
<PAGE>
National 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 balance
sheets represent funds that are separately administered, principally for
variable annuity contracts. Separate account assets are reported at market
value. Surrender charges collectible by the general account in the event of
variable policy surrenders are reported as a negative liability rather than an
asset pursuant to prescribed NAIC accounting practices. The operations of the
separate accounts are not included in the accompanying financial statements,
except for separate accounts with guarantees.
USE OF ESTIMATES
The preparation of financial statements in compliance with statutory accounting
practices 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation of the 1995 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "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
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
a state, and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in 1997, 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 financial statements. Although the recodification project
is meant to be surplus neutral, there is not enough available information for
the industry to assess the impact of such project.
3. INVESTMENTS
The cost or amortized cost and the fair, or comparable, value of investments in
bonds are summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1995:
U.S. treasury securities
and obligations of U.S.
government agencies $ 51,434 $ 1,381 $ 22 $ 52,793
States and political subdivisions 5,997 43 - 6,040
Foreign governments 1,898 62 - 1,960
Public utilities 19,861 190 41 20,010
Other corporate securities 229,776 5,366 1,653 233,489
Asset-backed securities 27,695 - - 27,695
Mortgage-backed securities 298,588 - - 298,588
---------------------------------------------
Total bonds $ 635,249 $ 7,042 $ 1,716 $ 640.575
=============================================
</TABLE>
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1994:
U.S. treasury securities
and obligations of U.S.
government agencies $ 1,233 $ - $ 11 $ 1,222
States and political subdivisions 11,628 - 1,318 10,310
Foreign governments 4,965 - 715 4,250
Public utilities 42,303 - 3,951 38,352
Other corporate securities 219,363 - 16,460 202,903
Asset-backed securities 15,208 - - 15,208
Mortgage-backed securities 265,465 - 568 264,897
---------------------------------------------
Total bonds $ 560,165 $ - $ 23,023 $ 537,142
=============================================
</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, 1995 and 1994, the fair
value of investments in bonds includes $426,972,000 and $343,698,000,
respectively, of bonds that were valued at amortized cost.
16
<PAGE>
National 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, 1995, 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 $ 3,348 $ 3,348
After one through five 119,032 118,398
After five through ten 68,617 68,611
After ten 117,969 123,935
Asset-backed securities 27,695 27,695
Mortgage-backed securities 298,588 298,588
-----------------------------
Total $ 635,249 $ 640,575
=============================
</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 1995 and 1994 were
$286,601,000 and $143,164,000; gross gains of $4,404,000 and $385,000, and
gross losses of $5,621,000 and $11,064,000 were realized on those sales,
respectively.
At December 31, 1995 and 1994, bonds with an admitted asset value of $1,234,000
and $1,233,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
The Company has made no new investments in mortgage loans during 1988. 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 is 75%. Fire insurance at
least equal to the excess of the loan over the maximum loan which would be
permitted by law on the land without the buildings is required on all properties
covered by mortgage loans. As of year-end the Company held no mortgages with
interest more than one year past due. During 1995, no interest rates of
outstanding mortgage loans were reduced. No amounts have been advanced by the
Company.
In connection with the change in control of the Company during 1993, National
Mutual agreed to indemnify the Company pursuant to a Guaranty Agreement dated
November 26, 1993, with respect to (i) principal (up to 100%) of the Company's
mortgage loans' statutory book value as of December 31, 1992 and (ii)
contractual interest payments (based on the original principal amount) of all
acquired commercial and agricultural mortgage loans. In support of its
indemnification obligations, National Mutual has placed $23.0 million into
escrow in favor of the Company and National Integrity until the mortgage loans
have been repaid in full.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-------------------------
(In Thousands)
<S> <C> <C>
Income:
Bonds $ 43,591 $ 41,326
Preferred stocks 1,282 356
Mortgage loans 565 633
Policy loans 1,751 1,478
Short-term investments and cash 773 1,117
Other investment income (loss) 383 5
-------------------------
Total investment income 48,345 44,915
Investment expenses (1,797) (1,164)
--------------------------
Net investment income $ 46,548 $ 43,751
==========================
</TABLE>
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
4. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, National Integrity reinsures mortality risks under certain
of its insurance products with other insurance companies through reinsurance
agreements. These reinsurance agreements primarily cover single premium
endowment contracts and variable life insurance policies. Through these
reinsurance agreements, substantially all mortality risks associated with SPE
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. Reinsurance ceded is not significant to the Company's premiums,
benefits or policy and contract liabilities. During 1995, the Company entered
into a reinsurance agreement with General American Life Insurance Company to
assume, on a 50% coinsurance basis, guaranteed investment contracts ("GICs").
Policy and contract liabilities assumed under this agreement were $117,770,000
at December 31, 1995. Reinsurance assumed has increased premiums and benefits
paid in 1995 by $117,175,000 and $1,400,000, respectively.
5. FEDERAL INCOME TAXES
The Company files a consolidated return with Integrity. The method of allocation
between the companies is based on separate return calculations.
Income before income taxes differs from taxable income principally due to value
of insurance in-force, policy acquisition costs, and differences in policy and
contract liabilities and investment income for tax and financial reporting
purposes.
The December 31, 1995 tax provision was calculated including net operating loss
carryover benefits of $4,304,000.
6. SURPLUS
The ability of the Company to pay dividends is limited by state insurance laws.
Under New York insurance law, the Company may pay dividends 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 the Company
does not warrant such distribution.
19
<PAGE>
National Integity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
6. SURPLUS (CONTINUED)
The NAIC adopted Risk-Based Capital ("RBC") requirements which became effective
December 31, 1993, that 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 will be 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, 1995 and 1994, the adjusted capital and surplus of the Company is
substantially in excess of the minimum level of RBC that would require
regulatory response.
20
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1995 and 1994, the Company's 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, 1995:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 67,407 8.1%
At book value less current surrender charge of 5% or more 190,629 22.7
At market value 180,991 21.6
------------------
Total with adjustment or at market value 439,027 52.4
Subject to discretionary withdrawal (without adjustment) at
book value with minimal or no charge or adjustment
337,299 40.2
Not subject to discretionary withdrawal 67,710 7.4
------------------
Total annuity reserves and deposit fund liabilities--before
reinsurance 838,036 100.0%
======
Less reinsurance ceded -
Net annuity reserves and deposit fund liabilities $ 838,036
==========
At December 31, 1994:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 37,840 5.9%
At book value less current surrender charge of 5% or more 220,038 34.4
At market value 96,158 15.0
------------------
Total with adjustment or at market value 354,036 55.3
Subject to discretionary withdrawal (without adjustment) at
book value with minimal or no charge or adjustment
229,231 35.8
Not subject to discretionary withdrawal 57,224 8.9
------------------
Total annuity reserves and deposit fund liabilities--before
reinsurance 640,491 100.0%
======
Less reinsurance ceded 325
----------
Net annuity reserves and deposit fund liabilities $ 640,166
==========
</TABLE>
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS
Separate accounts assets and liabilities represent funds segregated for the
benefit of variable annuity and variable life policyholders who generally bear
the investment risk (mutual fund options), or for certain policyholders who are
guaranteed a fixed rate of return (guaranteed rate options). 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, 1995 is as follows:
<TABLE>
<CAPTION>
*NON-
INDEXED NON-
GUARANTEE GUARANTEED
LESS THAN OR SEPARATE
EQUAL TO 4% ACCOUNTS TOTAL
---------------------------------
(In Thousands)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 25,771 $ 71,211 $ 96,982
=================================
Reserves for separate accounts with assets
at fair value $ 67,407 $181,059 $248,466
=================================
Reserves for separate accounts by withdrawal
characteristics:
Subject to discretionary withdrawal (with
adjustment):
With market value adjustment $ 67,407 $ - $ 67,407
At market value - 181,059 181,059
---------------------------------
Total with adjustment or at market value 67,407 181,059 248,466
Not subject to discretionary withdrawal - - -
---------------------------------
Total separate account reserves $ 67,407 $181,059 $248,466
=================================
</TABLE>
*Separate accounts with guarantees.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
1995 1994
------------------
(In Thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
Separate Accounts Statement:
Transfers to Separate Accounts $ 96,982 $110,843
Transfers from Separate Accounts (21,800) (11,473)
------------------
Net transfers to Separate Accounts 75,182 99,370
Reconciling adjustments:
Mortality and expense charges reported as other income 1,928 1,017
Other income (expenses) 56 (18)
------------------
Transfers as reported in the Summary of Operations of the
Life, Accident and Health Annual Statement $ 77,166 $100,369
==================
</TABLE>
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosures 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
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- --------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------- --------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Bonds $635,249 $666,955 $560,165 $517,098
Preferred stocks 14,428 15,964 13,355 13,304
Mortgage loans 5,318 5,318 6,644 6,644
Liabilities:
Life and annuity reserves
for investment-type contracts $472,037 $474,465 504,176 492,496
Separate account reserves 248,398 247,220 133,674 132,945
</TABLE>
Mortgage Loans on Real Estate
Pursuant to the terms of the acquisition, payments of principal and interest on
mortgage loans are guaranteed by National Mutual. Principal received in excess
of statutory book value is to be returned to National Mutual. Accordingly, book
value is deemed to be fair value.
Life and Annuity Reserves for Investment-type Contracts
The fair value of structured settlements and immediate annuities are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of structured settlements and immediate
annuities represents the fair values of those insurance policies as a whole. The
fair value amounts of the remaining annuities are based on the cash surrender
value of the underlying policies.
Separate Account Reserves
The fair value of separate account reserves for investment-type products equals
the cash surrender values.
24
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. Related Party Transactions
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement and an Investment Advisory Agreement with ARM. Under these agreements,
ARM performs certain administrative investment advisory 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
1995 and 1994, the Company was charged $5,641,000 and $5,648,000, respectively,
for these services in accordance with the requirements of applicable insurance
law and regulations.
25
