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STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
FOR
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
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Page
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Part 1 - National Integrity and Custodian................................................ 2
Part 2 - Distribution of the Contracts................................................... 3
Part 3 - Performance Information......................................................... 3
Part 4 - Death Benefit Information for Contracts Issued Prior to January 1, 1995......... 10
Part 5 - Financial Statements............................................................ 10
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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, 1996.
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 National Integrity Life Insurance Company
("National Integrity"), 200 Park Avenue, 20th Floor, New York, New York 10166,
or by calling 1-800-325-8583.
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PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity is a New York stock life insurance company that sells life
insurance and annuities. Its offices are located at 200 Park Avenue, 20th Floor,
New York, New York 10166. National Integrity, the depositor of Separate Account
I, is a wholly owned subsidiary of Integrity Life Insurance Company. Integrity
Life Insurance Company is a wholly owned subsidiary of Integrity Holdings, Inc.,
a Delaware corporation which is a holding company engaged in no active business.
All outstanding shares of Integrity Holdings, Inc. are owned by ARM Financial
Group, Inc., a Delaware corporation which is a financial services company
focusing on the long-term savings and retirement marketplace by providing retail
and institutional products and services throughout the United States (ARM). ARM
owns 100% of the stock of (i) SBM Financial Services, Inc., a Minnesota
corporation (SBM Financial Services), registered with the SEC as a broker-dealer
and a member of the National Association of Securities Dealers, Inc., (ii) ARM
Capital Advisors, Inc., a New York corporation registered with the SEC as an
investment adviser, (iii) SBM Certificate Company, a Minnesota corporation
registered with the SEC as an issuer of face-amount certificates, and (iv) ARM
Transfer Agency, Inc., a Delaware corporation registered with the SEC as a
transfer and dividend disbursing agency. Approximately 91% of the outstanding
voting stock of ARM is owned by The Morgan Stanley Leveraged Equity Fund II,
L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P., and MSCP III 892 Investors, L.P., each of which is a Delaware
limited partnership (collectively, the MSCP Funds). The MSCP Funds are private
equity funds sponsored by Morgan Stanley Group, Inc., a Delaware corporation
that, through its subsidiaries, provides a wide range of financial services on a
global basis (Morgan Stanley). The general partner of each of the MSCP Funds is
a wholly owned subsidiary of Morgan Stanley. Oldarm Limited Partnership, a
Kentucky limited partnership, New ARM, LLC, a Kentucky limited liability
company, and certain employees and management of ARM own in the aggregate
approximately 9% of the voting stock of ARM.
No person has the direct or indirect power to control Morgan Stanley except
insofar as he or she may have such power by virtue of his or her capacity as a
director or executive officer thereof. Morgan Stanley is publicly held; no
individual beneficially owns more than 5% of the common shares; however,
approximately 31% of such shares are subject to a stockholders' agreement or
voting agreement among certain current and former principals and employees of
Morgan Stanley and its predecessor.
Beginning in 1994, ARM Financial Group provided substantially all of the
services required to be performed on behalf of the Separate Account. Total fees
paid to ARM Financial Group by National Integrity for management services in
1995, including services applicable to the Registrant, were $5,640,827.
National 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 National Integrity, as determined by A.M. Best
Company, Moody's Investor Service, Standard & Poor's Corporation, Duff & Phelps
Corporation, or other recognized rating services. National Integrity is
currently rated "A" (Excellent) by A.M. Best Company, and has received claims
paying ability ratings of "A" (Good) from Standard & Poor's Corporation, Baa1
from Moody's Investors Service, Inc., and "A+" (High) from Duff and Phelps
Credit Rating Company. However, National Integrity does not guarantee the
investment performance of the portfolios, and these ratings do not reflect
protection against investment risk.
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PART 2 - DISTRIBUTION OF THE CONTRACTS
SBM Financial Services, an affiliate of National Integrity, is the principal
underwriter of the contracts. SBM Financial Services 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 SBM Financial
Services on a continuous basis.
We generally pay a maximum distribution allowance of 6% of contributions. The
amount of distribution allowances paid was $2,217,123, $912,740 and $781,431 for
the years ended December 31, 1995, 1994, and 1993, respectively. National
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, such other incentives may be offered only to
certain broker-dealers that sell or are expected to sell during specified time
periods certain minimum amounts of the contracts.
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 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 there can be no assurance 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
applicable charges 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 applicable.
Any such 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 currently applicable under
the contract. Total returns may be shown simultaneously 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 illustrated. Average annual returns are calculated pursuant to the
following formula: P(1+T)/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
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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 the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
Current yield and effective yield are calculated for the 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:
Effective Yield = {(Base Period Return) + 1)/365/7/} - 1
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The table below provides average annual total returns for each Option for the
one and three year periods ending March 31, 1996 and from inception through
March 31, 1996. The "contract continues" columns show returns if the contract
continues and is not terminated, and the "contract surrendered" columns show
returns if the contract is surrendered at the end of the period, in which case
contingent withdrawal charges may apply. The performance information is based on
the historical investment experience of the Options and does not indicate or
represent future experience.
AVERAGE ANNUAL TOTAL RETURNS FOR ONE YEAR PERIOD ENDING 03/31/96 AND SINCE
INCEPTION*
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Period Since Inception One Year Period Three Year Period
------------------------ --------------------------- -----------------
Contract Contract
Contract Surrendered Contract Surrendered
Option Continues 03/31/96 Continues 03/31/96 Contract Continues
- ------ --------- ----------- --------- ----------- ------------------
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Equity-Income 17.02% 16.57% 27.48% 21.41% 16.48%
Asset Manager 9.20% 8.65% 16.14% 10.06% 7.59%
Growth 15.86% 15.40% 32.92% 26.84% 16.32%
Overseas 7.32% 6.73% 13.29% 7.21% 10.81%
Investment Grade 5.67% 4.73% 9.04% 2.97% 4.18%
Bond
Index 500 14.81% 13.45% 30.11% 24.03% n/a
High Income 10.07% 8.91% 16.67% 10.60% 10.04%
Asset Manager: 21.85% 16.62% 23.11% 17.04% n/a
Growth
Contrafund 33.75% 28.49% 32.12% 26.05% n/a
</TABLE>
*The inception date for each Option is set forth in the table below.
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The table below provides cumulative total returns for each Option from inception
through March 31, 1996, and Year-To-Date from January 1, 1996 through March 31,
1996. The "contract continues" columns show returns if the contract continues
and is not terminated, and the "contract surrendered" column shows returns if
the contract is surrendered at the end of the period, in which case contingent
withdrawal charges apply. The performance information is based on the historical
investment experience of the Options and does not indicate or represent future
experience.
CUMULATIVE TOTAL RETURNS FOR PERIOD SINCE INCEPTION TO
03/31/96 AND FOR YEAR-TO-DATE PERIOD FROM
01/01/96 THROUGH 03/31/96
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Year-To-Date
Period Since Inception Through 3/31/96 Three-Year
---------------------- --------------- ----------
Contract
Contract Surrendered Contract Contract Inception
Option Continues 03/31/96 Continues Continues Date*
- ------ --------- ----------- --------- --------- ---------
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Equity-Income 105.32% 101.98% 3.99% 58.05% 09/03/91
Asset Manager 49.63% 46.29% 2.61% 24.56% 09/03/91
Growth 96.20% 92.85% 5.03% 57.38% 09/03/91
Overseas 38.20% 34.85% 3.37% 36.06% 09/03/91
Investment Grade Bond 24.65% 20.35% -2.29% 13.08% 04/02/92
Index 500 51.04% 45.81% 5.10% n/a 04/06/92
High Income 34.05% 29.82% 3.39% 33.26% 03/12/93
Asset Manager:
Growth 25.19% 19.11% 4.14% n/a 02/10/95
Contrafund 38.52% 32.44% 4.11% n/a 02/10/95
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*Inception Dates reflect date of first trade.
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), Donahue 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 traced 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.
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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.
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.
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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,
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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
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National Integrity or any of the Sub-Advisers derived from such indices or
averages.
Individualized Computer Generated Illustrations
National 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.
PART 4 - DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED PRIOR TO JANUARY 1, 1995
Notwithstanding anything in the prospectus to the contrary, for contracts issued
prior to January 1, 1995, the amount of the death benefit is the greatest of:
. your 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
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
PART 5 - FINANCIAL STATEMENTS
Ernst & Young LLP, 400 West Market Street, Louisville, Kentucky 40202, 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 and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1995 and 1994 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 National Integrity should be distinguished from the
financial statements of the Separate Account and should be considered only as it
relates to the ability of National 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
