<PAGE>
As filed with the Securities and Exchange Commission
on May 1, 1997
Registration No. 33-56658
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
---
Post-Effective Amendment No. 7 [X]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 16 [X]
----
(Check appropriate box or boxes)
Separate Account I of National Integrity Life Insurance Company
(Exact Name of Registrant)
National Integrity Life Insurance Company
(Name of Depositor)
515 West Market Street, Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
----------------
John McGeeney
National Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[_] on (date) pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year was
filed on February 19, 1997.
<PAGE>
CROSS REFERENCE SHEET - GrandMaster II
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information required By Form N-4
PART A: INFORMATION REQUIRED IN PROSPECTUS - GrandMaster II
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Prospectus
<S> <C> <C>
1. Cover Page Cover Page
2. Definitions Part 1 - Summary
3. Synopsis Part 1 - Summary; Table of Annual Fees and
Expenses; Examples
4. Condensed Financial Information Part 1 - Financial Information
5. General Description of Registrant, Part 2 - National Integrity and the Separate Account;
Annuity Contracts Part 3 - Your Investment Options
6. Deductions Part 4 - Deductions and Charges
7. General Description of Variable Part 5 - Terms of Your Variable
Annuity contracts Annuity Contract
8. Annuity Period Part 5 - Terms of Your Variable
Annuity Contract
9. Death Benefit Part 5 - Terms of Your Variable
Annuity Contract
10. Purchases and Contract Value Part 5 - Terms of Your Variable
Annuity Contract
11. Redemptions Part 5 - Terms of Your Variable
Annuity Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement Table of Contents
of Additional Information
</TABLE>
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - GrandMaster II
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Statement of Additional
Information
<S> <C> <C>
15. Cover Page Cover Page
16. Table of Contents Cover Page
17. General Information and History Part 1 - National Integrity and Custodian
18. Services Part 1 - National Integrity and Custodian
19. Purchase of Securities Being Offered Part 2 - Distribution of the Contracts
20. Underwriters Part 2 - Distribution of the Contracts
21. Calculation of Performance Data Part 3 - Performance Information
22. Annuity Payments Part 4 - Determination of Annuity Unit Values
23. Financial Statements Part 6 - Financial Statements
</TABLE>
<PAGE>
Prospectus
==========
GrandMaster II
Flexible Premium Variable Annuity
issued by National Integrity Life Insurance Company
This prospectus describes a flexible premium variable annuity offered by
National Integrity Life Insurance Company, an indirect wholly owned subsidiary
of ARM Financial Group, Inc. The individual contracts and group certificates
(contracts) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Contributions under the contracts may be allocated to the various
investment divisions of our Separate Account I (Variable Account Options, or
individually, Option) or to our Guaranteed Rate Options (GROs), or both.
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III), (the Funds or Fund). The Funds are part of the Fidelity
Investments(R) group of companies. The values allocated to the Options reflect
the investment performance of the Funds' portfolios. The prospectus for the
Funds describes the investment objectives, policies and risks of each of the
Funds' portfolios. There are thirteen Variable Account Options, which invest in
the following portfolios:
- VIP Money Market Portfolio - VIP II Investment Grade Bond Portfolio
- VIP High Income Portfolio - VIP II Asset Manager Portfolio
- VIP Equity-Income Portfolio - VIP II Index 500 Portfolio
- VIP Growth Portfolio - VIP II Contrafund Portfolio
- VIP Overseas Portfolio - VIP II Asset Manager: Growth Portfolio
- VIP III Balanced Portfolio - VIP III Growth Opportunities Portfolio
- VIP III Growth & Income
Your allocation to a GRO accumulates at a fixed interest rate we declare at the
beginning of the duration you select. A market value adjustment (Market Value
Adjustment) will be made for withdrawals, surrenders, transfers and certain
other transactions before the expiration of your GRO Account, but your value
under a GRO Account may not be decreased below an amount equal to your
allocation plus interest compounded at an annual effective rate of 3% (Minimum
Value), less previous withdrawals and any applicable contingent withdrawal
charges.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current prospectus for the Funds, which you should also read.
For further information and assistance, you should contact our Administrative
Office at National Integrity Life Insurance Company, 200 Park Avenue, 20th
Floor, New York, New York 10166. You may also call the following toll-free
number: 1-800-433-1778.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated May 1, 1997, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part 1 - Summary Page
<S> <C>
Your Variable Annuity Contract.................................. 1
Your Benefits................................................... 1
How Your Contract is Taxed...................................... 1
Your Contributions.............................................. 1
Your Investment Options......................................... 1
Variable Account Options........................................ 1
Account Value, Adjusted Account Value and Cash Value............ 2
Transfers....................................................... 2
Charges and Fees................................................ 2
Withdrawals..................................................... 2
Your Initial Right to Revoke.................................... 3
Table of Annual Fees and Expenses............................... 4
Financial Information........................................... 7
Part 2 - National Integrity And The Separate Account
National Integrity Life Insurance Company....................... 9
The Separate Account and the Variable Account Options........... 9
Assets of Our Separate Account.................................. 9
Changes In How We Operate....................................... 9
Part 3 - Your Investment Options
The Funds....................................................... 10
The Funds' Investment Adviser............................... 10
Investment Objectives of the Portfolios..................... 12
Guaranteed Rate Options......................................... 14
Renewals of GRO Accounts.................................. 14
Market Value Adjustments.................................. 15
Part 4 - Deductions and Charges
Separate Account Charges........................................ 16
Annual Administrative Charge.................................... 16
Fund Charges.................................................... 16
State Premium Tax Deduction..................................... 16
Contingent Withdrawal Charge.................................... 17
Transfer Charge................................................. 17
Tax Reserve..................................................... 18
Part 5 - Terms of Your Variable Annuity
Contributions Under Your Contract............................... 18
Your Account Value.............................................. 18
Your Purchase of Units in Our Separate Account.................. 18
How We Determine Unit Value..................................... 19
Transfers....................................................... 19
Withdrawals..................................................... 20
Assignments..................................................... 20
Death Benefits and Similar Benefit Distributions................ 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Annuity Benefits................................................ 21
Annuities....................................................... 21
Annuity Payments................................................ 22
Timing of Payment............................................... 22
How You Make Requests and Give Instructions..................... 22
Part 6 - Voting Rights
Fund Voting Rights.............................................. 23
How We Determine Your Voting Shares............................. 23
How Fund Shares Are Voted....................................... 23
Separate Account Voting Rights.................................. 23
Part 7 - Tax Aspects of the Contracts
Introduction.................................................... 24
Your Contract is an Annuity..................................... 24
Taxation of Annuities Generally................................. 24
Distribution-at-Death Rules..................................... 25
Diversification Standards....................................... 25
Tax-Favored Retirement Programs................................. 26
Individual Retirement Annuities............................. 26
Tax Sheltered Annuities..................................... 26
Simplified Employee Pensions................................ 26
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans................................... 27
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations.................... .......... 27
Distributions Under Tax-Favored Retirement Programs............. 27
Federal and State Income Tax Withholding........................ 28
Impact of Taxes to National Integrity........................... 28
Transfers Among Investment Options.............................. 28
Part 8 - Additional Information
Systematic Withdrawals.......................................... 28
Dollar Cost Averaging........................................... 29
Individual Asset Rebalancing.................................... 29
Systematic Contributions........................................ 29
Performance Information......................................... 29
Appendix A - Illustration of a Market Value Adjustment.......... 31
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
<PAGE>
SAI Table of Contents
<TABLE>
<CAPTION>
<C> <S>
Part 1 National Integrity and Custodian
Part 2 Distribution of the Contracts
Part 3 Performance Information
Part 4 Determination of Annuity Unit Values
Part 5 Death Benefit Information for Contracts Issued Prior to January 1, 1996
Part 6 Financial Statements
</TABLE>
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
ATTN: Request for SAI of Separate Account I
Name:_____________________________________________________________________
Address:__________________________________________________________________
City:________________________________ State:_________ Zip:________________
<PAGE>
PART 1 - SUMMARY
Your Variable Annuity Contract
In this prospectus, we, our and us mean National Integrity Life Insurance
Company (National Integrity), a subsidiary of Integrity Life Insurance Company
(Integrity) and an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of contracts.
When we use the words contract or certificate, we are referring to both the
individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, you
and your mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin.
Your retirement or endowment date (Retirement Date) will be no later than your
85th birthday or the tenth contract anniversary, whichever is later, unless you
notify us of a different date.
Your Benefits
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part 7, "Tax Aspects of the Contracts"
for detailed information.
How Your Contract is Taxed
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part 7, "Tax Aspects of the Contracts."
Your Contributions
The minimum initial contribution in most states is currently $1,000. Subsequent
contributions of at least $100 can be made. Special rules for lower minimum
initial and subsequent contributions apply for certain tax-favored retirement
plans. See "Contributions Under Your Contract" in Part 5.
Your Investment Options
You may allocate contributions to the Variable Account Options or to the GROs,
or both. The Variable Account Options and the GROs are together referred to as
the Investment Options. Contributions may be allocated to up to nine Investment
Options at any one time. See "Contributions Under Your Contract" in Part 5. To
select Investment Options most suitable for you, see Part 3, "Your Investment
Options."
Variable Account Options
The Variable Account Options (also referred to as Divisions) invest in shares of
corresponding investment portfolios of the Funds, each a "series" type of mutual
fund. Each investment portfolio is referred to as a Portfolio. The investment
objective of each Variable Account Option and its corresponding Portfolio is the
same. Your value in a Variable Account Option will vary depending on the
performance of the corresponding Portfolio. For a full description of the Funds,
see the Funds' prospectus and the Funds' Statement of Additional
Information.
1
<PAGE>
Account Value, Adjusted Account Value and Cash Value
The sum of your values under the GROs plus your values in the Variable Account
Options is referred to as the Account Value. Your Adjusted Account Value is your
Account Value, as increased or decreased (but not below the Minimum Value) by
any Market Value Adjustments. Your Cash Value is equal to your Adjusted Account
Value, reduced by any applicable contingent withdrawal charge and will be
reduced by the pro rata portion of the annual administrative charge, if
applicable. See "Charges and Fees" below.
Transfers
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may be
arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under special services we offer to dollar cost
average or rebalance your investment in the Variable Account Options. See Part
8, "Dollar Cost Averaging" and "Individual Asset Rebalancing."
Charges and Fees
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value of the assets
in each Variable Account Option is made daily. We make this charge to cover
mortality and expense risks (1.20%) and certain administrative expenses (.15%).
The charge will never be greater than an effective annual rate of 1.35% of the
Account Value of the assets in each Variable Account Options. See Part 4,
"Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts invested
by the Separate Account in the Funds. For providing investment management
services to the Portfolios of the Funds, Fidelity Management and Research
Company (Fidelity Management) receives fees from the Portfolios based on the
average net assets of each Portfolio. The highest annual rate at which any of
the Portfolios paid advisory fees in 1996 was .76% of average net assets.
Advisory fees cannot be increased without the consent of Fund shareholders. See
"Table of Annual Fees and Expenses" below and "The Funds' Investment Adviser" in
Part 3.
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part 4.
When you make withdrawals from your contract, a contingent withdrawal charge may
be deducted from your Account Value. This sales charge will be in addition to
the Market Value Adjustment applicable to early withdrawals from GRO Accounts.
See "Withdrawals" below and "Guaranteed Rate Options" in Part 3.
Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $100. A sales charge of up to
7% of the amount withdrawn, in excess of any free withdrawal amount (defined
below), will be deducted from your Account Value, unless one of the exceptions
applies. This charge defrays marketing expenses. See "Contingent Withdrawal
Charge" in Part 4. Most withdrawals made by you prior to age 59-1/2 are also
subject to a 10% federal tax penalty. In addition, some tax-favored retirement
programs limit withdrawals. See Part 7, "Tax Aspects of the Contracts." For
partial withdrawals, the total amount deducted from your Account Value will
include the withdrawal amount requested, any applicable Market Value Adjustment,
and any applicable withdrawal charge, so that the net amount you receive will be
the amount requested.
2
<PAGE>
The free withdrawal amount is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to the greater of
(i)10% of the Account Value, minus cumulative prior withdrawals in the current
contract year and (ii) the investment gain under the contract during the prior
contract year, minus such cumulative withdrawals. However, as explained above, a
tax penalty still applies if you are under age 59-1/2.
Your Initial Right to Revoke
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. The 10-day period may be extended if required
by state law. We will refund all your contributions with an adjustment for any
investment gain or loss on the contributions put into each Variable Account
Option from the date units were purchased until the date your contract is
received by us, including any charges deducted. If state law instead requires a
refund of your contributions without any adjustment, we will return that amount
to you. For allocations to GROs, we will refund to you the amount of your
contributions.
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Table of Annual Fees and Expenses
Contract Owner Transaction Expenses
- -----------------------------------
<S> <C>
Sales Load on Purchases.................................... $ 0
Deferred Sales Load (1).............................. 7% Maximum
Exchange Fee (2)........................................... $ 0
Annual Administrative Charge (3)........................... $30
Separate Account Annual Expenses (as a
- --------------------------------------
percentage of average account value) (4)
- ----------------------------------------
Mortality and Expense Risk Fees........................... 1.20%
Administrative Expenses................................... .15%
----
Total Separate Account Annual Expenses.................... 1.35%
====
</TABLE>
Fund Annual Expenses After Reimbursement
- ----------------------------------------
(as a percentage of average net assets) (5)
- -------------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees (6) Expenses Expenses
- --------- -------- -------- ------------
<S> <C> <C> <C>
VIP Money Market .21% .09% .30%
VIP High Income .59% .12% .71%(6)
VIP Equity-Income .51% .07% .58%
VIP Growth .61% .08% .69%
VIP Overseas .76% .17% .93%
VIP II Investment Grade Bond .45% .13% .58%
VIP II Asset Manager .64% .10% .74%(6)(7)
VIP II Index 500 .13% .15% .28%(7)
VIP II Contrafund .61% .13% .74%(6)
VIP II Asset Manager: Growth .65% .22% .87%(6)(7)
VIP III Balanced .48% .24% .72%(6)
VIP III Growth Opportunities .61% .16% .77%(6)
VIP III Growth & Income .50% .20% .70%(6)(8)
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
may make a partial withdrawal of up to 10% of the Account Value in any contract
year or the investment gain under the contract during the previous contract
year, whichever is greater, less withdrawals during the current contract year,
without assessment of any withdrawal charge.
(2) After the first twelve transfers during a contract year, National Integrity
has the right to impose a transfer charge of $20 per transfer. This charge would
not apply to transfers made for dollar cost averaging or individual asset
rebalancing. See "Deductions and Charges - Transfer Charge" in Part 4.
(3) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to your
Retirement Date. See "Deductions and Charges -Annual Administrative Charge" in
Part 4.
(4) See "Deductions and Charges - Separate Account Charges" in Part 4.
(5) In the Funds' prospectus, see "Management, Distribution and Service Fees."
4
<PAGE>
(6) A portion of the brokerage commissions that certain funds pay was used to
reduce funds' expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented in
the table would have been .56% for VIP Equity-Income Portfolio, .67% for VIP
Growth Portfolio, .92% for VIP Overseas Portfolio, .73% for VIP II Asset Manager
Portfolio, .71% for VIP II Contrafund Portfolio, .85% for VIP II Asset Manager:
Growth Portfolio, and .76% for VIP III Growth Opportunities Portfolio, and .71%
for VIP III Balanced Portfolio.
(7) The investment adviser agreed to reimburse a portion of VIP II Index 500
Portfolio's expenses during the period. Without this reimbursement, the fund's
management fee, other expenses and total expenses would have been .28%, .15%,
and .43%, respectively.
(8) Annualized
Examples
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $40,000 average contract value and a 5% annual
rate of return on assets.
Expenses per $1,000 investment if you surrender your contract at the end of the
- -------------------------------------------------------------------------------
applicable period:
- -----------------
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market.............. $87.66 $104.61 $123.86 $203.09
VIP High Income............... $91.86 $117.34 $145.29 $246.89
VIP Equity-Income............. $90.53 $113.32 $138.53 $233.20
VIP Growth.................... $91.65 $116.72 $144.25 $244.80
VIP Overseas.................. $94.11 $124.13 $156.63 $269.66
VIP II Investment Grade Bond.. $90.53 $113.32 $138.53 $233.20
VIP II Asset Manager.......... $92.17 $118.27 $146.84 $250.03
VIP II Index 500.............. $87.45 $103.98 $122.81 $200.91
VIP II Contrafund............. $92.17 $118.27 $146.84 $250.03
VIP II Asset Manager: Growth.. $93.50 $122.28 $153.55 $263.50
VIP III Balanced.............. $91.96 $117.65 $145.81 $247.94
VIP III Growth Opportunities.. $92.47 $119.19 $148.39 $253.15
VIP III Growth & Income....... $91.76 $117.03 $144.77 $245.84
</TABLE>
5
<PAGE>
Expenses per $1,000 investment if you do not surrender your contract at the end
- -------------------------------------------------------------------------------
of the applicable period:
- -------------------------
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market.............. $17.66 $54.61 $ 93.86 $203.09
VIP High Income............... $21.86 $67.34 $115.29 $246.89
VIP Equity-Income............. $20.53 $63.32 $108.53 $233.20
VIP Growth.................... $21.65 $66.72 $114.25 $244.80
VIP Overseas.................. $24.11 $74.13 $126.63 $269.66
VIP II Investment Grade Bond.. $20.53 $63.32 $108.53 $233.20
VIP II Asset Manager.......... $22.17 $68.27 $116.84 $250.03
VIP II Index 500.............. $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund............. $22.17 $68.27 $116.84 $250.03
VIP II Asset Manager: Growth.. $23.50 $72.28 $123.55 $263.50
VIP III Balanced.............. $21.96 $67.65 $115.81 $247.94
VIP III Growth Opportunities.. $22.47 $69.19 $118.39 $253.15
VIP III Growth & Income....... $21.76 $67.03 $114.77 $245.84
</TABLE>
Expenses per $1,000 investment if you elect the normal form of annuity at the
- -----------------------------------------------------------------------------
end of the applicable period:
- -----------------------------
Same expenses per $1,000 investment as shown in table immediately above.
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment advisory fees and other expenses of the
Funds as they were for the year ended December 31, 1996, except for VIP III
Growth & Income Portfolio, which were based on estimated current expenses.
Actual Fund expenses may be greater or less than those on which these examples
were based. The annual rate of return assumed in the examples is not an estimate
or guarantee of future investment performance. The table also assumes an
estimated $40,000 average contract value, so that the administrative charge per
$1,000 of net asset value in the Separate Account is $0.75. Such per $1,000
charge would be higher for smaller Account Values and lower for higher
values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
6
<PAGE>
Financial Information
The table below shows the unit value for each Variable Account Option at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the end of each period. The unit value at the
beginning of each period is the unit value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
Money High Equity- Investment
Market Income Income Growth Overseas Grade Bond
Division Division Division Division Division Division
-------- -------- ---------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Date of Inception $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 - - - - - -
Number of Units - - - - - -
December 31, 1988 - - - - $9.79 $10.05
Number of Units - - - - 1,646 1,287
December 31, 1989 - - $10.99 $11.13 $12.08 $11.48
Number of Units - - 12,808 91 1,646 1,286
December 31, 1990 $10.17 - $9.54 $11.76 $11.13 $12.06
Number of Units 2,001 - 10,281 90 1,697 1,283
December 31, 1991 $10.64 - $13.63 $19.12 $13.63 $12.25
Number of Units 3,961 - 12,059 927 2,789 -
December 31, 1992 $10.90 - $15.72 $20.62 $12.01 $13.44
Number of Units 2,744 - 32,842 30,140 3,816 5,995
December 31, 1993 $11.10 $11.22 $18.33 $24.29 $16.25 $14.72
Number of Units 109,685 120,243 192,745 136,418 97,667 52,787
December 31, 1994 $11.42 $10.90 $19.37 $23.95 $16.31 $13.98
Number of Units 782,370 512,098 503,403 372,307 432,518 97,548
December 31, 1995 $11.93 $12.97 $25.81 $31.99 $17.65 $16.18
Number of Units 1,692,564 1,131,907 1,316,163 657,586 426,045 264,608
December 31, 1996 $12.40 $14.58 $29.09 $36.19 $19.71 $16.47
Number of Units 1,453,359 1,605,055 1,895,597 942,118 596,757 340,273
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP III
Growth & Income Option was December 31, 1996. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively.
7
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
Asset
Asset Index Contra- Manager Growth Growth
Manager 500 fund Growth Balanced Income Opportunities
Division Division Division Division Division Division Division
---------- -------- --------- --------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $7.92 - - - - - -
Number of Units 15,626 - - - - - -
December 31, 1988 $8.89 - - - - - -
Number of Units 23,806 - - - - - -
December 31, 1989 $11.05 - - - - - -
Number of Units 26,296 - - - - - -
December 31, 1990 $10.90 - - - - - -
Number of Units 33,770 - - - - - -
December 31, 1991 $13.45 - - - - - -
Number of Units 28,066 - - - - - -
December 31, 1992 $14.85 - - - - - -
Number of Units 57,934 - - - - - -
December 31, 1993 $17.73 $10.65 - - - - -
Number of Units 744,402 16,821 - - - - -
December 31, 1994 $16.43 $10.62 - - - - -
Number of Units 1,706,592 99,982 - - - - -
December 31, 1995 $18.95 $14.37 $13.31 $12.02 - - -
Number of Units 1,460,833 293,436 954,037 85,146 - - -
December 31, 1996 $21.42 $17.41 $15.92 $14.22 - - -
Number of Units 1,351,936 738,488 1,865,749 282,677 - - -
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP III
Growth & Income Option was December 31, 1996. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively.
8
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National Integrity Life Insurance Company
National Integrity is a stock life insurance company organized under the laws of
New York. Our home office is located in New York, New York. We are authorized
to sell life insurance and annuities in eight states and the District of
Columbia. In addition to the contracts, we sell flexible premium annuity
contracts with an underlying investment medium other than the Funds, and fixed
single premium annuity contracts. We are currently licensed to sell variable
contracts in five states and the District of Columbia. In addition to issuing
annuity products, we have entered into agreements with other insurance companies
to provide administrative and investment support for products to be designed,
underwritten and sold by these companies.
National Integrity is an indirect wholly owned subsidiary of ARM. ARM
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets. At December 31, 1996, ARM had $4.8
billion of assets under management.
The Separate Account and the Variable Account Options
The Separate Account is established and maintained under the insurance laws of
the State of New York. It is a unit investment trust registered with the
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (1940 Act). A unit investment trust is a type of investment company. SEC
registration does not involve any supervision by the SEC of the management or
investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio of the Funds. We may establish
additional Options, some of which may not be available for your allocations. The
Variable Account Options currently available to you are listed on the cover page
of this prospectus. Prior to September 3, 1991, the Portfolios then offered
invested in shares of corresponding portfolios of Prism Investment Trust.
Assets of Our Separate Account
Under New York law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate in
the Separate Account in proportion to the amounts relating to their contracts.
The Separate Account's assets supporting the variable portion of these variable
contracts may not be used to satisfy liabilities arising out of any other
business of ours. Under certain unlikely circumstances, one Variable Account
Option may be liable for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may permit charges owed to us to
stay in the Separate Account, and thus may participate proportionately in the
Separate Account. Amounts in the Separate Account in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(General Account).
Changes In How We Operate
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. We may:
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- - register or end the registration of the Separate Account under the 1940
Act;
9
<PAGE>
- - operate our Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of National Integrity
under the 1940 Act);
- - restrict or eliminate any voting rights of Owners or others who have
voting rights that affect our Separate Account;
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
- - operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
The Funds
Each of the Funds is an open-end diversified management investment company
registered under the 1940 Act. Such registration does not involve supervision by
the SEC of the investments or investment policies of the Funds. The Funds are
each a "series" type of investment company with diversified portfolios. The
Funds do not impose a sales charge or "load" for buying and selling their
shares. The shares of the Portfolios of the Funds are bought and sold by the
Separate Account at their respective net asset values.
The Funds are designed to serve as investment vehicle for variable annuity and
variable life contracts of insurance companies. Shares of the Portfolios of the
Funds currently are available to the separate accounts of a number of insurance
companies, both affiliated and unaffiliated with Fidelity Management or National
Integrity. The Board of Trustees of each of the Funds is responsible for
monitoring the Fund for the existence of any material irreconcilable conflict
between the interests of the policyowners of all separate accounts investing in
the Fund and determining what action, if any, should be taken in response. If we
believe that a Fund's response to any of those events insufficiently protects
our contract owners, we will see to it that appropriate and available action is
taken to protect our contract owners. See "The Fund and the Fidelity
Organization" in the Funds' prospectus for a further discussion of the risks
associated with the offering of Fund shares to our Separate Account and the
separate accounts of other insurance companies.
Shares of Portfolios of the Funds are made available to the Separate Account
under three essentially identical Participation Agreements (Participation
Agreement or Agreements). The Participation Agreements are among the applicable
Fund, Fidelity Distributors Corporation which is the principal underwriter for
shares of the Funds (Distributor), and National Integrity. If state or federal
law precludes the sale of the Funds' or any Portfolio's shares to the Separate
Account, or in certain other circumstances, sales of shares to the Separate
Account may be suspended and/or the Participation Agreements may be terminated
as to the Funds or the affected Portfolio. Also, the Participation Agreements
may be terminated by any party thereto with one year's written notice.
Notwithstanding termination of the Participation Agreement, the Fund and the
Distributor are obligated to continue to make the Funds' shares available for
contracts outstanding on the date the Participation Agreement terminates, unless
the Participation Agreement was terminated due to an irreconcilable conflict
among contractowners of different separate accounts. If for any reason the
shares of any Portfolio are no longer available for purchase by the Separate
Account for outstanding contracts, the parties to the Participation Agreements
have agreed to cooperate to comply with the 1940 Act in arranging for the
substitution of another funding medium as soon as reasonably practicable and
without disruption of sales of shares to the Separate Account or any Variable
Account Option.
The Funds' Investment Adviser. Fidelity Management & Research Company (Fidelity
Management), a registered investment adviser under the Investment Advisers Act
of 1940, serves as the investment adviser to each Fund. Fidelity Management,
whose principal address is 82 Devonshire Street, Boston, Massachusetts, is a
wholly owned subsidiary of FMR Corp. and is part of Fidelity Investments(R), one
of
10
<PAGE>
the largest investment management organizations in the United States. Fidelity
Investments(R) includes a number of different companies, which provide a variety
of financial services and products to individuals and corporations.
Fidelity Management provides investment research and portfolio management
services to mutual funds and other clients. At December 31, 1996, Fidelity
Management advised funds having more than 23 million shareholder accounts with a
total value of more than $354 billion. For certain of the Portfolios, Fidelity
Management has entered into sub-advisory agreements with affiliated companies
that are part of the Fidelity Investments(R) organization. Fidelity Management,
not the Portfolios, pays the sub-advisers for their services to the Portfolios.
The Portfolios of the Funds pay monthly advisory fees to Fidelity Management.
The advisory fee payable by each of the Portfolios, other than the VIP Money
Market Portfolio and the VIP II Index 500 Portfolio, is composed of a group fee
rate and an individual fund fee rate. The group fee rate is based on the average
monthly net assets of all mutual funds advised by Fidelity Management. For the
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Asset Manager, VIP II
Contrafund, and VIP II Asset Manager: Growth Portfolios, the group fee rate
cannot rise above .52%. For the VIP High Income and VIP II Investment Grade Bond
Portfolios, the group fee rate cannot rise above .37%. The group fee rate drops
as total assets under management increase.
The VIP Money Market Portfolio's advisory fee is made up of two components: a
basic fee rate and an income-based component. The basic fee rate is the sum of a
group fee rate as described above (but capped at a maximum of .37%) and an
individual fund fee rate of .03%. The income based component is 6% of that
portion of the fund's gross yield which exceeds a 5% return (but capped at a
maximum of .24%).
The VIP II Index 500 Portfolio pays a monthly fee at the annual rate of .28% of
the Portfolio's average net assets.
Set forth in the table below is the individual fund fee rate for the portfolios
and their 1996 aggregate advisory rate, comprised of the individual and group
rates, as a percentage of average net assets, and the VIP II Index 500
Portfolio's 1996 advisory rate as a percentage of average net assets.
<TABLE>
<CAPTION>
1996
Portfolio Individual Rate Aggregate Rate
- --------- ---------------- ---------------
<S> <C> <C>
VIP Money Market .03% .21%
VIP High Income .45% .59%
VIP Equity-Income .20% .51%
VIP Growth .30% .61%
VIP Overseas .45% .76%
VIP II Investment Grade
Bond .30% .45%
VIP II Asset Manager .25% .64%
VIP II Index 500 N/A .13%
VIP II Contrafund .30% .61%
VIP II Asset Manager:
Growth .30% .65%
VIP III Balanced .20% .48%
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
VIP III Growth
Opportunities .30% .61%
VIP III Growth & Income .20% .50%
</TABLE>
Investment Objectives of the Portfolios. Set forth below is a summary of the
investment objectives of the Portfolios of the Funds. There can be no assurance
that these objectives will be achieved. You should read the Funds' prospectus
carefully before investing.
VIP Money Market Portfolio
--------------------------
VIP 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.
VIP High Income Portfolio
-------------------------
VIP 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. In view of the types of securities in which this Portfolio
invests, you should read the complete risk disclosure for this Portfolio in the
Funds' prospectus before investing in it.
VIP Equity-Income Portfolio
---------------------------
VIP 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.
VIP Growth Portfolio
--------------------
VIP 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.
VIP Overseas Portfolio
----------------------
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in securities from at least three countries outside North America.
VIP II Investment Grade Bond Portfolio
--------------------------------------
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in 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 VIP
II Investment Grade Bond Portfolio purchases 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.
VIP II Asset Manager Portfolio
------------------------------
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market fixed-income instruments. The expected
12
<PAGE>
"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 50% in equities, 40% in intermediate to long-term bonds and 10% in short-term
money market fixed income instruments.
VIP II Index 500 Portfolio
--------------------------
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II Contrafund Portfolio
---------------------------
VIP II Contrafund Portfolio is a growth fund which seeks to increase the value
of your 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. VIP II 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.
VIP II Asset Manager: Growth Portfolio
--------------------------------------
VIP II Asset Manager: Growth Portfolio is an asset allocation fund which seeks
to maximize total return over the long term through investments in stocks,
bonds, and short-term money market instruments. The fund has a neutral mix which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
------ ------------
<S> <C> <C>
Stock Class 0-100% 70%
Bond Class 0-100% 25%
Short-Term/
Money Market Class 0-100% 5%
</TABLE>
VIP III Growth Opportunities Portfolio
--------------------------------------
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. It has the flexibility to adjust its investment mix between growth,
cyclical and value stocks as market conditions change. The portfolio seeks
growth through either appreciation of the security itself or an increase in the
company's earning or gross sales.
VIP III Balanced Portfolio
--------------------------
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a diversified portfolio of equity and fixed-income securities. It uses a
balanced approach to provide the best possible total return from investments in
foreign and domestic equity securities, convertible securities, preferred and
common stocks paying any combination of dividends and capital gains, and fixed
income securities.
VIP III Growth & Income Portfolio
---------------------------------
VIP III Growth & Income Portfolio seeks long-term growth of capital with some
current income. It invests primarily in stocks of companies that offer potential
for growth in earnings while paying dividends, but offer the potential for
capital appreciation on future income. Investments may include common and
preferred stocks, convertible securities, fixed-income securities and foreign
securities.
13
<PAGE>
Guaranteed Rate Options
Because of applicable exemptive and exclusionary provisions, interests in
contracts attributable to GROs have not been registered under the Securities Act
of 1933 ("1933 Act"), nor under the Investment Company Act of 1940 ("1940 Act").
Thus, neither such contracts nor our General Account, which guarantees the
values and benefits under those contracts, are generally subject to regulation
under the provisions of the 1933 Act or the 1940 Act. Accordingly, we have been
advised that the staff of the Securities and Exchange Commission has not
reviewed the disclosure in this prospectus relating to the GROs or the General
Account. Disclosures regarding the GROs or the General Account may, however, be
subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
We offer GROs with durations of two, four, six and ten years. We may from time
to time change the durations available. Each allocation to a GRO locks in a
fixed effective annual interest rate declared by us (Guaranteed Interest Rate)
for the duration you select (your GRO Account). The duration of your GRO Account
is the Guarantee Period. Each contribution or transfer to a GRO establishes a
new GRO Account at the then-current Guaranteed Interest Rate declared by us. We
will not declare an interest rate less than 3%. Each GRO Account expires at the
end of the duration you have selected. See "Renewals of GRO Accounts" below.
Values and benefits under your contract attributable to GROs are guaranteed by
the reserves in our GRO separate account as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO Value. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO which will exceed the Guaranteed Interest Rate credited
during the remaining years of the Guarantee Period (Enhanced Rate). This
Enhanced Rate will be guaranteed for the Guaranteed Period's first year and
declared at the time of purchase. We reserve the right to declare and credit
additional interest based on Contribution, Account Value, withdrawal dates,
economic conditions or on any other lawful, nondiscriminatory basis (Additional
Interest). Any Enhanced Rate and Additional Interest credited to your GRO
Account will be separate from the Guaranteed Interest Rate and not used in the
Market Value Adjustment formula. The Enhanced Rate or Additional Interest may
not be made applicable under contracts issued in certain states.
Each group of GRO Accounts of the same duration is referred to as a GRO, (i.e.
all of your two-year GRO Accounts are one GRO while all of your four-year GRO
Accounts are another GRO.)
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
Allocations to GROs may not be made under contracts issued in certain
states.
Renewals of GRO Accounts. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO Accounts. You
must notify us prior to the expiration of your GRO Accounts of any changes you
desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew a GRO Account that expires
after your Retirement Date.
14
<PAGE>
Market Value Adjustments. A Market Value Adjustment is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
MVA = GRO Value x [(1 + A)/N/12/ / (1 + B + .0025)/N/12/ - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
15
<PAGE>
PART 4 -- DEDUCTIONS AND CHARGES
Separate Account Charges
National Integrity deducts from the unit value every calendar day an amount
equal to an effective annual rate of 1.35% of the Account Value in the Variable
Account Options. This daily expense rate cannot be increased without your
consent. Various portions of this total charge, as described below, pay for
certain services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse National
Integrity for expenses actually incurred, without profit.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for National Integrity's assuming the
expense risk (.85%) and the mortality risk (.35%) under the contract. The
expense risk is the risk that our actual expenses of administering the contracts
will exceed the annual administrative expense charge. In this context, mortality
risk refers to the cost of insuring the risk National Integrity takes that
annuitants, as a class of persons, will live longer than estimated and therefore
require National Integrity to pay out more annuity benefits than anticipated.
The relative proportion of the mortality and expense risk charges may be
modified, but the total effective annual risk charge of 1.20% of the value of
the Variable Account Options may not be increased on your Contract.
National Integrity may realize a gain from these daily charges to the extent
they are not needed to meet the actual expenses incurred.
Annual Administrative Charge
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, National Integrity charges an annual
administrative charge of $30. This charge is deducted from your Account Value in
each Investment Option on a pro-rata basis. The portion of the charge applicable
to the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to GROs is withdrawn in dollars. The annual
administrative charge will be pro-rated based on the number of days that have
elapsed in the contract year in the event of the Annuitant's retirement, death,
or termination of a contract during a contract year. The annual administrative
charge is waived for employees of National Integrity or Integrity, the parent of
National Integrity, who purchase contracts under the salary allotment program of
either company.
Fund Charges
Our Separate Account purchases shares of the Funds at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Funds. The amount charged for
investment management may not be increased without the prior approval of the
Funds' respective shareholders. See "The Funds" in Part 3.
State Premium Tax Deduction
National Integrity will not deduct state premium taxes from your contributions
before applying the contributions to the Investment Options, unless required to
pay such taxes under applicable state law. If the Annuitant elects an annuity
benefit, National Integrity will deduct any applicable state premium taxes from
the amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
16
<PAGE>
Contingent Withdrawal Charge
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 7%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal-that is, the contract year in which
each contribution was made. The maximum percentage of 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contract year. No withdrawal charge applies when you withdraw
contributions made earlier than your fifth prior contract year. For purposes of
calculating the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn and more recent contributions next, and (2) partial
withdrawals up to the free withdrawal amount will not be considered a withdrawal
of any contributions. For partial withdrawals, the total amount deducted from
your Account Value will include the withdrawal amount requested, any applicable
Market Value Adjustment, and any applicable withdrawal charge, so that the net
amount you receive will be the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is the greater of (i) 10% of your Account Value and (ii) any
investment gain during the prior contract year, less withdrawals during the
current contract year. Investment gain is calculated as the increase in the
Account Value during the prior contract year, minus contributions during such
year, plus withdrawals made during such year. If any partial withdrawal exceeds
the free withdrawal amount, we will deduct the applicable contingent withdrawal
charge with respect to such excess amount. The contingent withdrawal charge is a
sales charge to defray our costs of selling and promoting the contracts. We do
not expect that revenues from contingent withdrawal charges will cover all of
such costs. Any shortfall will be made up from our General Account assets,
including any profits from other charges under the contracts.
<TABLE>
<CAPTION>
Contract Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current............................. 7%
First Prior......................... 6
Second Prior........................ 5
Third Prior......................... 4
Fourth Prior........................ 3
Fifth Prior......................... 2
Sixth Prior and Earlier............. 0
</TABLE>
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from National Integrity an
immediate annuity benefit with life contingencies or an immediate annuity
without life contingencies which provides for level payments over five or more
years, with a restricted prepayment option. Similarly, no charge will be applied
if the Annuitant dies and the withdrawal is made by the Annuitant's beneficiary.
See "Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, National Integrity will make
withdrawals (including any applicable charges) from the Investment Options in
the same ratio the Annuitant's Account Value in each Investment Option bears to
the Annuitant's total Account Value. The minimum withdrawal permitted is $300.
Transfer Charge
No charge is made for your first twelve transfers (excluding dollar cost
averaging and individual asset rebalancing transfers) among the Variable Account
Options or the GROs during a contract year. We are, however, permitted to charge
up to $20 for each additional transfer during that contract year. See
"Transfers" in Part 5. Transfers from a GRO may be subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3.
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Tax Reserve
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
PART 5 -- TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000.
We will accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Special Rules for Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are 76 to 79 years of age. Once you reach
eight years before your Retirement Date, we may refuse to accept any
contribution made for you. Contributions may also be limited by various laws or
prohibited by National Integrity for all Annuitants under the contract. If your
contributions are made under a tax-favored retirement program, we will not
measure them against the maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have received (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options, provided that at any time you may have
amounts in not more than nine Investment Options. For purposes of calculating
the nine Investment Options, each of your GRO Accounts counts as one Investment
Option. Wire transfers of federal funds are deemed received on the day of
transmittal if credited to our account by 3 p.m. Eastern Time, otherwise they
are deemed received on the next Business Day. Contributions by check or mail are
deemed received not later than the second Business Day after they are delivered
to our Administrative Office. A Business Day is any day other than a weekend or
a national bank holiday.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
Your Account Value
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. For
contributions allocated to the Variable Account Options, there are no guaranteed
values. The value of your contributions allocated to GROs is guaranteed, subject
to any applicable Market Value Adjustments. See "Guaranteed Rate Options" in
Part 3.
Your Purchase of Units in Our Separate Account
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
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The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Funds which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Funds' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, will not vary because of changes in unit values.
Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
How We Determine Unit Value
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a net investment factor for each Option as follows:
- - First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Funds.
- - Next, we add any dividends or capital gains distributions by the Fund on
that day.
- - Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- - the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- - Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Fund, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
Transfers
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to National Integrity's then current transfer restrictions.
Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO that you have
not elected before) at the then-current Guaranteed Interest Rate, unless
National Integrity otherwise consents. Transfers from a GRO other than within 30
days prior to the expiration date of a GRO Account are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. For amounts in GROs,
transfers will be made according to the order in which monies were originally
allocated to any GRO.
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The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our Dollar Cost Averaging or Individual Asset Rebalancing programs,
described in Part 8. Once annuity payments begin, transfers are no longer
permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN Code). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 a.m. - 5:00 p.m., Eastern Time, on any day
we are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 p.m. Eastern Time will be processed using unit
values as of the close of business on the next Business Day after the day you
call. All transfers will be confirmed in writing.
Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A withdrawal charge of
up to 7% of the contribution amount withdrawn, as adjusted for any applicable
Market Value Adjustment and the withdrawal charge itself will be deducted from
your Account Value, unless one of the exceptions applies. See "Guaranteed Rate
Options" in Part 3 and "Contingent Withdrawal Charge" in Part 4. Most
withdrawals made by you prior to age 59-1/2 are also subject to a 10% federal
tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts" for further information
regarding various tax consequences associated with the contracts.
Assignments
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part 7, "Tax
Aspects of the Contracts." National Integrity will not be bound by an assignment
unless it is in writing and we have received it at the Administrative
Office.
Death Benefits and Similar Benefit Distributions
A death benefit is available to a beneficiary if the Annuitant dies prior to
the Retirement Date.
The amount of the death benefit is the greatest of:
. your Account Value
. the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
. your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
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See the Statement of Additional Information dated May 1, 1997 regarding death
benefit information for contracts issued prior to January 1, 1995.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
Annuity Benefits
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 85th birthday or the tenth contract anniversary,
whichever is later. The terms of the contracts applicable to the various
retirement programs, along with the federal tax laws, establish certain minimum
and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment without a withdrawal charge applying.
Annuities
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Separate Account Divisions. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 85th birthday or the tenth
contract anniversary, whichever is later. You will receive a lump sum benefit if
you do not make an election by such date.
We currently offer the following types of annuities:
A period certain annuity provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the payee) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
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A period certain life annuity provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The normal form of annuity is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A life income annuity provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
Annuity Payments
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If National Integrity's
current annuity rates then in effect would yield a larger payment, those current
rates will apply instead of the tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The number
of units purchased is equal to the amount of the first annuity payment divided
by the new annuity unit value for the valuation period which includes the due
date of the first annuity payment. The amount of the first annuity payment is
determined in the same manner for a variable annuity as it is for a fixed
annuity. The number of annuity units stays the same for the annuity payment
period but the new annuity unit value changes to reflect the investment income
and the realized and unrealized capital gains and losses of the Variable Account
Option or Options selected, after charges made against it. Annuity unit values
assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall depending on whether the actual rate of net investment return
is higher or lower than the assumed base rate. In the SAI, see "Determination of
Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
Timing of Payment
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits National
Integrity to defer action in order to protect persons with interests in the
Separate Account. National Integrity can defer payment of your GROs for up to
six months, and interest will be paid on any such payment delayed for 30 days or
more.
How You Make Requests and Give Instructions
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
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PART 6 - VOTING RIGHTS
Fund Voting Rights
National Integrity is the legal owner of the shares of the Funds held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Funds' Board of Directors, to ratify the
selection of independent auditors for the Funds, and on any other matters
described in the Funds' current prospectus or requiring a vote by shareholders
under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in our Separate Account, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of the Funds in our own right or
to restrict Owner voting, we may do so.
How We Determine Your Voting Shares
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by the
Funds' Board for the Funds' shareholders' meeting. The record date for this
purpose must be no more than 60 days before the meeting of the Funds. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
How Fund Shares Are Voted
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of the Funds are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by National Integrity from its
Owners.
Separate Account Voting Rights
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
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PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on National Integrity's tax status, on the
type of retirement plan, if any, for which the contract is purchased, and upon
the tax and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. NATIONAL INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
Your Contract is an Annuity
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (nonqualified annuity), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (qualified annuity). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
Taxation of Annuities Generally
Section 72 of the Internal Revenue Code of 1986, as amended (the Code), governs
the taxation of annuities. In general, an Owner is not taxed on increases in
value under a contract until some form of withdrawal or distribution is made
under the contract. However, under certain circumstances, the increase in value
may be subject to current federal income tax. For example, corporations,
partnerships, trusts and other non-natural persons cannot defer the taxation of
current income credited to the contract unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or divorced spouse), any increase in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the
contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract equals
the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment
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to his or her expected return under the contract (exclusion Ratio). The
remainder of each payment will be ordinary income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies National Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by National Integrity or its affiliates to one
Annuitant during any calendar year are treated as a single contract in measuring
the taxable income that results from surrenders and withdrawals under any one of
the contracts.
Distribution-at-Death Rules
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies on
or after the Retirement Date and before the entire interest in the contract has
been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Funds monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
of the investments of a segregated asset account may cause the investor (i.e.,
the
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Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
Tax-Favored Retirement Programs
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. Therefore, no attempt is made to provide more than
general information about the use of contracts with the various types of
qualified plans.
National Integrity reserves the right to change its administrative rules, such
as minimum contribution amounts, as needed to comply with the Code as to tax-
favored retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract.
Individual Retirement Annuities
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-favored retirement program
to an IRA contract. Your IRA contract will be issued with a rider outlining the
special terms of your contract which apply to IRAs.
Tax Sheltered Annuities
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms which apply to a TSA.
Simplified Employee Pensions
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAs) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
26
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employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing
Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with such plans
should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity does not administer such plans.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. If the plan is in
existence on August 20, 1996, the employer need not establish a trust, custodial
account, or annuity contract until January 1, 1999. Loans to employees may be
permitted under such plans; however, a Section 457 plan is not required to allow
loans. Contributions to a contract in connection with an eligible government
plan are subject to limitations. Those who intend to use the contracts in
connection with such plans should seek competent advice. The Company reserves
the right to request documentation to substantiate that a qualified plan exists
and is being properly administered. National Integrity does not administer such
plans.
Distributions Under Tax-Favored Retirement Programs
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
IRA holders, to begin receiving distributions by April 1 of the calendar year
following the later of either (i) the calendar year in which the employee
reaches age 70-1/2, or (ii) the calendar year in which the employee retires.
Additional distribution rules apply after the participant's death. Failure to
make mandatory distributions may result in the imposition of a 50% penalty tax
on any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all plans (other than 457
plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
Distributions from a tax-favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
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We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the
plan.
Federal and State Income Tax Withholding
National Integrity will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a contract unless the
distributee notifies National Integrity at or before the time of the
distribution of an election not to have any amounts withheld. In certain
circumstances, National Integrity may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic payments
(including withdrawals prior to the maturity date) is 10%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
Impact of Taxes to National Integrity
The contracts provide that National Integrity may charge the Separate Account
for taxes. National Integrity can also set up reserves for taxes.
Transfers Among Investment Options
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. You may also specify an account for direct deposit
of your systematic withdrawals. To enroll under our systematic withdrawal
program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal date you do not
have sufficient values to make all of the withdrawals you have specified, no
withdrawals will be made and your enrollment in the program will be ended.
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Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. Amounts withdrawn under the systematic withdrawal program in excess
of the free withdrawal amount will be subject to a contingent withdrawal charge
and a Market Value Adjustment if applicable. Withdrawals also may be subject to
the 10% federal tax penalty for early withdrawals under the contracts and to
income taxation. See Part 7, "Tax Aspects of the Contracts."
Dollar Cost Averaging
We offer a dollar cost averaging program under which allocations to the VIP
Money Market Option are automatically transferred on a monthly, quarterly, semi-
annual or annual basis to one or more other Variable Account Options. You must
specify a dollar amount to be transferred into each Variable Account Option, and
the current minimum transfer to each Option is $250. No transfer charge will
apply to transfers under our dollar cost averaging program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the VIP Money Market Option to transfer to
each Variable Account Option specified, no transfer will be made and your
enrollment in the program will be ended.
Individual Asset Rebalancing
We offer an individual asset rebalancing program whereby you can select the
frequency for rebalancing. Frequencies available include rebalancing monthly,
quarterly, semi-annually or annually. The value in the Variable Account Options
will be automatically rebalanced by transfers among such Variable Account
Options, and you will receive a confirmation notice after each rebalancing.
Transfers will occur only to and from those Variable Account Options where you
have current contribution allocations. No transfer charge will apply to
transfers under our Individual Asset Rebalancing program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
GROs are not eligible for the Individual Asset Rebalancing program.
To enroll under our Individual Asset Rebalancing program, you must deliver the
appropriate administrative form to our Administrative Office. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work in concert with the
Individual Asset Rebalancing program. You should, therefore, monitor your use of
such other programs, transfers, and withdrawals while the Individual Asset
Rebalancing program is in effect. You or we may terminate your participation in
the program upon one day's prior written notice, and we may terminate or amend
the Individual Asset Rebalancing program at any time.
Systematic Contributions
We offer a program for systematic contributions that allows you to pre-authorize
monthly withdrawals from your checking account for payment to us. To enroll
under our program, you must deliver the appropriate administrative form to our
Administrative Office. You or we may terminate your participation in the program
upon 30 days' prior written notice. Your participation may be terminated by us
if your bank declines to make any payment. The minimum amount for systematic
contributions is $100 per month.
Performance Information
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may
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appear in advertisements or sales literature. Performance data for any Option
reflects only the performance of a hypothetical investment in the Option during
the particular time period on which the calculations are based. Performance
information should be considered in light of the investment objectives and
policies of the Portfolio in which the Option invests and the market conditions
during the given time period, and it should not be considered as a
representation of performance to be achieved in the future.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A cumulative total return reflects an Option's performance over a stated period
of time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise yield. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The VIP Money Market Option may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Option over
a specified 7-day period. Effective yield is calculated in a similar manner
except that income earned is assumed to be reinvested. The VIP II Investment
Grade Bond and VIP High Income Option may advertise a 30-day yield which
reflects the income generated by an investment in such Option over a specified
30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
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APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution:. . . . . . . . . $50,000.00
GRO Account duration:. . . . . 6 Years
Guaranteed Interest Rate:. . . 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $67,004.78 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been three years remaining in your GRO Account. These examples also show
the withdrawal charge which would be calculated separately.
Example of a Downward Market Value Adjustment:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.5% for a three-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0483785 = [(1 + .05)/36/12/ / (1 + .065 + .0025)/36/12/]- 1
The Market Value Adjustment is a reduction of $2,800.21 from the GRO Value:
-$2,800.21 = -0.0483785 X $57,881.25
The Market Adjusted Value would be:
$55,081.04 = $57,881.25 - $2,800.21
A withdrawal charge of 4% would be assessed against the $50,000 original
contribution:
$2,000.00 = $50,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$53,081.04 = $57,881.25 - $2,800.21 - $2,000.00
If instead of a full withdrawal, $20,000 was requested, we would first
determine the free withdrawal amount:
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Greater of:
a) $5,788.13 = $57,881.25 X .10
or
b) $2,756.25 = gain in prior contract year
Free Amount = $5,788.13
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be:
- $687.55 = -0.0483785 X $14,211.87
The withdrawal charge would be:
$620.81 = [($14,211.87 + $687.55)/(1 - .04)] - ($14,211.87 + 687.55)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,308.36 = $20,000.00 + $687.55 + $620.81
The ending Account Value would be:
$36,572.89 = $57,881.25 - $21,308.36
Example of an Upward Market Value Adjustment:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
three-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
0.0217384 = [(1 + .05)/36/12/ / (1 + .04 + .0025)/36/12/]- 1
The Market Value Adjustment is an increase of $1,258.25 to the GRO Value:
$1,258.25 = 0.0217384 X $57,881.25
The Market Adjusted Value would be:
$59,139.50 = $57,881.25 + $1,258.25
A withdrawal charge of 4% would be assessed against the $50,000 original
contribution:
$2,000.00 = $50,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$57,139.50 = $57,881.25 + $1,258.25 - $2,000.00
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If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$308.94 = .0217384 X $14,211.87
The withdrawal charge would be:
$572.29 = [($14,211.87 - $308.94)/(1 - .04)] - ($14,211.87 - $308.94)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,270.35 = $20,000.00 - $308.94 + $579.29
The ending Account Value would be:
$37,610.90 = $57,881.25 - $20,270.35
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
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STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
FOR
GRANDMASTER II
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
Table of Contents
<TABLE>
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Page
<S> <C>
Part 1 - National Integrity and Custodian ........................................ 2
Part 2 - Distribution of the Contracts............................................ 2
Part 3 - Performance Information.................................................. 3
Part 4 - Determination of Annuity Unit Values..................................... 10
Part 5 - Death Benefit Information for Contracts Issued Prior to January 1, 1995.. 11
Part 6 - Financial Statements..................................................... 12
</TABLE>
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, 1997.
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.
<PAGE>
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. (ARM), 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 owns
100% of the stock of (i) ARM Securities Corporation (ARM Securities), a
Minnesota corporation, 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 current and former 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 provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by National
Integrity for management services in 1995 and 1996, including services
applicable to the Registrant, were $5,640,827 and $6,007,766, respectively.
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.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a continuous
basis.
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We generally pay a maximum distribution allowance of 6% of initial
contributions. The amount of distribution allowances paid was $2,229,269,
$2,217,123, and $912,740 for the years ended December 31, 1996, 1995, and 1994,
respectively. No distribution allowances were retained by ARM Securities during
these years. 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
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and 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 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.
3
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Current yield and effective yield are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the base period), and stated as a percentage of the investment at the start of
the base period (the base period return). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)/365/7/} - 1
4
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The table below provides average annual total returns for each Option for the
One and Three Year Periods ended December 31, 1996 and from inception through
December 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.
<TABLE>
<CAPTION>
Average Annual Total Returns for One and Three Year Periods Ended 12/31/96 and Since Inception*
Period Since Inception One Year Period Three Year Period
---------------------- ------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Contract
Contract Surrendered Contract Surrendered
Option Continues 12/31/96 Continues 12/31/96 Contract Continues
- ------ --------- ----------- --------- ----------- ------------------
VIP Equity-Income 16.19% 15.92% 12.73% 6.65% 16.64%
VIP II Asset
Manager 9.83% 9.50% 13.04% 6.97% 6.51%
VIP Growth 15.07% 14.79% 13.14% 7.07% 14.22%
VIP Overseas 7.81% 7.46% 11.67% 5.60% 6.64%
VIP II Investment
Grade Bond 5.65% 5.06% 1.78% -4.29% 3.80%
VIP II Index 500 15.98% 15.19% 21.15% 15.07% 17.79%
VIP High Income 10.41% 9.54% 12.48% 6.40% 9.13%
VIP II Asset
Manager: Growth 20.48% 17.69% 18.30% 12.23% n/a
VIP II Contrafund 28.17% 25.49% 19.66% 13.58% n/a
VIP III Balanced n/a n/a n/a n/a n/a
VIP III Growth & n/a n/a n/a n/a n/a
Income
VIP III Growth
Opportunities n/a n/a n/a n/a n/a
</TABLE>
*The inception date for each Option is set forth in the table below.
5
<PAGE>
The table below provides cumulative total returns for each Option from inception
through December 31, 1996, and for the One and Three Year Periods ended December
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 12/31/96, and for the One
and Three Year Periods ended 12/31/96
<TABLE>
<CAPTION>
Period Since Inception One Year Three-Year
------------------------- --------- ----------
Contract
Contract Surrendered Contract Contract Inception
Option Continues 12/31/96 Continues Continues Date*
- ------ --------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
VIP Equity-Income 122.58% 120.18% 12.73% 58.68% 09/03/91
VIP II Asset Manager 64.84% 62.44% 13.04% 20.83% 09/03/91
VIP Growth 111.35% 108.95% 13.14% 49.02% 09/03/91
VIP Overseas 49.30% 46.90% 11.67% 21.26% 09/03/91
VIP II Investment
Grade Bond 29.84% 26.48% 1.78% 11.85% 04/02/92
VIP II Index 500 74.10% 69.82% 21.15% 63.44% 04/06/93
VIP High Income 45.83% 41.55% 12.48% 29.98% 03/12/93
VIP II Asset Manager:
Growth 42.22% 36.07% 18.30% n/a 02/10/95
VIP II Contrafund 59.21% 53.07% 19.66% n/a 02/16/95
VIP III Balanced n/a n/a n/a n/a 12/31/96
VIP III Growth & Income n/a n/a n/a n/a 12/31/96
VIP III Growth
Opportunities n/a n/a n/a n/a 12/31/96
</TABLE>
*Inception Dates reflect date of first trade.
6
<PAGE>
Performance Comparisons
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (Lipper) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in Lipper Performance Analysis.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as Barron's, Business Week, CDA Technologies, Inc., Changing
Times, Consumer's Digest, Dow Jones Industrial Average, Financial Planning,
Financial Times, Financial World, Forbes, Fortune, Global Investor, Hulbert's
Financial Digest, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Funds, The New York Times, Personal Investor, Stanger's Investment
Adviser, Value Line, The Wall Street Journal, Wiesenberger Investment Company
Service and USA Today.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
7
<PAGE>
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.
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.
8
<PAGE>
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 greater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
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.
9
<PAGE>
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 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 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% and 3.5% a year, respectively. For
each valuation period thereafter, it is the annuity value for the preceding
valuation period multiplied by the adjusted net investment factor under the
contracts. For each valuation period, the adjusted net investment factor is
equal to the net investment factor reduced for each day in the valuation period
by:
* .00013366 for a contract with an assumed base rate of net investment return of
5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return of
3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in
10
<PAGE>
the contract or on our current rates, whichever is more favorable to the
participant. Where the Company's current annuity rates are used, contributions
in the current and five prior participation years will qualify for the Company's
current individual annuity rates applicable to funds derived from sources
outside the Company. The balance of the proceeds will qualify for the Company's
current individual annuity rates for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that, each
payment will be calculated by multiplying the number of annuity units credited
by the average annuity unit value for the second calendar month before the due
date of the payment. The number of annuity units credited equals the initial
periodic payment divided by the annuity unit value for the valuation period that
includes the due date of the first annuity payment. The average annuity unit
value is the average of the annuity unit values for the valuation periods ending
in that month. Each business day together with any non-business day or
consecutive non-business day immediately preceding such business day will
constitute a valuation period.
Illustration of Changes in Annuity Unit Values. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units credited
under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date the Company
receives a written request for lump sum payment of remaining values. Assets held
in the Account at least equal to all statutory reserves required for such
Separate Account.
PART 5 - 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.
11
<PAGE>
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 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 as of December 31, 1996, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1996 and 1995 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
they relate 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.
12
<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
December 31, 1996
With Report of Independent Auditors
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1996
Contents
Report of Independent Auditors.......................................... 1
Audited Financial Statements
Statement of Assets and Liabilities..................................... 2
Statement of Operations................................................. 4
Statements of Changes in Net Assets..................................... 6
Notes to Financial Statements........................................... 10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of 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, 1996, 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,
1996, 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, 1996, and the results of their operations and changes in
their net assets for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
Louisville, Kentucky
April 18, 1997
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High 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 $197,164,560 in the aggregate) $18,020,587 $23,407,036 $55,149,674 $34,096,543 $11,759,340
Liabilities
Payable to (receivable from) the general
account of National Integrity (1,065) 5,334 6,757 1,293 (2,740)
--------------------------------------------------------------------------
Net assets $18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080
===========================================================================
Unit value $ 12.40 $ 14.58 $ 29.09 $ 36.19 $ 19.71
===========================================================================
Units outstanding $ 1,453,359 1,605,055 1,895,597 942,118 596,757
===========================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1996
<TABLE>
<CAPTION>
Asset
Investment Asset Manager:
Grade Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments in Fidelity VIP Funds at value
(cost of $197,164,560 in the aggregate) $ 5,602,752 $28,963,476 $12,856,944 $ 4,019,997 $29,705,335 $223,581,684
Liabilities
Payable to (receivable from) the general
account of National Integrity (1,544) 5,007 (132) 330 2,611 15,851
-----------------------------------------------------------------------------------
Net assets $ 5,604,296 $28,958,469 $12,857,076 $ 4,019,667 $29,702,724 $223,565,833
===================================================================================
Unit value $ 16.47 $ 21.42 $ 17.41 $ 14.22 $ 15.92
===================================================================
Units outstanding 340,273 1,351,936 738,488 282,677 1,865,749
===================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High Income Income Growth Overseas
Division Division Division Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from Fidelity VIP Funds $990,302 $1,503,172 $1,662,157 $1,563,686 $ 202,159
Expenses
Mortality and expense risk and administrative
charges 258,367 258,372 623,813 389,332 138,984
--------------------------------------------------------------------
Net investment income (loss) 731,935 1,244,800 1,038,344 1,174,354 63,175
Realized and unrealized gain (loss) on
investments
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - 1,197,030 4,753,760 3,418,140 497,261
End of period - 1,536,022 8,336,245 4,306,351 1,370,759
--------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period - 338,992 3,582,485 888,211 873,498
--------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments - 911,057 4,476,304 2,073,552 1,027,351
--------------------------------------------------------------------
Net increase in net assets resulting from operations $731,935 $2,155,857 $5,514,648 $3,247,906 $1,090,526
====================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Investment Asset
Grade Asset Manager:
Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from Fidelity VIP Funds $221,647 $1,820,860 $ 207,812 $197,529 $ 127,036 $ 8,496,360
Expenses
Mortality and expense risk and
administrative charges 70,736 390,908 115,631 28,143 290,294 2,564,580
---------------------------------------------------------------------------
Net investment income (loss) 150,911 1,429,952 92,181 169,386 (163,258) 5,931,780
Realized and unrealized gain (loss)
on investments
Net realized gain on sales of investments 66,281 130,034 511,372 29,931 370,212 3,912,908
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 305,849 2,437,834 449,723 10,050 728,190 13,797,837
End of period 211,915 4,378,137 1,532,542 170,065 4,575,088 26,417,124
---------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (93,934) 1,940,303 1,082,819 160,015 3,846,898 12,619,287
---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (27,653) 2,070,337 1,594,191 189,946 4,217,110 16,532,195
---------------------------------------------------------------------------
Net increase in net assets resulting from operations $123,258 $3,500,289 $1,686,372 $359,332 $4,053,852 $22,463,975
===========================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High 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) $ 731,935 $ 1,244,800 $ 1,038,344 $ 1,174,354 $ 63,175
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853
Change in net unrealized appreciation/
depreciation during the period - 338,992 3,582,485 888,211 873,498
---------------------------------------------------------------------
Net increase in net assets resulting from operations 731,935 2,155,857 5,514,648 3,247,906 1,090,526
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 13,022,443 5,768,611 16,528,721 9,117,366 2,244,838
Contract terminations and benefits (2,565,173) (2,122,255) (2,744,148) (2,172,101) (543,454)
Net transfers among investment options (13,359,842) 2,918,655 1,873,529 2,865,903 1,450,476
---------------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions (2,902,572) 6,565,011 15,658,102 9,811,168 3,151,860
---------------------------------------------------------------------
Increase (decrease) in net assets (2,170,637) 8,720,868 21,172,750 13,059,074 4,242,386
Net assets, beginning of year 20,192,289 14,680,834 33,970,167 21,036,176 7,519,694
---------------------------------------------------------------------
Net assets, end of year $ 18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080
=====================================================================
Unit transactions
Contributions 1,070,667 420,641 613,841 264,112 120,141
Terminations and benefits (209,764) (152,014) (101,953) (62,070) (27,727)
Net transfers (1,100,108) 204,521 67,546 82,490 78,298
---------------------------------------------------------------------
Net increase (decrease) in units (239,205) 473,148 579,434 284,532 170,712
=====================================================================
</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, 1996
<TABLE>
<CAPTION>
Asset
Investment Asset Manager:
Grade Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 150,911 $1,429,952 $ 92,181 $ 169,386 $ (163,258) $ 5,931,780
Net realized gain on sales of investments 66,281 130,034 511,372 29,931 370,212 3,912,908
Change in net unrealized appreciation/
depreciation during the period (93,934) 1,940,303 1,082,819 160,015 3,846,898 12,619,287
----------------------------------------------------------------------------
Net increase in net assets resulting from operations 123,258 3,500,289 1,686,372 359,332 4,053,852 22,463,975
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 1,384,320 2,057,176 5,841,031 1,297,372 9,673,035 66,934,913
Contract terminations and benefits (297,734) (2,120,090) (484,894) (89,733) (1,301,783) (14,441,365)
Net transfers among investment options 113,095 (2,161,691) 1,597,892 1,429,241 4,579,388 1,306,646
----------------------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 1,199,681 (2,224,605) 6,954,029 2,636,880 12,950,640 53,800,194
----------------------------------------------------------------------------
Increase (decrease) in net assets 1,322,939 1,275,684 8,640,401 2,996,212 17,004,492 76,264,169
Net assets, beginning of year 4,281,357 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
----------------------------------------------------------------------------
Net assets, end of year $5,604,296 $28,958,469 $12,857,076 $4,019,667 $29,702,724 $223,565,833
============================================================================
Unit transactions
Contributions 86,373 104,501 371,841 99,473 677,612
Terminations and benefits (17,903) (107,819) (30,376) (6,955) (89,447)
Net transfers 7,195 (105,579) 103,587 105,013 323,547
--------------------------------------------------------------
Net increase (decrease) in units 75,665 (108,897) 445,052 197,531 911,712
==============================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Money Equity-
Market High 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.
8
<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 Manager:
Grade Bond Asset Manager Index 500 Growth
Division Division Division Division*
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 14,363 $ 195,610 $ (9,282) $ 38,507
Net realized gain (loss) on sales of investments (1,976) 67,575 163,144 15,291
Change in net unrealized appreciation/
depreciation during the period 344,325 3,725,015 455,826 10,050
-----------------------------------------------------------
Net increase in net assets resulting from operations 356,712 3,988,200 609,688 63,848
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders $2,299,947 5,153,894 1,801,990 852,854
Contract terminations and benefits (76,202) (2,134,550) (154,064) (51,829)
Net transfers among investment options 337,449 (7,356,843) 897,468 158,582
-----------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 2,561,194 (4,337,499) 2,545,394 959,607
-----------------------------------------------------------
Increase (decrease) in net assets 2,917,906 (349,299) 3,155,082 1,023,455
Net assets, beginning of year 1,363,451 28,032,084 1,061,593 -
-----------------------------------------------------------
Net assets, end of year $4,281,357 $27,682,785 $4,216,675 $1,023,455
===========================================================
Unit transactions
Contributions 150,331 306,214 136,806 75,747
Terminations and benefits (4,694) (124,737) (11,135) (4,392)
Net transfers 21,423 (427,236) 67,783 13,791
-----------------------------------------------------------
Net increase (decrease) in units 167,060 (245,759) 193,454 85,146
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Contrafund
Division* Total
------------------------------
<S> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 90,265 $ 1,725,405
Net realized gain (loss) on sales of investments 214,827 1,237,615
Change in net unrealized appreciation/
depreciation during the period 728,190 15,185,552
------------------------------
Net increase in net assets resulting from operations 1,033,282 18,148,572
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 9,594,998 65,835,986
Contract terminations and benefits (235,829) (7,080,428)
Net transfers among investment options 2,305,781 (293,420)
------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 11,664,950 58,462,138
------------------------------
Increase (decrease) in net assets 12,698,232 76,610,710
Net assets, beginning of year - 70,690,954
------------------------------
Net assets, end of year $12,698,232 $147,301,664
==============================
Unit transactions
Contributions 777,515
Terminations and benefits (17,708)
Net transfers 194,230
-----------
Net increase (decrease) in units 954,037
===========
</TABLE>
*For the period February 6, 1995 (commencement of operations) to December 31,
1995.
See accompanying notes.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1996
1. Organization and Significant Accounting Policies
Organization and Nature of Operations
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 premium
variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended. The operations of the Separate
Account are part of 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
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets.
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 rate options of National Integrity's
Separate Account GRO. 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"). The contract
holder's account value in a Separate Account division will vary depending on the
performance of the corresponding portfolio. The Separate Account currently has
ten investment divisions available. The Separate Account introduced three new
investment divisions to contract holders on December 31, 1996 which include the
Balanced Portfolio, the Growth and Income Portfolio, and the Growth
Opportunities Portfolio from the Fidelity VIP Funds. The investment objective of
each division and its corresponding portfolio are the same. Set forth below is a
summary of the investment objectives of the operative portfolios of the Fidelity
VIP Funds at December 31, 1996 for this Separate Account.
10
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. It invests
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 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.
11
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
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 50% in equities, 40% in
intermediate to long-term bonds and 10% in short-term fixed income
instruments. The 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.
Index 500 Portfolio seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's 500 Composite Stock Price Index while keeping
transaction costs and other expenses low.
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 70%, 25% 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 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.
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
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 and distributions from the Fidelity VIP Fund portfolios
are reinvested in the respective portfolios and are reflected in the unit value
of the divisions of the Separate Account.
Unit Value
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Taxes
Operations of the Separate Account are included in the income tax return of
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Investments
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1996 and the cost of shares held
at December 31, 1996 for each division were as follows:
<TABLE>
<CAPTION>
Division Purchases Sales Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $30,714,814 $32,878,326 $18,020,587
High Income 22,332,381 14,511,994 21,871,014
Equity-Income 20,475,054 3,770,667 46,813,429
Growth 15,553,784 4,565,309 29,790,192
Overseas 4,779,899 1,565,635 10,388,581
Investment Grade Bond 2,497,921 1,148,199 5,390,837
Asset Manager 4,139,075 4,931,455 24,585,339
Index 500 9,140,212 2,094,301 11,324,402
Asset Manager: Growth 3,049,651 243,187 3,849,932
Contrafund 14,227,273 1,433,356 25,130,247
</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, 1996 and 1995
with Report of Independent Auditors
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1996 and 1995
<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 (Statutory Basis).............................9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
National Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of National
Integrity Life Insurance Company as of December 31, 1996 and 1995, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
generally accepted accounting principles. 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 effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of National Integrity Life Insurance Company at December 31, 1996 and 1995, or
the results of its operations or its cash flows for the years then ended.
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, 1996 and 1995, 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 12, 1997
2
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Admitted assets
Cash and investments:
Bonds $451,439 $635,249
Preferred stocks 50,715 14,428
Mortgage loans 3,929 5,318
Policy loans 24,981 22,606
Cash and short-term investments 14,570 20,268
Other invested assets 36 8,827
------------------
Total cash and investments 545,670 706,696
Separate accounts assets 370,988 265,264
Receivable for investments sold 4,576 -
Accrued investment income 6,513 7,959
Federal income tax recoverable 438 -
Other admitted assets 1,740 -
------------------
Total admitted assets $929,925 $979,919
==================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $513,639 $671,322
Unpaid claims 124 1,813
Deposits on policies to be issued 645 -
------------------
Total policy and contract liabilities 514,408 673,135
Separate accounts liabilities 370,988 265,264
Accounts payable and accrued expenses 213 264
Transfers to separate accounts due or accrued, net (21,247) (16,329)
Reinsurance balances payable 589 98
Federal income taxes - 1,005
Asset valuation reserve 1,773 1,969
Interest maintenance reserve 8,914 6,992
Payable for investments purchased - 6,082
Other liabilities 6,016 2,300
------------------
Total liabilities 881,654 940,780
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued, and outstanding 2,000 2,000
Paid-in surplus 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (13,723) (22,855)
------------------
Total capital and surplus 48,271 39,139
------------------
Total liabilities and capital and surplus $929,925 $979,919
==================
</TABLE>
See accompanying notes.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 8,640 $ 1,262
Deposit-type funds 352,899 261,378
Net investment income 53,553 46,548
Amortization of the interest maintenance reserve 1,001 823
Other revenues 5,653 3,913
-----------------------
Total premiums and other revenues 421,746 313,924
Benefits paid or provided:
Death benefits 8,260 9,098
Annuity benefits 12,106 3,581
Surrender benefits 101,241 119,789
Payments on supplementary contracts 1,879 1,869
Increase in insurance and annuity reserves 192,985 80,945
Other benefits 7,818 1,492
-----------------------
Total benefits paid or provided 324,289 216,774
Insurance and other expenses:
Commissions 5,817 4,809
General expenses 8,051 8,150
Taxes, licenses and fees 349 301
Net transfers to separate accounts 69,158 77,166
Other expenses 3,110 -
-----------------------
Total insurance and other expenses 86,485 90,426
Gain from operations before federal income taxes
and net realized capital losses 10,972 6,724
Federal income tax expense (benefit) (444) 991
-----------------------
Gain from operations before net realized capital losses 11,416 5,733
Net realized capital losses, less capital gains
tax expense (1996-$544; 1995-$1,800)
and excluding net gains (losses) transferred
to the interest maintenance reserve
(1996-$2,923; 1995-$(2,850)| (2,500) (900)
-----------------------
Net income $ 8,916 $ 4,833
=======================
</TABLE>
See accompanying notes.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Special Total
Common Paid-In Surplus Unassigned Capital and
Stock Surplus Funds Surplus Surplus
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $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
Net income 8,916 8,916
Decrease in nonadmitted assets 19 19
Decrease in asset valuation reserve 197 197
------------------------------------------------------------
Balance, December 31, 1996 $2,000 $59,244 $ 750 $ (13,723) $ 48,271
============================================================
</TABLE>
See accompanying notes.
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Operations:
Premiums, policy proceeds, and other considerations received $ 361,539 $ 262,639
Net investment income received 53,492 47,165
Commission and expense allowances received on reinsurance ceded 644 6
Benefits paid (125,238) (134,780)
Insurance expenses paid (14,170) (13,461)
Other income received net of other expenses paid 5,009 3,942
Net transfers to separate accounts (74,076) (83,932)
-----------------------
Net cash provided by operations 207,200 81,579
Investment activities:
Proceeds from sales, maturities, or repayments of investments:
Bonds 455,716 339,361
Preferred stocks 19,067 6,913
Mortgage loans 1,389 1,326
Other invested assets 8,826 -
-----------------------
Total investment proceeds 484,998 347,600
Taxes paid on capital gains (1,212) -
-----------------------
Net proceeds from sales, maturities, or repayments of investments 483,786 347,600
Cost of investments acquired:
Bonds 626,879 416,110
Preferred stocks 55,045 7,818
Other invested assets - 8,841
Miscellaneous proceeds 36 -
-----------------------
Total cost of investments acquired 681,960 432,769
Net increase in policy loans and premium notes 2,375 2,876
-----------------------
Net cash used in investment activities (200,549) (88,045)
Financing and miscellaneous activities:
Other cash provided:
Other sources 3,826 7,899
-----------------------
Total other cash provided 3,826 7,899
-----------------------
7
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Other cash applied:
Other applications, net 16,175 2,236
-----------------------
Total other cash applied 16,175 2,236
-----------------------
Net cash provided by (used in) financing and miscellaneous activities (12,349) 5,663
-----------------------
Net decrease in cash and short-term investments (5,698) (803)
Cash and short-term investments at beginning of year 20,268 21,071
-----------------------
Cash and short-term investments at end of year $ 14,570 $ 20,268
=======================
See accompanying notes.
8
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
1. Organization and Accounting Policies
Organization
National Integrity Life Insurance Company ("National Integrity" or the
"Company") is a wholly owned subsidiary 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 the National Association of Insurance Commissioners (the
"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 stock
are based on values specified by the NAIC, rather than on actual or estimated
market values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is reported
as a liability rather than unassigned surplus.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity 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 include provisions when
there has been a decline in asset values deemed other than temporary.
Policy Acquisition Costs
Costs of acquiring and renewing business are expensed when incurred. Under
GAAP, acquisition costs related to investment-type products, to the extent
recoverable from future gross profits, are amortized generally in proportion
to the emergence of future gross profits over the estimated term of the
underlying policies.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally receivables greater
than 90 days past due, are excluded from the accompanying balance sheets and
are charged directly to unassigned surplus.
Premiums
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and therefore
not recognized as premium revenue; benefits paid equal to the policy account
value are accounted for as a return of deposit instead of benefit expense.
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1.Organization and Accounting Policies (continued)
Benefit Reserves
Certain policy reserves are calculated using statutorily prescribed interest
and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
Federal Income Taxes
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 8,916 $ 4,833
Deferred policy acquisition costs, net of
amortization 5,187 7,614
Adjustments to customer deposits (441) (3,669)
Adjustments to invested asset carrying values
at acquisition date (160) (180)
Amortization of value of insurance in force (1,470) (2,905)
Amortization of interest maintenance reserve (1,001) (823)
Adjustments for realized investment gains (losses) 852 (747)
Adjustments for federal income tax benefit (expense) (2,185) 564
Other (200) 356
-----------------------
Net income, GAAP basis $ 9,498 $ 5,043
=======================
</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,
1996 1995
-------------------
(In Thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 48,271 $ 39,139
Adjustments to customer deposits (27,233) (26,792)
Adjustments to invested asset carrying values
at acquisition date (5,197) (5,889)
Asset valuation reserve and interest maintenance
reserve 19,369 20,567
Value of insurance in force 13,913 15,383
Deferred policy acquisition costs 23,728 18,541
Net unrealized gains on available-for-sale securities 1,416 5,577
Other (2,650) (246)
-------------------
Shareholder's equity, GAAP basis $ 71,617 $ 66,280
===================
</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 are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Preferred stocks are reported at cost.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the specific
identification method.
Benefits
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the New York Insurance Department. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserves. 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.
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 financial
statements 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. Fees charged on separate account
policyholder deposits are included in other revenues.
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 these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation of the 1996 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
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. Permitted Statutory Accounting Practices (continued)
administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future. 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 effective for 1999, 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 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, 1996:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 16,243 $ 415 $ 110 $ 16,548
Foreign governments 12,363 643 - 13,006
Public utilities 40,882 379 644 40,617
Other corporate securities 127,264 396 6,534 121,126
Asset-backed securities 10,311 - - 10,311
Mortgage-backed securities 244,376 - - 244,376
--------------------------------------------
Total bonds $451,439 $1,833 $7,288 $445,984
============================================
</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, 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
Assets-backed securities 27,695 - - 27,695
Mortgage-backed
securities 298,588 - - 298,588
-------------------------------------------
Total bonds $635,249 $7,042 $1,716 $640,575
===========================================
</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, 1996 and 1995, the fair
value of investments in bonds includes $312,677,000 and $426,972,000,
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, 1996, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
--------------------
(In Thousands)
<S> <C> <C>
Years to maturity:
After one through five $ 20,176 $ 16,110
After five through ten 32,815 31,575
After ten 143,761 143,612
Asset-backed securities 10,311 10,311
Mortgage-backed securities 244,376 244,376
-------------------
Total $451,439 $445,984
===================
</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 1996 and 1995 were
$755,711,000 and $286,601,000; gross gains of $7,901,000 and $4,404,000, and
gross losses of $4,450,000 and $5,621,000 were realized on those sales,
respectively.
At December 31, 1996 and 1995, bonds with an admitted asset value of $1,234,000
and $1,235,000, 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 since 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 was 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 1996, 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 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,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Income:
Bonds $47,487 $43,591
Preferred stocks 4,150 1,282
Mortgage loans 610 565
Policy loans 1,886 1,751
Short-term investments and cash 1,277 773
Other investment income 3 383
------------------
Total investment income 55,413 48,345
Investment expenses (1,860) (1,797)
------------------
Net investment income $53,553 $46,548
==================
</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 risks under certain of its
insurance products with other insurance companies through reinsurance
agreements. Through these reinsurance agreements substantially all mortality
risks associated with single premium endowment and variable annuity deposits and
substantially all risks associated with variable life business have been
reinsured with non-affiliated insurance companies. A contingent liability exists
with respect to insurance ceded which would become a liability should the
reinsurer be unable to meet the obligations assumed under these reinsurance
agreements. 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 zero and
$117,770,000 at December 31, 1996 and 1995, respectively.
The effect of reinsurance on premiums and amounts earned is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $115,547 $145,630
Reinsurance assumed 246,571 117,175
Reinsurance ceded (580) (165)
-----------------------------------
Net premiums and amounts earned $361,538 $262,640
===================================
</TABLE>
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 after
consolidated losses and credits.
19
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
5. Federal Income Taxes (continued)
Income before income taxes differs from taxable income principally due to value
of insurance in-force, interest maintenance reserves and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
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 laws, 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.
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, 1996 and 1995, 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, 1996 and 1995, the Company's annuity reserves, including
separate accounts, 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, 1996:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 89,668 11.5%
At book value less surrender charge
of 5% or more 23,208 3.0
At market value 257,419 33.0
-------------------
Total with adjustment or at market
value 370,295 47.5
Subject to discretionary withdrawal
(without adjustment) at book value
with minimal or no charge or
adjustment 347,883 44.7
Not subject to discretionary withdrawal 60,995 7.8
-------------------
Total annuity reserves and deposit
fund liabilities-before reinsurance 779,173 100.0%
=====
Less reinsurance ceded -
--------
Net annuity reserves and deposit fund
liabilities $779,173
========
At December 31, 1995:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 67,407 8.1%
At book value less 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 61,710 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
========
</TABLE>
The Company sold $358,339,000 of guaranteed investment contracts, assumed by the
Company through a coinsurance agreement with General American Life Insurance
Company, to Integrity as of June 30, 1996.
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, 1996 is as follows:
<TABLE>
<CAPTION>
*Nonindexed
Guaranteed Nonguaranteed
More Separate
than 4% Accounts Total
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Premiums, deposits and other
considerations $32,363 $ 70,537 $102,900
==========================================
Reserves for separate accounts with
assets at fair value $90,084 $257,514 $347,598
==========================================
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $89,668 $ - $ 89,668
At book value without market value
adjustment and with current
surrender charge of 5% or more 416 257,514 257,930
------------------------------------------
Total with adjustment or at market
value 90,084 257,514 347,598
Not subject to discretionary
withdrawal - - -
------------------------------------------
Total separate accounts reserves $90,084 $257,514 $347,598
==========================================
</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, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------
(In Thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $102,901 $ 96,982
Transfers from separate accounts (37,150) (21,800)
-------------------
Net transfers to separate accounts 65,751 75,182
Reconciling adjustments:
Mortality and expense charges reported as other revenues 3,194 1,928
Other revenues 213 56
-------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 69,158 $ 77,166
===================
</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 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.
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Bonds $451,439 $457,875 $635,249 $666,955
Preferred stocks 50,715 50,454 14,428 15,964
Mortgage loans 3,929 3,929 5,318 5,318
Liabilities:
Life and annuity reserves for
investment-type contracts $432,013 $426,516 $472,037 $474,465
Separate accounts annuity reserves 347,503 347,072 248,398 247,220
</TABLE>
Bonds and Preferred Stocks
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
Mortgage Loans on Real Estate
Pursuant to the terms of ARM's acquisition of the Company, payments of principal
and interest on mortgage loans acquired on November 26, 1993 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 single premium immediate annuities is based on discounted
cash flow calculations using a market yield rate for assets with similar
durations. The fair value of the remaining annuities is based on the cash
surrender value of the underlying policies.
24
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
Separate Accounts Annuity Reserves
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
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
1996 and 1995, the Company was charged $6,008,000 and $5,641,000, respectively,
for these services in accordance with the requirements of applicable insurance
law and regulations.
25
<PAGE>
CROSS REFERENCE SHEET - GrandMaster III
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information required By Form N-4
PART A: INFORMATION REQUIRED IN PROSPECTUS - GrandMaster III
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Prospectus
<S> <C> <C>
1. Cover Page Cover Page
2. Definitions Part 1 - Summary
3. Synopsis Part 1 - Summary; Table of Annual Fees and
Expenses; Examples
4. Condensed Financial Information Part 1 - Financial Information
5. General Description of Registrant, Part 2 - National Integrity and the Separate Account;
Annuity Contracts Part 3 - Your Investment Options
6. Deductions Part 4 - Deductions and Charges
7. General Description of Variable Part 5 - Terms of Your Variable
Annuity contracts Annuity Contract
8. Annuity Period Part 5 - Terms of Your Variable
Annuity Contract
9. Death Benefit Part 5 - Terms of Your Variable
Annuity Contract
10. Purchases and Contract Value Part 5 - Terms of Your Variable
Annuity Contract
11. Redemptions Part 5 - Terms of Your Variable
Annuity Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement Table of Contents
of Additional Information
</TABLE>
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - GrandMaster III
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Statement of Additional
Information
<S> <C> <C>
15. Cover Page Cover Page
16. Table of Contents Cover Page
17. General Information and History Part 1 - National Integrity and Custodian
18. Services Part 1 - National Integrity and Custodian
19. Purchase of Securities Being Offered Part 2 - Distribution of the Contracts
20. Underwriters Part 2 - Distribution of the Contracts
21. Calculation of Performance Data Part 3 - Performance Information
22. Annuity Payments Part 4 - Determination of Annuity Unit Values
23. Financial Statements Part 5 - Financial Statements
</TABLE>
<PAGE>
Prospectus
==========
GrandMaster III
Flexible Premium Variable Annuity
issued by National Integrity Life Insurance Company
This prospectus describes a flexible premium variable annuity offered by
National Integrity Life Insurance Company, an indirect wholly owned subsidiary
of ARM Financial Group, Inc. The individual contracts and group certificates
(contracts) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Contributions under the contracts may be allocated to the various
investment divisions of our Separate Account I (Variable Account Options, or
individually, Option) or to our Guaranteed Rate Options (GROs), or both.
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III) (the Funds or Fund). The Funds are part of the Fidelity Investments(R)
group of companies. The values allocated to the Options reflect the investment
performance of the Funds' portfolios. The prospectus for the Funds describes the
investment objectives, policies and risks of each of the Funds' portfolios.
There are thirteen Variable Account Options, which invest in the following
portfolios:
. VIP Money Market Portfolio . VIP II Investment Grade Bond Portfolio
. VIP High Income Portfolio . VIP II Asset Manager Portfolio
. VIP Equity-Income Portfolio . VIP II Index 500 Portfolio
. VIP Growth Portfolio . VIP II Contrafund Portfolio
. VIP Overseas Portfolio . VIP II Asset Manager: Growth Portfolio
. VIP III Balanced Portfolio . VIP III Growth Opportunities Portfolio
. VIP III Growth & Income
Your allocation to a GRO accumulates at a fixed interest rate we declare at the
beginning of the duration you select. A market value adjustment (Market Value
Adjustment) will be made for withdrawals, surrenders, transfers and certain
other transactions before the expiration of your GRO Account, but your value
under a GRO Account may not be decreased below an amount equal to your
allocation plus interest compounded at an annual effective rate of 3% (Minimum
Value), less previous withdrawals and any applicable contingent withdrawal
charges.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current prospectus for the Funds, which you should also read.
For further information and assistance, you should contact our Administrative
Office at National Integrity Life Insurance Company, 200 Park Avenue, 20th
Floor, New York, New York 10166. You may also call the following toll-free
number: 1-800-433-1778.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated May 1, 1997, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part 1 - Summary Page
<S> <C>
Your Variable Annuity Contract......................... 1
Your Benefits.......................................... 1
How Your Contract is Taxed............................. 1
Your Contributions..................................... 1
Your Investment Options................................ 1
Variable Account Options............................... 1
Account Value, Adjusted Account Value and Cash Value... 2
Transfers.............................................. 2
Charges and Fees....................................... 2
Withdrawals............................................ 2
Your Initial Right to Revoke........................... 3
Table of Annual Fees and Expenses...................... 4
Financial Information.................................. 7
Part 2 - National Integrity And The Separate Account
National Integrity Life Insurance Company.............. 9
The Separate Account and the Variable Account Options.. 9
Assets of Our Separate Account......................... 9
Changes In How We Operate.............................. 9
Part 3 - Your Investment Options
The Funds.............................................. 10
The Funds' Investment Adviser.......................... 10
Investment Objectives of the Portfolios................ 12
Guaranteed Rate Options................................ 14
Renewals of GRO Accounts............................... 14
Market Value Adjustments............................... 15
Part 4 - Deductions and Charges
Separate Account Charges............................... 16
Annual Administrative Charge........................... 16
Fund Charges........................................... 16
State Premium Tax Deduction............................ 16
Contingent Withdrawal Charge........................... 16
Transfer Charge........................................ 17
Hardship Waiver........................................ 18
Tax Reserve............................................ 18
Part 5 - Terms of Your Variable Annuity
Contributions Under Your Contract...................... 18
Your Account Value..................................... 19
Your Purchase of Units in Our Separate Account......... 19
How We Determine Unit Value............................ 19
Transfers.............................................. 20
Withdrawals............................................ 20
Assignments............................................ 21
Death Benefits and Similar Benefit Distributions....... 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Annuity Benefits................................................ 21
Annuities....................................................... 22
Annuity Payments................................................ 22
Timing of Payment............................................... 23
How You Make Requests and Give Instructions..................... 23
Part 6 - Voting Rights
Fund Voting Rights.............................................. 23
How We Determine Your Voting Shares............................. 23
How Fund Shares Are Voted....................................... 24
Separate Account Voting Rights.................................. 24
Part 7 - Tax Aspects of the Contracts
Introduction.................................................... 24
Your Contract is an Annuity..................................... 24
Taxation of Annuities Generally................................. 25
Distribution-at-Death Rules..................................... 25
Diversification Standards....................................... 26
Tax-Favored Retirement Programs................................. 26
Individual Retirement Annuities............................. 26
Tax Sheltered Annuities..................................... 27
Simplified Employee Pensions................................ 27
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans................................... 27
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations.............................. 28
Distributions Under Tax-Favored Retirement Programs............. 28
Federal and State Income Tax Withholding........................ 29
Impact of Taxes to National Integrity........................... 29
Transfers Among Investment Options.............................. 29
Part 8 - Additional Information
Systematic Withdrawals.......................................... 29
Dollar Cost Averaging........................................... 30
Individual Asset Rebalancing.................................... 30
Ibbotson Asset Allocation and Rebalancing Program............... 30
Systematic Contributions........................................ 31
Performance Information......................................... 32
</TABLE>
Appendix A - Illustration of a Market Value Adjustment........ 33
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
<PAGE>
SAI Table of Contents
Part 1 - National Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
ATTN: Request for SAI of Separate Account I
Name:_____________________________________________________________________
Address:__________________________________________________________________
City:________________________________ State:_________ Zip:________________
<PAGE>
PART 1 - SUMMARY
Your Variable Annuity Contract
In this prospectus, we, our and us mean National Integrity Life Insurance
Company (National Integrity), a subsidiary of Integrity Life Insurance Company
(Integrity) and an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of contracts.
When we use the words contract or certificate, we are referring to both the
individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, you
and your mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin.
Your retirement or endowment date (Retirement Date) will be no later than your
90th birthday or earlier, if required by law, unless you notify us of a
different date.
Your Benefits
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part 7, "Tax Aspects of the
Contracts" for detailed information.
How Your Contract is Taxed
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part 7, "Tax Aspects of the Contracts."
Your Contributions
The minimum initial contribution in most states is currently $1,000. Subsequent
contributions of at least $100 can be made. Special rules for lower minimum
initial and subsequent contributions apply for certain tax-favored retirement
plans. See "Contributions Under Your Contract" in Part 5.
Your Investment Options
You may allocate contributions to the Variable Account Options or to the GROs,
or both. The Variable Account Options and the GROs are together referred to as
the Investment Options. Contributions may be allocated to up to nine Investment
Options at any one time. See "Contributions Under Your Contract" in Part 5. To
select Investment Options most suitable for you, see Part 3, "Your Investment
Options."
Variable Account Options
The Variable Account Options (also referred to as Divisions) invest in shares of
corresponding investment portfolios of the Funds, each a "series" type of mutual
fund. Each investment portfolio is referred to as a Portfolio. The investment
objective of each Variable Account Option and its corresponding Portfolio is the
same. Your value in a Variable Account Option will vary depending on the
performance of the corresponding Portfolio. For a full description of the Funds,
see the Funds' prospectus and the Funds' Statement of Additional
Information.
1
<PAGE>
Account Value, Adjusted Account Value and Cash Value
The sum of your values under the GROs plus your values in the Variable Account
Options is referred to as the Account Value. Your Adjusted Account Value is your
Account Value, as increased or decreased (but not below the Minimum Value) by
any Market Value Adjustments. Your Cash Value is equal to your Adjusted Account
Value, reduced by any applicable contingent withdrawal charge and will be
reduced by the pro rata portion of the annual administrative charge, if
applicable. See "Charges and Fees" below.
Transfers
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may be
arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under special services we offer to dollar cost
average or rebalance your investment in the Variable Account Options. See Part
8, "Dollar Cost Averaging," "Individual Asset Rebalancing," and "Ibbotson Asset
Allocation and Rebalancing Program."
Charges and Fees
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value of the assets
in each Variable Account Option is made daily. We make this charge to cover
mortality and expense risks (1.20%) and certain administrative expenses (.15%).
The charge will never be greater than an effective annual rate of 1.35% of the
Account Value of the assets in each Variable Account Option. See Part 4,
"Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts invested
by the Separate Account in the Funds. For providing investment management
services to the Portfolios of the Funds, Fidelity Management and Research
Company (Fidelity Management) receives fees from the Portfolios based on the
average net assets of each Portfolio. The highest annual rate at which any of
the Portfolios paid advisory fees in 1996 was .76% of average net assets.
Advisory fees cannot be increased without the consent of Fund shareholders. See
"Table of Annual Fees and Expenses" below and "The Funds' Investment Adviser" in
Part 3.
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part 4.
When you make withdrawals from your contract, a contingent withdrawal charge may
be deducted from your Account Value. This sales charge will be in addition to
the Market Value Adjustment applicable to early withdrawals from GRO Accounts.
Under certain circumstances, the contingent withdrawal charge and market value
adjustment may be waived. See "Withdrawals" below and "Guaranteed Rate Options"
in Part 3.
Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A sales charge of up to
7% of the contribution amount withdrawn, in excess of any free withdrawal amount
(defined below), will be deducted from your Account Value, unless one of the
exceptions applies. This charge defrays marketing expenses. See "Contingent
Withdrawal Charge" in Part 4. Most withdrawals made by you prior to age 59-1/2
are also subject to a 10% federal tax penalty. In addition, some tax-favored
retirement programs limit withdrawals. See Part 7, "Tax Aspects of the
Contracts." For partial withdrawals, the total amount deducted from your
Account Value will
2
<PAGE>
include the withdrawal amount requested, any applicable Market Value Adjustment,
and any applicable withdrawal charge, so that the net amount you receive will be
the amount requested.
The free withdrawal amount is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to 10% of the
Account Value, minus cumulative prior withdrawals in the current contract year.
However, as explained above, a tax penalty still applies if you are under age
59-1/2.
Your Initial Right to Revoke
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. The 10-day period may be extended if required
by state law. We will refund all your contributions with an adjustment for any
investment gain or loss on the contributions put into each Variable Account
Option from the date units were purchased until the date your contract is
received by us, including any charges deducted. If state law instead requires a
refund of your contributions without any adjustment, we will return that amount
to you. For allocations to GROs, we will refund to you the amount of your
contributions.
3
<PAGE>
Table of Annual Fees and Expenses
<TABLE>
<CAPTION>
Contract Owner Transaction Expenses
- -----------------------------------
<S> <C>
Sales Load on Purchases.................................. $ 0
Deferred Sales Load (1)........................... 7% Maximum
Exchange Fee (2)......................................... $ 0
Annual Administrative Charge (3)......................... $30
</TABLE>
<TABLE>
<CAPTION>
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ----------------------------------------
<S> <C>
Mortality and Expense Risk Fees......................... 1.20%
Administrative Expenses................................. .15%
-----
Total Separate Account Annual Expenses.................. 1.35%
=====
</TABLE>
Fund Annual Expenses After Reimbursement
(as a percentage of average net assets) (5)
- -------------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---------- -------- --------
<S> <C> <C> <C>
VIP Money Market................. .21% .09% .30%
VIP High Income.................. .59% .12% .71%(6)
VIP Equity-Income................ .51% .07% .58%
VIP Growth....................... .61% .08% .69%
VIP Overseas..................... .76% .17% .93%
VIP II Investment Grade Bond..... .45% .13% .58%
VIP II Asset Manager............. .64% .10% .74%(6)(7)
VIP II Index 500................. .13% .15% .28%(7)
VIP II Contrafund................ .61% .13% .74%(6)
VIP II Asset Manager: Growth..... .65% .22% .87%(6)(7)
VIP III Balanced................. .48% .24% .72%(6)
VIP III Growth Opportunities..... .61% .16% .77%(6)
VIP III Growth & Income.......... .50% .20% .70%(6)(8)
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
may make a partial withdrawal of up to 10% of the Account Value in any contract
year less withdrawals during the current contract year, without assessment of
any withdrawal charge.
(2) After the first twelve transfers during a contract year, National Integrity
has the right to impose a transfer charge of $20 per transfer. This charge would
not apply to transfers made for dollar cost averaging, individual asset
rebalancing, Ibbotson Asset Allocation and Rebalancing Program, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
(3) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to your
Retirement Date. See "Deductions and Charges - Annual Administrative Charge" in
Part 4.
(4) See "Deductions and Charges - Separate Account Charges" in Part 4.
(5) In the Funds' prospectus, see "Management, Distribution and Service Fees."
4
<PAGE>
(6) A portion of the brokerage commissions that certain funds pay was used to
reduce funds' expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented in
the table would have been .56% for VIP Equity-Income Portfolio, .67% for VIP
Growth Portfolio, .92% for VIP Overseas Portfolio, .73% for VIP II Asset Manager
Portfolio, .71% for VIP II Contrafund Portfolio, .85% for VIP II Asset Manager:
Growth Portfolio, and .76% for VIP III Growth Opportunities Portfolio, and .71%
for VIP III Balanced Portfolio.
(7) The investment adviser agreed to reimburse a portion of VIP II Index 500
Portfolio's expenses during the period. Without this reimbursement, the fund's
management fee, other expenses and total expenses would have been .28%, .15%,
and .43%, respectively, for VIP II Index 500 Portfolio, and .50%, 195.78%, and
196.29%, respectively.
(8) Annualized
Examples
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $40,000 average contract value and a 5% annual
rate of return on assets.
Expenses per $1,000 investment if you surrender your contract at the end of the
- -------------------------------------------------------------------------------
applicable period:
- -----------------
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market.............. $ 97.66 $114.61 $133.86 $203.09
VIP High Income............... $101.86 $127.34 $155.29 $246.89
VIP Equity-Income............. $100.53 $123.32 $148.53 $233.20
VIP Growth.................... $101.65 $126.72 $154.25 $244.80
VIP Overseas.................. $104.11 $134.13 $166.63 $269.66
VIP II Investment Grade Bond.. $100.53 $123.32 $148.53 $233.20
VIP II Asset Manager.......... $102.17 $128.27 $156.84 $250.03
VIP II Index 500.............. $ 97.45 $113.98 $132.81 $200.91
VIP II Contrafund............. $102.17 $128.27 $156.84 $250.03
VIP II Asset Manager: Growth.. $103.50 $132.28 $163.55 $263.50
VIP III Balanced.............. $101.96 $127.65 $155.81 $247.94
VIP III Growth Opportunities.. $102.47 $129.19 $158.39 $253.15
VIP III Growth & Income....... $101.76 $127.03 $154.77 $245.84
</TABLE>
5
<PAGE>
Expenses per $1,000 investment if you do not surrender your contract at the end
- -------------------------------------------------------------------------------
of the applicable period:
- ------------------------
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market.............. $17.66 $54.61 $ 93.86 $203.09
VIP High Income............... $21.86 $67.34 $115.29 $246.89
VIP Equity-Income............. $20.53 $63.32 $108.53 $233.20
VIP Growth.................... $21.65 $66.72 $114.25 $244.80
VIP Overseas.................. $24.11 $74.13 $126.63 $269.66
VIP II Investment Grade Bond.. $20.53 $63.32 $108.53 $233.20
VIP II Asset Manager.......... $22.17 $68.27 $116.84 $250.03
VIP II Index 500.............. $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund............. $22.17 $68.27 $116.84 $250.03
VIP II Asset Manager: Growth.. $23.50 $72.28 $123.55 $263.50
VIP III Balanced.............. $21.96 $67.65 $115.81 $247.94
VIP III Growth Opportunities.. $22.47 $69.19 $118.39 $253.15
VIP III Growth & Income....... $21.76 $67.03 $114.77 $245.84
</TABLE>
Expenses per $1,000 investment if you elect the normal form of annuity at the
- -----------------------------------------------------------------------------
end of the applicable period:
- ----------------------------
Same expenses per $1,000 investment as shown in table immediately above.
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment advisory fees and other expenses of the
Funds as they were for the year ended December 31, 1996, except for VIP III
Growth & Income Portfolio, which were based on estimated current expenses.
Actual Fund expenses may be greater or less than those on which these examples
were based. The annual rate of return assumed in the examples is not an estimate
or guarantee of future investment performance. The table also assumes an
estimated $40,000 average contract value, so that the administrative charge per
$1,000 of net asset value in the Separate Account is $0.75. Such per $1,000
charge would be higher for smaller Account Values and lower for higher
values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
6
<PAGE>
Financial Information
The table below shows the unit value for each Variable Account Option at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the end of each period. The unit value at the
beginning of each period is the unit value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
Money High Equity- Investment
Market Income Income Growth Overseas Grade Bond
Division Division Division Division Division Division
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Date of Inception $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 - - - - - -
Number of Units - - - - - -
December 31, 1988 - - - - $9.79 $10.05
Number of Units - - - - 1,646 1,287
December 31, 1989 - - $10.99 $11.13 $12.08 $11.48
Number of Units - - 12,808 91 1,646 1,286
December 31, 1990 $10.17 - $9.54 $11.76 $11.13 $12.06
Number of Units 2,001 - 10,281 90 1,697 1,283
December 31, 1991 $10.64 - $13.63 $19.12 $13.63 $12.25
Number of Units 3,961 - 12,059 927 2,789 -
December 31, 1992 $10.90 - $15.72 $20.62 $12.01 $13.44
Number of Units 2,744 - 32,842 30,140 3,816 5,995
December 31, 1993 $11.10 $11.22 $18.33 $24.29 $16.25 $14.72
Number of Units 109,685 120,243 192,745 136,418 97,667 52,787
December 31, 1994 $11.42 $10.90 $19.37 $23.95 $16.31 $13.98
Number of Units 782,370 512,098 503,403 372,307 432,518 97,548
December 31, 1995 $11.93 $12.97 $25.81 $31.99 $17.65 $16.18
Number of Units 1,692,564 1,131,907 1,316,163 657,586 426,045 264,608
December 31, 1996 $12.40 $14.58 $29.09 $36.19 $19.71 $16.47
Number of Units 1,453,359 1,605,055 1,895,597 942,118 596,757 340,273
</TABLE>
*Inception dates for the VIP High Income Option and the VIP Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP III
Growth & Income Option was December 31, 1996. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively.
7
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
Asset
Asset Index Contra- Manager Growth Growth
Manager 500 fund Growth Balanced Income Opportunities
Division Division Division Division Division Division Division
--------- -------- --------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $7.92 - - - - - -
Number of Units 15,626 - - - - - -
December 31, 1988 $8.89 - - - - - -
Number of Units 23,806 - - - - - -
December 31, 1989 $11.05 - - - - - -
Number of Units 26,296 - - - - - -
December 31, 1990 $10.90 - - - - - -
Number of Units 33,770 - - - - - -
December 31, 1991 $13.45 - - - - - -
Number of Units 28,066 - - - - - -
December 31, 1992 $14.85 - - - - - -
Number of Units 57,934 - - - - - -
December 31, 1993 $17.73 $10.65 - - - - -
Number of Units 744,402 16,821 - - - - -
December 31, 1994 $16.43 $10.62 - - - - -
Number of Units 1,706,592 99,982 - - - - -
December 31, 1995 $18.95 $14.37 $13.31 $12.02 - - -
Number of Units 1,460,833 293,436 954,037 85,146 - - -
December 31, 1996 $21.42 $17.41 $15.92 $14.22 - - -
Number of Units 1,351,936 738,488 1,865,749 282,677 - - -
</TABLE>
*Inception dates for the VIP High Income Option and the VIP Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP Growth Opportunities Option, and VIP III Growth
& Income Option was December 31, 1996. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively.
8
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National Integrity Life Insurance Company
National Integrity is a stock life insurance company organized under the laws of
New York. Our home office is located in New York, New York. We are authorized to
sell life insurance and annuities in eight states and the District of Columbia.
In addition to the contracts, we sell flexible premium annuity contracts with an
underlying investment medium other than the Funds, and fixed single premium
annuity contracts. We are currently licensed to sell variable contracts in five
states and the District of Columbia. In addition to issuing annuity products, we
have entered into agreements with other insurance companies to provide
administrative and investment support for products to be designed, underwritten
and sold by these companies.
National Integrity is an indirect wholly owned subsidiary of ARM. ARM
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets. At December 31, 1996, ARM had $4.8
billion of assets under management.
The Separate Account and the Variable Account Options
The Separate Account is established and maintained under the insurance laws of
the State of New York. It is a unit investment trust registered with the
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (1940 Act). A unit investment trust is a type of investment company. SEC
registration does not involve any supervision by the SEC of the management or
investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio of the Funds. We may establish
additional Options, some of which may not be available for your allocations. The
Variable Account Options currently available to you are listed on the cover page
of this prospectus. Prior to September 3, 1991, the Portfolios then offered
invested in shares of corresponding portfolios of Prism Investment Trust.
Assets of Our Separate Account
Under New York law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate in
the Separate Account in proportion to the amounts relating to their contracts.
The Separate Account's assets supporting the variable portion of these variable
contracts may not be used to satisfy liabilities arising out of any other
business of ours. Under certain unlikely circumstances, one Variable Account
Option may be liable for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may permit charges owed to us to
stay in the Separate Account, and thus may participate proportionately in the
Separate Account. Amounts in the Separate Account in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(General Account).
Changes In How We Operate
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. We may:
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options, within our Separate Account, or withdraw assets relating
to your contract from one Option and put them into another;
9
<PAGE>
- - register or end the registration of the Separate Account under the 1940
Act;
- - operate our Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed of
a majority of persons who are "interested persons" of National Integrity
under the 1940 Act);
- - restrict or eliminate any voting Separate Account; rights of Owners or
others who have voting rights that affect our
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
- - operate our Separate Account or including a form that one or more of the
Options in any allows us to make direct other form the law allows,
investments. We may make any legal investments we wish. In choosing these
investments, we will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
The Funds
Each of the Funds is an open-end diversified management investment company
registered under the 1940 Act. Such registration does not involve supervision by
the SEC of the investments or investment policies of the Funds. The Funds are
each a "series" type of investment company with diversified portfolios. The
Funds do not impose a sales charge or "load" for buying and selling their
shares. The shares of the Portfolios of the Funds are bought and sold by the
Separate Account at their respective net asset values.
The Funds are designed to serve as investment vehicle for variable annuity and
variable life contracts of insurance companies. Shares of the Portfolios of the
Funds currently are available to the separate accounts of a number of insurance
companies, both affiliated and unaffiliated with Fidelity Management or National
Integrity. The Board of Trustees of each of the Funds is responsible for
monitoring the Fund for the existence of any material irreconcilable conflict
between the interests of the policyowners of all separate accounts investing in
the Fund and determining what action, if any, should be taken in response. If we
believe that a Fund's response to any of those events insufficiently protects
our contract owners, we will see to it that appropriate and available action is
taken to protect our contract owners. See "The Fund and the Fidelity
Organization" in the Funds' prospectus for a further discussion of the risks
associated with the offering of Fund shares to our Separate Account and the
separate accounts of other insurance companies.
Shares of Portfolios of the Funds are made available to the Separate Account
under three essentially identical Participation Agreements (Participation
Agreement or Agreements). The Participation Agreements are among the applicable
Fund, Fidelity Distributors Corporation which is the principal underwriter for
shares of the Funds (Distributor), and National Integrity. If state or federal
law precludes the sale of the Funds' or any Portfolio's shares to the Separate
Account, or in certain other circumstances, sales of shares to the Separate
Account may be suspended and/or the Participation Agreements may be terminated
as to the Funds or the affected Portfolio. Also, the Participation Agreements
may be terminated by any party thereto with one year's written notice.
Notwithstanding termination of the Participation Agreement, the Fund and the
Distributor are obligated to continue to make the Funds' shares available for
contracts outstanding on the date the Participation Agreement terminates, unless
the Participation Agreement was terminated due to an irreconcilable conflict
among contractowners of different separate accounts. If for any reason the
shares of any Portfolio are no longer available for purchase by the Separate
Account for outstanding contracts, the parties to the Participation Agreements
have agreed to cooperate to comply with the 1940 Act in arranging for the
substitution of another funding medium as soon as reasonably practicable and
without disruption of sales of shares to the Separate Account or any Variable
Account Option.
The Funds' Investment Adviser. Fidelity Management & Research Company (Fidelity
Management), a registered investment adviser under the Investment Advisers Act
of 1940, serves as the investment adviser to each Fund. Fidelity Management,
whose principal address is 82 Devonshire Street, Boston,
10
<PAGE>
Massachusetts, is a wholly owned subsidiary of FMR Corp. and is part of Fidelity
Investments(R), one of the largest investment management organizations in the
United States. Fidelity Investments(R) includes a number of different companies,
which provide a variety of financial services and products to individuals and
corporations.
Fidelity Management provides investment research and portfolio management
services to mutual funds and other clients. At December 31, 1996, Fidelity
Management advised funds having more than 23 million shareholder accounts with a
total value of more than $354 billion. For certain of the Portfolios, Fidelity
Management has entered into sub-advisory agreements with affiliated companies
that are part of the Fidelity Investments(R) organization. Fidelity Management,
not the Portfolios, pays the sub-advisers for their services to the Portfolios.
The Portfolios of the Funds pay monthly advisory fees to Fidelity Management.
The advisory fee payable by each of the Portfolios, other than the VIP Money
Market Portfolio and the VIP II Index 500 Portfolio, is composed of a group fee
rate and an individual fund fee rate. The group fee rate is based on the average
monthly net assets of all mutual funds advised by Fidelity Management. For the
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Asset Manager, VIP II
Contrafund, and VIP II Asset Manager: Growth Portfolios, the group fee rate
cannot rise above .52%. For the VIP High Income and VIP II Investment Grade Bond
Portfolios, the group fee rate cannot rise above .37%. The group fee rate drops
as total assets under management increase.
The VIP Money Market Portfolio's advisory fee is made up of two components: a
basic fee rate and an income-based component. The basic fee rate is the sum of a
group fee rate as described above (but capped at a maximum of .37%) and an
individual fund fee rate of .03%. The income based component is 6% of that
portion of the fund's gross yield which exceeds a 5% return (but capped at a
maximum of .24%).
The VIP II Index 500 Portfolio pays a monthly fee at the annual rate of .28% of
the Portfolio's average net assets.
Set forth in the table below is the individual fund fee rate for the portfolios
and their 1996 aggregate advisory rate, comprised of the individual and group
rates, as a percentage of average net assets, and the VIP II Index 500
Portfolio's 1996 advisory rate as a percentage of average net assets.
<TABLE>
<CAPTION>
1996
Portfolio Individual Rate Aggregate Rate
- --------- --------------- --------------
<S> <C> <C>
VIP Money Market .03% .21%
VIP High Income .45% .59%
VIP Equity-Income .20% .51%
VIP Growth .30% .61%
VIP Overseas .45% .76%
VIP II Investment Grade
Bond .30% .45%
VIP II Asset Manager .25% .64%
VIP II Index 500 N/A .13%
VIP II Contrafund .30% .61%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
VIP II Asset Manager:
Growth .30% .65%
VIP III Balanced .20% .48%
VIP III Growth Opportunities .30% .61%
VIP III Growth & Income .20% .50%
</TABLE>
Investment Objectives of the Portfolios. Set forth below is a summary of the
investment objectives of the Portfolios of the Funds. There can be no assurance
that these objectives will be achieved. You should read the Funds' prospectus
carefully before investing.
VIP Money Market Portfolio
--------------------------
VIP 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.
VIP High Income Portfolio
-------------------------
VIP 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. In view of the types of securities in which this Portfolio
invests, you should read the complete risk disclosure for this Portfolio in the
Funds' prospectus before investing in it.
VIP Equity-Income Portfolio
---------------------------
VIP 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.
VIP Growth Portfolio
--------------------
VIP 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.
VIP Overseas Portfolio
----------------------
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in securities from at least three countries outside North America.
VIP II Investment Grade Bond Portfolio
--------------------------------------
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in 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 VIP
II Investment Grade Bond Portfolio purchases only securities rated A or better
by Moody's Investors
12
<PAGE>
Service, Inc. or Standard & Poor's Corporation or unrated securities judged by
Fidelity Management to be of equivalent quality.
VIP II Asset Manager Portfolio
------------------------------
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market 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 50% in equities, 40% in
intermediate to long-term bonds and 10% in short-term money market fixed income
instruments.
VIP II Index 500 Portfolio
---------------------------
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II Contrafund Portfolio
---------------------------
VIP II Contrafund Portfolio is a growth fund which seeks to increase the value
of your 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. VIP II 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.
VIP II Asset Manager: Growth Portfolio
--------------------------------------
VIP II Asset Manager: Growth Portfolio is an asset allocation fund which seeks
to maximize total return over the long term through investments in stocks,
bonds, and short-term money market instruments. The fund has a neutral mix which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
------ -----------
<S> <C> <C>
Stock Class 0-100% 70%
Bond Class 0-100% 25%
Short-Term/
Money Market Class 0-100% 5%
</TABLE>
VIP III Growth Opportunities Portfolio
--------------------------------------
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. It has the flexibility to adjust its investment mix between growth,
cyclical and value stocks as market conditions change. The portfolio seeks
growth through either appreciation of the security itself or an increase in the
company's earning or gross sales.
VIP III Balanced Portfolio
--------------------------
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a diversified portfolio of equity and fixed-income securities. It uses a
balanced approach to provide the best possible total return from investments in
foreign and domestic equity securities, convertible securities, preferred and
common stocks paying any combination of dividends and capital gains, and fixed
income securities.
13
<PAGE>
VIP III Growth & Income Portfolio
---------------------------------
VIP III Growth & Income Portfolio seeks long-term growth of capital with some
current income. It invests primarily in stocks of companies that offer potential
for growth in earnings while paying dividends, but offer the potential for
capital appreciation on future income. Investments may include common and
preferred stocks, convertible securities, fixed-income securities and foreign
securities.
Guaranteed Rate Option
Because of applicable exemptive and exclusionary provisions, interests in
contracts attributable to GROs have not been registered under the Securities Act
of 1933 ("1933 Act"), nor under the Investment Company Act of 1940 ("1940 Act").
Thus, neither such contracts nor our General Account, which guarantees the
values and benefits under those contracts, are generally subject to regulation
under the provisions of the 1933 Act or the 1940 Act. Accordingly, we have been
advised that the staff of the Securities and Exchange Commission has not
reviewed the disclosure in this prospectus relating to the GROs or the General
Account. Disclosures regarding the GROs or the General Account may, however, be
subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
We offer GROs with durations of three, five, seven and ten years. We may from
time to time change the durations available. Each allocation to a GRO locks in a
fixed effective annual interest rate declared by us (Guaranteed Interest Rate)
for the duration you select (your GRO Account). The duration of your GRO Account
is the Guarantee Period. Each contribution or transfer to a GRO establishes a
new GRO Account at the then-current Guaranteed Interest Rate declared by us. We
will not declare an interest rate less than 3%. Each GRO Account expires at the
end of the duration you have selected. See "Renewals of GRO Accounts" below.
Values and benefits under your contract attributable to GROs are guaranteed by
the reserves in our GRO separate account as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO Value. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO which will exceed the Guaranteed Interest Rate credited
during the remaining years of the Guarantee Period (Enhanced Rate). This
Enhanced Rate will be guaranteed for the Guaranteed Period's first year and
declared at the time of purchase. We reserve the right to declare and credit
additional interest based on Contribution, Account Value, withdrawal dates,
economic conditions or on any other lawful, nondiscriminatory basis (Additional
Interest). Any Enhanced Rate and Additional Interest credited to your GRO
Account will be separate from the Guaranteed Interest Rate and not used in the
Market Value Adjustment formula. The Enhanced Rate or Additional Interest may
not be made applicable under contracts issued in certain states.
Each group of GRO Accounts of the same duration is considered one GRO, (i.e. all
of your three-year GRO Accounts are one GRO while all of your five-year GRO
Accounts are another GRO.)
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
Allocations to GROs may not be made under contracts issued in certain states.
Renewals of GRO Accounts. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO
14
<PAGE>
Accounts. You must notify us prior to the expiration of your GRO Accounts of any
changes you desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew a GRO Account that expires
after your Retirement Date.
Market Value Adjustments. A Market Value Adjustment is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
MVA = GRO Value x [(1 + A)/N/12/ / (1 + B + .0025)/N/12/ - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula,
see Appendix A.
15
<PAGE>
PART 4 DEDUCTIONS AND CHARGES
Separate Account Charges
National Integrity deducts from the unit value every calendar day an amount
equal to an effective annual rate of 1.35% of the Account Value in the Variable
Account Options. This daily expense rate cannot be increased without your
consent. Various portions of this total charge, as described below, pay for
certain services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse National
Integrity for expenses actually incurred, without profit.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for National Integrity's assuming the
expense risk (.85%) and the mortality risk (.35%) under the contract. The
expense risk is the risk that our actual expenses of administering the contracts
will exceed the annual administrative expense charge. In this context, mortality
risk refers to the cost of insuring the risk National Integrity takes that
annuitants, as a class of persons, will live longer than estimated and therefore
require National Integrity to pay out more annuity benefits than anticipated.
The relative proportion of the mortality and expense risk charges may be
modified, but the total effective annual risk charge of 1.20% of the value of
the Variable Account Options may not be increased on your Contract.
National Integrity may realize a gain from these daily charges to the extent
they are not needed to meet the actual expenses incurred.
Annual Administrative Charge
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, National Integrity charges an annual
administrative charge of $30. This charge is deducted from your Account Value in
each Investment Option on a pro-rata basis. The portion of the charge applicable
to the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to GROs is withdrawn in dollars. The annual
administrative charge will be pro-rated based on the number of days that have
elapsed in the contract year in the event of the Annuitant's retirement, death,
or termination of a contract during a contract year. The annual administrative
charge is waived for employees of National Integrity or Integrity, the parent of
National Integrity, who purchase contracts under the salary allotment program of
either company.
Fund Charges
Our Separate Account purchases shares of the Funds at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Funds. The amount charged for
investment management may not be increased without the prior approval of the
Funds' respective shareholders. See "The Funds" in Part 3.
State Premium Tax Deduction
National Integrity will not deduct state premium taxes from your contributions
before applying the contributions to the Investment Options, unless required to
pay such taxes under applicable state law. If the Annuitant elects an annuity
benefit, National Integrity will deduct any applicable state premium taxes from
the amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
Contingent Withdrawal Charge
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 7%. As
shown below, the percentage charge varies, depending
16
<PAGE>
upon the "age" of the contributions included in the withdrawal--that is, the
contract year in which each contribution was made. The maximum percentage of 7%
would apply if the entire amount of the withdrawal consisted of contributions
made during your current contract year. No withdrawal charge applies when you
withdraw contributions made earlier than your sixth prior contract year. For
purposes of calculating the withdrawal charge, (1) the oldest contributions will
be treated as the first withdrawn and more recent contributions next, and (2)
partial withdrawals up to the free withdrawal amount will not be considered a
withdrawal of any contributions. For partial withdrawals, the total amount
deducted from your Account Value will include the withdrawal amount requested,
any applicable Market Value Adjustment, and any applicable withdrawal charge, so
that the net amount you receive will be the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is 10% of your Account Value less withdrawals during the
current contract year. If any partial withdrawal exceeds the free withdrawal
amount, we will deduct the applicable contingent withdrawal charge with respect
to such excess amount. The contingent withdrawal charge is a sales charge to
defray our costs of selling and promoting the contracts. We do not expect that
revenues from contingent withdrawal charges will cover all of such costs. Any
shortfall will be made up from our General Account assets, including any profits
from other charges under the contracts.
<TABLE>
<CAPTION>
Contract Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current............................ 7%
First Prior........................ 6
Second Prior....................... 5
Third Prior........................ 4
Fourth Prior....................... 3
Fifth Prior........................ 2
Sixth Prior........................ 1
Seventh Prior and Earlier.......... 0
</TABLE>
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from National Integrity an
immediate annuity benefit with life contingencies or an immediate annuity
without life contingencies which provides for level payments over five or more
years, with a restricted prepayment option. Similarly, no charge will be applied
if the Annuitant dies and the withdrawal is made by the Annuitant's beneficiary.
See "Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, National Integrity will make
withdrawals (including any applicable charges) from the Investment Options in
the same ratio the Annuitant's Account Value in each Investment Option bears to
the Annuitant's total Account Value. The minimum withdrawal permitted is $300.
Transfer Charge
No charge is made for your first twelve transfers (excluding dollar cost
averaging and individual asset rebalancing transfers) among the Variable Account
Options or the GROs during a contract year. We are, however, permitted to charge
up to $20 for each additional transfer during that contract year. (No transfer
charge will apply to transfers under our (i) Dollar Cost Averaging, (ii)
Individual Asset Rebalancing, or (iii) the Ibbotson Asset Allocation and
Rebalancing Program, nor will such transfers count towards the twelve transfers
you may make in a contract year before we may impose a transfer charge.) See
"Transfers" in Part 5. Transfers from a GRO may be subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3.
17
<PAGE>
Hardship Waiver
Withdrawal Charges may also be waived on full or partial withdrawal requests of
$1,000 or more under a Hardship circumstance. The Market Value Adjustment may
also be waived on any amounts withdrawn from the GRO Accounts. Such Hardship
circumstances include the Owner's (1) confinement to a nursing home, hospital
and long term care facility, (2) diagnosis of terminal illness with any medical
condition which would result in death or total disability, and (3) unemployment.
We reserve the right to obtain reasonable notice and documentation including,
but not limited to, a physician's certification and Determination Letter from a
State Department of Labor. Some of the hardship circumstances listed above may
not be applicable in some states and, in other states, may not be available at
all.
Tax Reserve
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
PART 5 TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000.
We will accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Special Rules for Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution made for
you. Contributions may also be limited by various laws or prohibited by National
Integrity for all Annuitants under the contract. If your contributions are made
under a tax-favored retirement program, we will not measure them against the
maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have received (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options, provided that at any time you may have
amounts in not more than nine Investment Options. For purposes of calculating
the nine Investment Options, each of your GRO Accounts counts as one Investment
Option. Wire transfers of federal funds are deemed received on the day of
transmittal if credited to our account by 3 p.m. Eastern Time, otherwise they
are deemed received on the next Business Day. Contributions by check or mail are
deemed received not later than the second Business Day after they are delivered
to our Administrative Office. A Business Day is any day other than a weekend or
a national bank holiday.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
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Your Account Value
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. For
contributions allocated to the Variable Account Options, there are no guaranteed
values. The value of your contributions allocated to GROs is guaranteed, subject
to any applicable Market Value Adjustments. See "Guaranteed Rate Options" in
Part 3.
Your Purchase of Units in Our Separate Account
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Funds which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Funds' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, will not vary because of changes in unit values.
Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
How We Determine Unit Value
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a net investment factor for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Funds.
- Next, we add any dividends or capital gains distributions by the Fund on
that day.
- Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
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- Finally, we subtract a daily asset charge for each value was determined
(for example, a Monday calculation will include charges for Saturday and
Sunday). The daily charge is .00003721, which is an effective annual rate
of 1.35%. This charge is for the mortality risk, administrative expenses
and expense risk assumed by us under the calendar day since the last day
on which a unit contract.
Generally, this means that we adjust unit values to reflect what happens to the
Fund, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
Transfers
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to National Integrity's then current transfer restrictions.
Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO that you have
not elected before) at the then-current Guaranteed Interest Rate, unless
National Integrity otherwise consents. Transfers from a GRO other than within 30
days prior to the expiration date of a GRO Account are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. For amounts in GROs,
transfers will be made according to the order in which monies were originally
allocated to any GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our Dollar Cost Averaging or Individual Asset Rebalancing programs, or the
Ibbotson Asset Allocation and Rebalancing Program described in Part 8. Once
annuity payments begin, transfers are no longer permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN Code). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 a.m. - 5:00 p.m., Eastern Time, on any day
we are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 p.m. Eastern Time will be processed using unit
values as of the close of business on the next Business Day after the day you
call. All transfers will be confirmed in writing.
Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A withdrawal charge of
up to 7% of the contribution amount withdrawn, as adjusted for any applicable
Market Value Adjustment and the withdrawal charge itself will be deducted from
your Account Value, unless one of the exceptions applies. See "Guaranteed Rate
Options" in Part 3 and "Contingent Withdrawal Charge" in Part 4. Most
withdrawals made by you prior to age 59-1/2 are also subject to a 10% federal
tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts" for further information
regarding various tax consequences associated with the contracts.
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Assignments
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part 7, "Tax
Aspects of the Contracts." National Integrity will not be bound by an assignment
unless it is in writing and we have received it at the Administrative
Office.
Death Benefits and Similar Benefit Distributions
A death benefit is available to a beneficiary if the Annuitant dies prior to the
Retirement Date.
If the Annuitant is under the age of 80 at the time of death, the amount of the
death benefit is the greatest of:
- your Account Value
- the highest Account Value at the beginning of any contract year,
plus subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
If the Annuitant is 80 or older at the time of death, the amount of the death
benefit will be your Account Value.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
Annuity Benefits
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 90th birthday or earlier, if required by law. The
terms of the contracts applicable to the various retirement programs, along with
the federal tax laws, establish certain minimum and maximum retirement
ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment without a withdrawal charge applying.
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Annuities
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Separate Account Divisions. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 90th birthday or earlier, if
required by law. You will receive a lump sum benefit if you do not make an
election by such date.
We currently offer the following types of annuities:
A period certain annuity provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the payee) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
A period certain life annuity provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The normal form of annuity is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A life income annuity provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
Annuity Payments
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If National Integrity's
current annuity rates then in effect would yield a larger payment, those current
rates will apply instead of the tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The number
of units purchased is equal to the amount of the first annuity payment divided
by the new annuity unit value for the valuation period which includes the due
date of the first annuity payment. The amount of the first annuity payment is
determined in the same manner for a variable annuity as it is for a fixed
annuity. The number of annuity units stays the same for the annuity payment
period but the new annuity unit value changes to reflect the investment income
and the realized and unrealized capital gains and losses of the Variable Account
Option or Options selected, after charges made against it. Annuity unit values
assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall
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depending on whether the actual rate of net investment return is higher or lower
than the assumed base rate. In the SAI, see "Determination of Annuity Unit
Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
Timing of Payment
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits National
Integrity to defer action in order to protect persons with interests in the
Separate Account. National Integrity can defer payment of your GROs for up to
six months, and interest will be paid on any such payment delayed for 30 days or
more.
How You Make Requests and Give Instructions
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
PART 6 - VOTING RIGHTS
Fund Voting Rights
National Integrity is the legal owner of the shares of the Funds held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Funds' Board of Directors, to ratify the
selection of independent auditors for the Funds, and on any other matters
described in the Funds' current prospectus or requiring a vote by shareholders
under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in our Separate Account, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of the Funds in our own right or
to restrict Owner voting, we may do so.
How We Determine Your Voting Shares
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by the
Funds'
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Board for the Funds' shareholders' meeting. The record date for this purpose
must be no more than 60 days before the meeting of the Funds. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
How Fund Shares Are Voted
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of the Funds are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by National Integrity from its
Owners.
Separate Account Voting Rights
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on National Integrity's tax status, on the
type of retirement plan, if any, for which the contract is purchased, and upon
the tax and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. NATIONAL INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
Your Contract is an Annuity
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (nonqualified annuity), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (qualified annuity). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
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Taxation of Annuities Generally
Section 72 of the Internal Revenue Code of 1986, as amended (the Code), governs
the taxation of annuities. In general, an Owner is not taxed on increases in
value under a contract until some form of withdrawal or distribution is made
under the contract. However, under certain circumstances, the increase in value
may be subject to current federal income tax. For example, corporations,
partnerships, trusts and other non-natural persons cannot defer the taxation of
current income credited to the contract unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or divorced spouse), any increase in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the
contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract equals
the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion Ratio). The remainder of each payment will be ordinary
income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies National Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by National Integrity or its affiliates to one
Annuitant during any calendar year are treated as a single contract in measuring
the taxable income that results from surrenders and withdrawals under any one of
the contracts.
Distribution-at-Death Rules
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies on
or after the Retirement Date and before the entire interest in the contract has
been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
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If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Funds monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
of the investments of a segregated asset account may cause the investor (i.e.,
the Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
Tax-Favored Retirement Programs
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. Therefore, no attempt is made to provide more than
general information about the use of contracts with the various types of
qualified plans.
National Integrity reserves the right to change its administrative rules, such
as minimum contribution amounts, as needed to comply with the Code as to tax-
favored retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract.
Individual Retirement Annuities
- -------------------------------
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-
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favored retirement program to an IRA contract. Your IRA contract will be issued
with a rider outlining the special terms of your contract which apply to IRAs.
Tax Sheltered Annuities
- -----------------------
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms which apply to a TSA.
Simplified Employee Pensions
- ----------------------------
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAs) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing Plans
- --------------------------------------------------------------------------------
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with such plans
should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity does not administer such plans.
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Deferred Compensation Plans of State and Local Governments and Tax-Exempt
- -------------------------------------------------------------------------
Organizations
- -------------
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. If the plan is in
existence on August 20, 1996, the employer need not establish a trust, custodial
account, or annuity contract until January 1, 1999. Loans to employees may be
permitted under such plans; however, a Section 457 plan is not required to allow
loans. Contributions to a contract in connection with an eligible government
plan are subject to limitations. Those who intend to use the contracts in
connection with such plans should seek competent advice. The Company reserves
the right to request documentation to substantiate that a qualified plan exists
and is being properly administered. National Integrity does not administer such
plans.
Distributions Under Tax-Favored Retirement Programs
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
IRA holders, to begin receiving distributions by April 1 of the calendar year
following the later of either (i) the calendar year in which the employee
reaches age 70-1/2, or (ii) the calendar year in which the employee retires.
Additional distribution rules apply after the participant's death. Failure to
make mandatory distributions may result in the imposition of a 50% penalty tax
on any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all plans (other than 457
plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
Distributions from a tax-favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the
plan.
28
<PAGE>
Federal and State Income Tax Withholding
National Integrity will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a contract unless the
distributee notifies National Integrity at or before the time of the
distribution of an election not to have any amounts withheld. In certain
circumstances, National Integrity may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic payments
(including withdrawals prior to the maturity date) is 10%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
Impact of Taxes to National Integrity
The contracts provide that National Integrity may charge the Separate Account
for taxes. National Integrity can also set up reserves for taxes.
Transfers Among Investment Options
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. You may also specify an account for direct deposit
of your systematic withdrawals. To enroll under our systematic withdrawal
program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal date you do not
have sufficient values to make all of the withdrawals you have specified, no
withdrawals will be made and your enrollment in the program will be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. Amounts withdrawn under the systematic withdrawal program in excess
of the free withdrawal amount will be subject to a contingent withdrawal charge
and a Market Value Adjustment if applicable. Withdrawals also may be subject to
the 10% federal tax penalty for early withdrawals under the contracts and to
income taxation. See Part 7, "Tax Aspects of the Contracts."
29
<PAGE>
Dollar Cost Averaging
We offer a dollar cost averaging program under which allocations to the VIP
Money Market Option are automatically transferred on a monthly, quarterly, semi-
annual or annual basis to one or more other Variable Account Options. You must
specify a dollar amount to be transferred into each Variable Account Option, and
the current minimum transfer to each Option is $250. No transfer charge will
apply to transfers under our Dollar Cost Averaging program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
To enroll under our Dollar Cost Averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the Dollar Cost Averaging program at any time. If
you do not have sufficient funds in the VIP Money Market Option to transfer to
each Variable Account Option specified, no transfer will be made and your
enrollment in the program will be ended.
Individual Asset Rebalancing
We offer an individual asset rebalancing program whereby you can select the
frequency for rebalancing. Frequencies available include rebalancing monthly,
quarterly, semi-annually or annually. The value in the Variable Account Options
will be automatically rebalanced by transfers among such Variable Account
Options, and you will receive a confirmation notice after each rebalancing.
Transfers will occur only to and from those Variable Account Options where you
have current contribution allocations. No transfer charge will apply to
transfers under our Individual Asset Rebalancing program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
GROs are not eligible for the Individual Asset Rebalancing program.
To enroll under our Individual Asset Rebalancing program, you must deliver the
appropriate administrative form to our Administrative Office. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work in concert with the
Individual Asset Rebalancing program. You should, therefore, monitor your use of
such other programs, transfers, and withdrawals while the Individual Asset
Rebalancing program is in effect. This program is not available in concert with
the Ibbotson Asset Allocation and Rebalancing Program. You or we may terminate
your participation in the program upon one day's prior written notice, and we
may terminate or amend the Individual Asset Rebalancing program at any time.
Ibbotson Asset Allocation and Rebalancing Program
We also offer an Asset Allocation and Rebalancing Program designed by Ibbotson
Associates (Ibbotson Model(s)). Ibbotson Associates is an independent research
and consulting firm, specializing in the strategic asset allocation decision.
You may select one of three proposed Ibbotson Models: Aggressive, Moderate or
Conservative. Your current contribution allocations will be initially allocated
as recommended by Ibbotson and approved by you, among the Options currently
established for each Ibbotson Model as indicated below.
To ensure conformity with current Ibbotson Model instructions, the value in the
Variable Account Options will be automatically rebalanced annually by transfers
among such Variable Account Options. You will receive a confirmation notice
after each rebalancing. GRO Accounts attributable to the Ibbotson Model will not
rebalance. Instead, GRO Accounts shall renew for the same duration at the then-
current Guaranteed Interest Rate. See "Guaranteed Rate Options - Renewals of GRO
Accounts" in Part 3.
No transfer charge will apply to transfers under the Ibbotson Asset Allocation
and Rebalancing Program, nor will such transfers count toward the twelve
transfers you may make in a contract year before we may impose a transfer
charge. See "Transfers" in Part 4.
30
<PAGE>
To enroll under the Ibbotson Asset Allocation and Rebalancing Program, you must
deliver the appropriate administrative form to our Administrative Office. You
should be aware that other allocation programs, such as dollar cost averaging,
as well as transfers and withdrawals that you make, may not work in concert with
the Individual Asset Rebalancing program. You should, therefore, monitor your
use of such other programs, transfers, and withdrawals while the Individual
Asset Rebalancing program is in effect. This program is not available in concert
with the Individual Asset Allocation program. We reserve the right to terminate
or amend this program in whole or in part, or to place restrictions on
contributions to the program. This program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
<TABLE>
<CAPTION>
CONSERVATIVE MODEL
Fund Allocation Percentage
---- ---------------------
<S> <C>
VIP III Balanced 10%
VIP Equity Income 20%
VIP Growth 0%
VIP II Index 500 0%
VIP Overseas 5%
VIP II Investment Grade Bond 30%
GRO - 3 Year 35%
---
100%
MODERATE MODEL
Fund Allocation Percentage
---------------------
VIP III Balanced 10%
VIP Equity Income 25%
VIP Growth 10%
VIP II Index 500 15%
VIP Overseas 15%
VIP II Investment Grade Bond 15%
GRO - 3 Year 30%
---
100%
AGGRESSIVE MODEL
Fund Allocation Percentage
---- ---------------------
VIP III Balanced 0%
VIP Equity Income 20%
VIP Growth 30%
VIP II Index 500 20%
VIP Overseas 20%
VIP II Investment Grade Bond 0%
GRO - 3 Year 10%
---
100%
</TABLE>
Systematic Contributions
We offer a program for systematic contributions that allows you to pre-authorize
monthly withdrawals from your checking account for payment to us. To enroll
under our program, you must deliver the appropriate administrative form to our
Administrative Office. You or we may terminate your participation in the program
upon 30 days' prior written notice. Your participation may be terminated by us
if your bank declines to make any payment. The minimum amount for systematic
contributions is $100 per month.
31
<PAGE>
Performance Information
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. Performance data for any Option reflects only the performance of a
hypothetical investment in the Option during the particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time period, and it
should not be considered as a representation of performance to be achieved in
the future.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A cumulative total return reflects an Option's performance over a stated period
of time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise yield. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The VIP Money Market Option may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Option over
a specified 7-day period. Effective yield is calculated in a similar manner
except that income earned is assumed to be reinvested. The VIP II Investment
Grade Bond and VIP High Income Option may advertise a 30-day yield which
reflects the income generated by an investment in such Option over a specified
30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
32
<PAGE>
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account. These examples also show the
withdrawal charge which would be calculated separately.
Example of a Downward Market Value Adjustment:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0551589 = [(1 + .05)/48/12/ / (1 + .0625 + .0025)/48/12/] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
33
<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
-$783.91 = - 0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
Example of an Upward Market Value Adjustment:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
.0290890 = [(1 + .05)/48/12/ / (1 + .04 + .0025)/48/12/] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $5,788.13
Non-Free Amount = $14,211.87
34
<PAGE>
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
FOR
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - National Integrity and Custodian.................. 2
Part 2 - Distribution of the Contracts..................... 2
Part 3 - Performance Information........................... 3
Part 4 - Determination of Annuity Unit Values.............. 10
Part 5 - Financial Statements.............................. 11
</TABLE>
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, 1997.
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.
<PAGE>
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. (ARM), 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 owns
100% of the stock of (i) ARM Securities Corporation (ARM Securities), a
Minnesota corporation, 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 current and former 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 provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by National
Integrity for management services in 1995 and 1996, including services
applicable to the Registrant, were $5,640,827 and $6,007,766, respectively.
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.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
2
<PAGE>
We generally pay a maximum distribution allowance of 6.5% of initial
contributions. The amount of distribution allowances paid was $2,229,269,
$2,217,123, and $912,740 for the years ended December 31, 1996, 1995, and 1994,
respectively. No distribution allowances were retained by ARM Securities during
these years. 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 VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and 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 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.
3
<PAGE>
Current yield and effective yield are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the base period), and stated as a percentage of the investment at the start of
the base period (the base period return). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)/365/7/} - 1
4
<PAGE>
The table below provides average annual total returns for each Option for the
One and Three Year Periods ended December 31, 1996 and from inception through
December 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 and Three Year Periods Ended 12/31/96 and
Since Inception*
<TABLE>
<CAPTION>
Period Since Inception One Year Period Three Year Period
------------------------ ----------------------- -----------------
Contract Contract
Contract Surrendered Contract Surrendered Contract
Option Continues 12/31/96 Continues 12/31/96 Continues
- ------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
VIP Equity-Income 16.19% 15.82% 12.73% 5.65% 16.64%
VIP II Asset
Manager 9.83% 9.38% 13.04% 5.97% 6.51%
VIP Growth 15.07% 14.69% 13.14% 6.07% 14.22%
VIP Overseas 7.81% 7.32% 11.67% 4.60% 6.64%
VIP II Investment
Grade Bond 5.65% 4.88% 1.78% -5.29% 3.80%
VIP II Index 500 15.98% 15.01% 21.15% 14.07% 17.79%
VIP High Income 10.41% 9.33% 12.48% 5.40% 9.13%
VIP II Asset
Manager: Growth 20.48% 17.23% 18.30% 11.23% n/a
VIP II Contrafund 28.17% 25.06% 19.66% 12.58% n/a
VIP III Balanced n/a n/a n/a n/a n/a
VIP III Growth &
Income n/a n/a n/a n/a n/a
VIP III Growth
Opportunities n/a n/a n/a n/a n/a
</TABLE>
*The inception date for each Option is set forth in the table below.
5
<PAGE>
The table below provides cumulative total returns for each Option from inception
through December 31, 1996, and for the One and Three Year Periods ended December
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 12/31/96, and for the One
and Three Year Periods ended 12/31/96
<TABLE>
<CAPTION>
Period Since Inception One Year Three-Year
-------- ---------
Contract
Contract Surrendered Contract Contract Inception
Option Continues 12/31/96 Continues Continues Date*
- ------ --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
VIP Equity-
Income 122.58% 119.18% 12.73% 58.68% 09/03/91
VIP II Asset
Manager 64.84% 61.44% 13.04% 20.83% 09/03/91
VIP Growth 111.35% 107.95% 13.14% 49.02% 09/03/91
VIP Overseas 49.30% 45.90% 11.67% 21.26% 09/03/91
VIP II
Investment
Grade Bond 29.84% 25.48% 1.78% 11.85% 04/02/92
VIP II Index
500 74.10% 68.82% 21.15% 63.44% 04/06/93
VIP High
Income 45.83% 40.55% 12.48% 29.98% 03/12/93
VIP II Asset
Manager:
Growth 42.22% 35.07% 18.30% n/a 02/10/95
VIP II
Contrafund 59.21% 52.07% 19.66% n/a 02/16/95
VIP III
Balanced n/a n/a n/a n/a 12/31/96
VIP III Growth
& Income n/a n/a n/a n/a 12/31/96
VIP III Growth
Opportunities n/a n/a n/a n/a 12/31/96
</TABLE>
*Inception Dates reflect date of first trade.
Performance Comparisons
6
<PAGE>
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (Lipper) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in Lipper Performance Analysis.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as Barron's, Business Week, CDA Technologies, Inc., Changing
Times, Consumer's Digest, Dow Jones Industrial Average, Financial Planning,
Financial Times, Financial World, Forbes, Fortune, Global Investor, Hulbert's
Financial Digest, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Funds, The New York Times, Personal Investor, Stanger's Investment
Adviser, Value Line, The Wall Street Journal, Wiesenberger Investment Company
Service and USA Today.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
7
<PAGE>
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.
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
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 greater.
8
<PAGE>
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
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
9
<PAGE>
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 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 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% and 3.5% a year, respectively. For
each valuation period thereafter, it is the annuity value for the preceding
valuation period multiplied by the adjusted net investment factor under the
contracts. For each valuation period, the adjusted net investment factor is
equal to the net investment factor reduced for each day in the valuation period
by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in the contract or on our current
rates, whichever is more favorable to the participant. Where the Company's
current annuity rates are used, contributions in the current and five prior
participation years will qualify for the Company's current individual annuity
rates applicable to funds derived from sources outside the Company. The balance
of the proceeds will qualify for the Company's current individual annuity rates
for payment of proceeds.
10
<PAGE>
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that, each
payment will be calculated by multiplying the number of annuity units credited
by the average annuity unit value for the second calendar month before the due
date of the payment. The number of annuity units credited equals the initial
periodic payment divided by the annuity unit value for the valuation period that
includes the due date of the first annuity payment. The average annuity unit
value is the average of the annuity unit values for the valuation periods ending
in that month. Each business day together with any non-business day or
consecutive non-business day immediately preceding such business day will
constitute a valuation period.
Illustration of Changes in Annuity Unit Values. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units credited
under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date the Company
receives a written request for lump sum payment of remaining values. Assets held
in the Account at least equal to all statutory reserves required for such
Separate Account.
PART 5 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 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 as of December 31, 1996, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1996 and 1995 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
they relate 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.
11
<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
December 31, 1996
With Report of Independent Auditors
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1996
Contents
Report of Independent Auditors.......................................... 1
Audited Financial Statements
Statement of Assets and Liabilities..................................... 2
Statement of Operations................................................. 4
Statements of Changes in Net Assets..................................... 6
Notes to Financial Statements........................................... 10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of 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, 1996, 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,
1996, 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, 1996, and the results of their operations and changes in
their net assets for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
Louisville, Kentucky
April 18, 1997
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High 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 $197,164,560 in the aggregate) $18,020,587 $23,407,036 $55,149,674 $34,096,543 $11,759,340
Liabilities
Payable to (receivable from) the general
account of National Integrity (1,065) 5,334 6,757 1,293 (2,740)
--------------------------------------------------------------------------
Net assets $18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080
===========================================================================
Unit value $ 12.40 $ 14.58 $ 29.09 $ 36.19 $ 19.71
===========================================================================
Units outstanding $ 1,453,359 1,605,055 1,895,597 942,118 596,757
===========================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1996
<TABLE>
<CAPTION>
Asset
Investment Asset Manager:
Grade Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments in Fidelity VIP Funds at value
(cost of $197,164,560 in the aggregate) $ 5,602,752 $28,963,476 $12,856,944 $ 4,019,997 $29,705,335 $223,581,684
Liabilities
Payable to (receivable from) the general
account of National Integrity (1,544) 5,007 (132) 330 2,611 15,851
-----------------------------------------------------------------------------------
Net assets $ 5,604,296 $28,958,469 $12,857,076 $ 4,019,667 $29,702,724 $223,565,833
===================================================================================
Unit value $ 16.47 $ 21.42 $ 17.41 $ 14.22 $ 15.92
===================================================================
Units outstanding 340,273 1,351,936 738,488 282,677 1,865,749
===================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High Income Income Growth Overseas
Division Division Division Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from Fidelity VIP Funds $990,302 $1,503,172 $1,662,157 $1,563,686 $ 202,159
Expenses
Mortality and expense risk and administrative
charges 258,367 258,372 623,813 389,332 138,984
--------------------------------------------------------------------
Net investment income (loss) 731,935 1,244,800 1,038,344 1,174,354 63,175
Realized and unrealized gain (loss) on
investments
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - 1,197,030 4,753,760 3,418,140 497,261
End of period - 1,536,022 8,336,245 4,306,351 1,370,759
--------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period - 338,992 3,582,485 888,211 873,498
--------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments - 911,057 4,476,304 2,073,552 1,027,351
--------------------------------------------------------------------
Net increase in net assets resulting from operations $731,935 $2,155,857 $5,514,648 $3,247,906 $1,090,526
====================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Investment Asset
Grade Asset Manager:
Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from Fidelity VIP Funds $221,647 $1,820,860 $ 207,812 $197,529 $ 127,036 $ 8,496,360
Expenses
Mortality and expense risk and
administrative charges 70,736 390,908 115,631 28,143 290,294 2,564,580
---------------------------------------------------------------------------
Net investment income (loss) 150,911 1,429,952 92,181 169,386 (163,258) 5,931,780
Realized and unrealized gain (loss)
on investments
Net realized gain on sales of investments 66,281 130,034 511,372 29,931 370,212 3,912,908
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 305,849 2,437,834 449,723 10,050 728,190 13,797,837
End of period 211,915 4,378,137 1,532,542 170,065 4,575,088 26,417,124
---------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (93,934) 1,940,303 1,082,819 160,015 3,846,898 12,619,287
---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (27,653) 2,070,337 1,594,191 189,946 4,217,110 16,532,195
---------------------------------------------------------------------------
Net increase in net assets resulting from operations $123,258 $3,500,289 $1,686,372 $359,332 $4,053,852 $22,463,975
===========================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High 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) $ 731,935 $ 1,244,800 $ 1,038,344 $ 1,174,354 $ 63,175
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853
Change in net unrealized appreciation/
depreciation during the period - 338,992 3,582,485 888,211 873,498
---------------------------------------------------------------------
Net increase in net assets resulting from operations 731,935 2,155,857 5,514,648 3,247,906 1,090,526
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 13,022,443 5,768,611 16,528,721 9,117,366 2,244,838
Contract terminations and benefits (2,565,173) (2,122,255) (2,744,148) (2,172,101) (543,454)
Net transfers among investment options (13,359,842) 2,918,655 1,873,529 2,865,903 1,450,476
---------------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions (2,902,572) 6,565,011 15,658,102 9,811,168 3,151,860
---------------------------------------------------------------------
Increase (decrease) in net assets (2,170,637) 8,720,868 21,172,750 13,059,074 4,242,386
Net assets, beginning of year 20,192,289 14,680,834 33,970,167 21,036,176 7,519,694
---------------------------------------------------------------------
Net assets, end of year $ 18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080
=====================================================================
Unit transactions
Contributions 1,070,667 420,641 613,841 264,112 120,141
Terminations and benefits (209,764) (152,014) (101,953) (62,070) (27,727)
Net transfers (1,100,108) 204,521 67,546 82,490 78,298
---------------------------------------------------------------------
Net increase (decrease) in units (239,205) 473,148 579,434 284,532 170,712
=====================================================================
</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, 1996
<TABLE>
<CAPTION>
Asset
Investment Asset Manager:
Grade Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 150,911 $1,429,952 $ 92,181 $ 169,386 $ (163,258) $ 5,931,780
Net realized gain on sales of investments 66,281 130,034 511,372 29,931 370,212 3,912,908
Change in net unrealized appreciation/
depreciation during the period (93,934) 1,940,303 1,082,819 160,015 3,846,898 12,619,287
----------------------------------------------------------------------------
Net increase in net assets resulting from operations 123,258 3,500,289 1,686,372 359,332 4,053,852 22,463,975
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 1,384,320 2,057,176 5,841,031 1,297,372 9,673,035 66,934,913
Contract terminations and benefits (297,734) (2,120,090) (484,894) (89,733) (1,301,783) (14,441,365)
Net transfers among investment options 113,095 (2,161,691) 1,597,892 1,429,241 4,579,388 1,306,646
----------------------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 1,199,681 (2,224,605) 6,954,029 2,636,880 12,950,640 53,800,194
----------------------------------------------------------------------------
Increase (decrease) in net assets 1,322,939 1,275,684 8,640,401 2,996,212 17,004,492 76,264,169
Net assets, beginning of year 4,281,357 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
----------------------------------------------------------------------------
Net assets, end of year $5,604,296 $28,958,469 $12,857,076 $4,019,667 $29,702,724 $223,565,833
============================================================================
Unit transactions
Contributions 86,373 104,501 371,841 99,473 677,612
Terminations and benefits (17,903) (107,819) (30,376) (6,955) (89,447)
Net transfers 7,195 (105,579) 103,587 105,013 323,547
--------------------------------------------------------------
Net increase (decrease) in units 75,665 (108,897) 445,052 197,531 911,712
==============================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Money Equity-
Market High 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.
8
<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 Manager:
Grade Bond Asset Manager Index 500 Growth
Division Division Division Division*
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 14,363 $ 195,610 $ (9,282) $ 38,507
Net realized gain (loss) on sales of investments (1,976) 67,575 163,144 15,291
Change in net unrealized appreciation/
depreciation during the period 344,325 3,725,015 455,826 10,050
-----------------------------------------------------------
Net increase in net assets resulting from operations 356,712 3,988,200 609,688 63,848
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders $2,299,947 5,153,894 1,801,990 852,854
Contract terminations and benefits (76,202) (2,134,550) (154,064) (51,829)
Net transfers among investment options 337,449 (7,356,843) 897,468 158,582
-----------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 2,561,194 (4,337,499) 2,545,394 959,607
-----------------------------------------------------------
Increase (decrease) in net assets 2,917,906 (349,299) 3,155,082 1,023,455
Net assets, beginning of year 1,363,451 28,032,084 1,061,593 -
-----------------------------------------------------------
Net assets, end of year $4,281,357 $27,682,785 $4,216,675 $1,023,455
===========================================================
Unit transactions
Contributions 150,331 306,214 136,806 75,747
Terminations and benefits (4,694) (124,737) (11,135) (4,392)
Net transfers 21,423 (427,236) 67,783 13,791
-----------------------------------------------------------
Net increase (decrease) in units 167,060 (245,759) 193,454 85,146
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Contrafund
Division* Total
------------------------------
<S> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 90,265 $ 1,725,405
Net realized gain (loss) on sales of investments 214,827 1,237,615
Change in net unrealized appreciation/
depreciation during the period 728,190 15,185,552
------------------------------
Net increase in net assets resulting from operations 1,033,282 18,148,572
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 9,594,998 65,835,986
Contract terminations and benefits (235,829) (7,080,428)
Net transfers among investment options 2,305,781 (293,420)
------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 11,664,950 58,462,138
------------------------------
Increase (decrease) in net assets 12,698,232 76,610,710
Net assets, beginning of year - 70,690,954
------------------------------
Net assets, end of year $12,698,232 $147,301,664
==============================
Unit transactions
Contributions 777,515
Terminations and benefits (17,708)
Net transfers 194,230
-----------
Net increase (decrease) in units 954,037
===========
</TABLE>
*For the period February 6, 1995 (commencement of operations) to December 31,
1995.
See accompanying notes.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1996
1. Organization and Significant Accounting Policies
Organization and Nature of Operations
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 premium
variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended. The operations of the Separate
Account are part of 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
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets.
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 rate options of National Integrity's
Separate Account GRO. 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"). The contract
holder's account value in a Separate Account division will vary depending on the
performance of the corresponding portfolio. The Separate Account currently has
ten investment divisions available. The Separate Account introduced three new
investment divisions to contract holders on December 31, 1996 which include the
Balanced Portfolio, the Growth and Income Portfolio, and the Growth
Opportunities Portfolio from the Fidelity VIP Funds. The investment objective of
each division and its corresponding portfolio are the same. Set forth below is a
summary of the investment objectives of the operative portfolios of the Fidelity
VIP Funds at December 31, 1996 for this Separate Account.
10
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. It invests
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 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.
11
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
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 50% in equities, 40% in
intermediate to long-term bonds and 10% in short-term fixed income
instruments. The 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.
Index 500 Portfolio seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's 500 Composite Stock Price Index while keeping
transaction costs and other expenses low.
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 70%, 25% 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 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.
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
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 and distributions from the Fidelity VIP Fund portfolios
are reinvested in the respective portfolios and are reflected in the unit value
of the divisions of the Separate Account.
Unit Value
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Taxes
Operations of the Separate Account are included in the income tax return of
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Investments
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1996 and the cost of shares held
at December 31, 1996 for each division were as follows:
<TABLE>
<CAPTION>
Division Purchases Sales Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $30,714,814 $32,878,326 $18,020,587
High Income 22,332,381 14,511,994 21,871,014
Equity-Income 20,475,054 3,770,667 46,813,429
Growth 15,553,784 4,565,309 29,790,192
Overseas 4,779,899 1,565,635 10,388,581
Investment Grade Bond 2,497,921 1,148,199 5,390,837
Asset Manager 4,139,075 4,931,455 24,585,339
Index 500 9,140,212 2,094,301 11,324,402
Asset Manager: Growth 3,049,651 243,187 3,849,932
Contrafund 14,227,273 1,433,356 25,130,247
</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, 1996 and 1995
with Report of Independent Auditors
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1996 and 1995
<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 (Statutory Basis).............................9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
National Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of National
Integrity Life Insurance Company as of December 31, 1996 and 1995, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
generally accepted accounting principles. 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 effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of National Integrity Life Insurance Company at December 31, 1996 and 1995, or
the results of its operations or its cash flows for the years then ended.
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, 1996 and 1995, 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 12, 1997
2
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Admitted assets
Cash and investments:
Bonds $451,439 $635,249
Preferred stocks 50,715 14,428
Mortgage loans 3,929 5,318
Policy loans 24,981 22,606
Cash and short-term investments 14,570 20,268
Other invested assets 36 8,827
------------------
Total cash and investments 545,670 706,696
Separate accounts assets 370,988 265,264
Receivable for investments sold 4,576 -
Accrued investment income 6,513 7,959
Federal income tax recoverable 438 -
Other admitted assets 1,740 -
------------------
Total admitted assets $929,925 $979,919
==================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $513,639 $671,322
Unpaid claims 124 1,813
Deposits on policies to be issued 645 -
------------------
Total policy and contract liabilities 514,408 673,135
Separate accounts liabilities 370,988 265,264
Accounts payable and accrued expenses 213 264
Transfers to separate accounts due or accrued, net (21,247) (16,329)
Reinsurance balances payable 589 98
Federal income taxes - 1,005
Asset valuation reserve 1,773 1,969
Interest maintenance reserve 8,914 6,992
Payable for investments purchased - 6,082
Other liabilities 6,016 2,300
------------------
Total liabilities 881,654 940,780
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued, and outstanding 2,000 2,000
Paid-in surplus 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (13,723) (22,855)
------------------
Total capital and surplus 48,271 39,139
------------------
Total liabilities and capital and surplus $929,925 $979,919
==================
</TABLE>
See accompanying notes.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 8,640 $ 1,262
Deposit-type funds 352,899 261,378
Net investment income 53,553 46,548
Amortization of the interest maintenance reserve 1,001 823
Other revenues 5,653 3,913
-----------------------
Total premiums and other revenues 421,746 313,924
Benefits paid or provided:
Death benefits 8,260 9,098
Annuity benefits 12,106 3,581
Surrender benefits 101,241 119,789
Payments on supplementary contracts 1,879 1,869
Increase in insurance and annuity reserves 192,985 80,945
Other benefits 7,818 1,492
-----------------------
Total benefits paid or provided 324,289 216,774
Insurance and other expenses:
Commissions 5,817 4,809
General expenses 8,051 8,150
Taxes, licenses and fees 349 301
Net transfers to separate accounts 69,158 77,166
Other expenses 3,110 -
-----------------------
Total insurance and other expenses 86,485 90,426
Gain from operations before federal income taxes
and net realized capital losses 10,972 6,724
Federal income tax expense (benefit) (444) 991
-----------------------
Gain from operations before net realized capital losses 11,416 5,733
Net realized capital losses, less capital gains
tax expense (1996-$544; 1995-$1,800)
and excluding net gains (losses) transferred
to the interest maintenance reserve
(1996-$2,923; 1995-$(2,850)| (2,500) (900)
-----------------------
Net income $ 8,916 $ 4,833
=======================
</TABLE>
See accompanying notes.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Special Total
Common Paid-In Surplus Unassigned Capital and
Stock Surplus Funds Surplus Surplus
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $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
Net income 8,916 8,916
Decrease in nonadmitted assets 19 19
Decrease in asset valuation reserve 197 197
------------------------------------------------------------
Balance, December 31, 1996 $2,000 $59,244 $ 750 $ (13,723) $ 48,271
============================================================
</TABLE>
See accompanying notes.
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Operations:
Premiums, policy proceeds, and other considerations received $ 361,539 $ 262,639
Net investment income received 53,492 47,165
Commission and expense allowances received on reinsurance ceded 644 6
Benefits paid (125,238) (134,780)
Insurance expenses paid (14,170) (13,461)
Other income received net of other expenses paid 5,009 3,942
Net transfers to separate accounts (74,076) (83,932)
-----------------------
Net cash provided by operations 207,200 81,579
Investment activities:
Proceeds from sales, maturities, or repayments of investments:
Bonds 455,716 339,361
Preferred stocks 19,067 6,913
Mortgage loans 1,389 1,326
Other invested assets 8,826 -
-----------------------
Total investment proceeds 484,998 347,600
Taxes paid on capital gains (1,212) -
-----------------------
Net proceeds from sales, maturities, or repayments of investments 483,786 347,600
Cost of investments acquired:
Bonds 626,879 416,110
Preferred stocks 55,045 7,818
Other invested assets - 8,841
Miscellaneous proceeds 36 -
-----------------------
Total cost of investments acquired 681,960 432,769
Net increase in policy loans and premium notes 2,375 2,876
-----------------------
Net cash used in investment activities (200,549) (88,045)
Financing and miscellaneous activities:
Other cash provided:
Other sources 3,826 7,899
-----------------------
Total other cash provided 3,826 7,899
-----------------------
7
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Other cash applied:
Other applications, net 16,175 2,236
-----------------------
Total other cash applied 16,175 2,236
-----------------------
Net cash provided by (used in) financing and miscellaneous activities (12,349) 5,663
-----------------------
Net decrease in cash and short-term investments (5,698) (803)
Cash and short-term investments at beginning of year 20,268 21,071
-----------------------
Cash and short-term investments at end of year $ 14,570 $ 20,268
=======================
See accompanying notes.
8
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
1. Organization and Accounting Policies
Organization
National Integrity Life Insurance Company ("National Integrity" or the
"Company") is a wholly owned subsidiary 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 the National Association of Insurance Commissioners (the
"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 stock
are based on values specified by the NAIC, rather than on actual or estimated
market values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is reported
as a liability rather than unassigned surplus.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity 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 include provisions when
there has been a decline in asset values deemed other than temporary.
Policy Acquisition Costs
Costs of acquiring and renewing business are expensed when incurred. Under
GAAP, acquisition costs related to investment-type products, to the extent
recoverable from future gross profits, are amortized generally in proportion
to the emergence of future gross profits over the estimated term of the
underlying policies.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally receivables greater
than 90 days past due, are excluded from the accompanying balance sheets and
are charged directly to unassigned surplus.
Premiums
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and therefore
not recognized as premium revenue; benefits paid equal to the policy account
value are accounted for as a return of deposit instead of benefit expense.
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1.Organization and Accounting Policies (continued)
Benefit Reserves
Certain policy reserves are calculated using statutorily prescribed interest
and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
Federal Income Taxes
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 8,916 $ 4,833
Deferred policy acquisition costs, net of
amortization 5,187 7,614
Adjustments to customer deposits (441) (3,669)
Adjustments to invested asset carrying values
at acquisition date (160) (180)
Amortization of value of insurance in force (1,470) (2,905)
Amortization of interest maintenance reserve (1,001) (823)
Adjustments for realized investment gains (losses) 852 (747)
Adjustments for federal income tax benefit (expense) (2,185) 564
Other (200) 356
-----------------------
Net income, GAAP basis $ 9,498 $ 5,043
=======================
</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,
1996 1995
-------------------
(In Thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 48,271 $ 39,139
Adjustments to customer deposits (27,233) (26,792)
Adjustments to invested asset carrying values
at acquisition date (5,197) (5,889)
Asset valuation reserve and interest maintenance
reserve 19,369 20,567
Value of insurance in force 13,913 15,383
Deferred policy acquisition costs 23,728 18,541
Net unrealized gains on available-for-sale securities 1,416 5,577
Other (2,650) (246)
-------------------
Shareholder's equity, GAAP basis $ 71,617 $ 66,280
===================
</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 are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Preferred stocks are reported at cost.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the specific
identification method.
Benefits
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the New York Insurance Department. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserves. 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.
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 financial
statements 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. Fees charged on separate account
policyholder deposits are included in other revenues.
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 these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation of the 1996 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
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. Permitted Statutory Accounting Practices (continued)
administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future. 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 effective for 1999, 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 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, 1996:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 16,243 $ 415 $ 110 $ 16,548
Foreign governments 12,363 643 - 13,006
Public utilities 40,882 379 644 40,617
Other corporate securities 127,264 396 6,534 121,126
Asset-backed securities 10,311 - - 10,311
Mortgage-backed securities 244,376 - - 244,376
--------------------------------------------
Total bonds $451,439 $1,833 $7,288 $445,984
============================================
</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, 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
Assets-backed securities 27,695 - - 27,695
Mortgage-backed
securities 298,588 - - 298,588
-------------------------------------------
Total bonds $635,249 $7,042 $1,716 $640,575
===========================================
</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, 1996 and 1995, the fair
value of investments in bonds includes $312,677,000 and $426,972,000,
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, 1996, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
--------------------
(In Thousands)
<S> <C> <C>
Years to maturity:
After one through five $ 20,176 $ 16,110
After five through ten 32,815 31,575
After ten 143,761 143,612
Asset-backed securities 10,311 10,311
Mortgage-backed securities 244,376 244,376
-------------------
Total $451,439 $445,984
===================
</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 1996 and 1995 were
$755,711,000 and $286,601,000; gross gains of $7,901,000 and $4,404,000, and
gross losses of $4,450,000 and $5,621,000 were realized on those sales,
respectively.
At December 31, 1996 and 1995, bonds with an admitted asset value of $1,234,000
and $1,235,000, 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 since 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 was 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 1996, 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 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,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Income:
Bonds $47,487 $43,591
Preferred stocks 4,150 1,282
Mortgage loans 610 565
Policy loans 1,886 1,751
Short-term investments and cash 1,277 773
Other investment income 3 383
------------------
Total investment income 55,413 48,345
Investment expenses (1,860) (1,797)
------------------
Net investment income $53,553 $46,548
==================
</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 risks under certain of its
insurance products with other insurance companies through reinsurance
agreements. Through these reinsurance agreements substantially all mortality
risks associated with single premium endowment and variable annuity deposits and
substantially all risks associated with variable life business have been
reinsured with non-affiliated insurance companies. A contingent liability exists
with respect to insurance ceded which would become a liability should the
reinsurer be unable to meet the obligations assumed under these reinsurance
agreements. 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 zero and
$117,770,000 at December 31, 1996 and 1995, respectively.
The effect of reinsurance on premiums and amounts earned is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $115,547 $145,630
Reinsurance assumed 246,571 117,175
Reinsurance ceded (580) (165)
-----------------------------------
Net premiums and amounts earned $361,538 $262,640
===================================
</TABLE>
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 after
consolidated losses and credits.
19
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
5. Federal Income Taxes (continued)
Income before income taxes differs from taxable income principally due to value
of insurance in-force, interest maintenance reserves and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
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 laws, 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.
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, 1996 and 1995, 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, 1996 and 1995, the Company's annuity reserves, including
separate accounts, 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, 1996:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 89,668 11.5%
At book value less surrender charge
of 5% or more 23,208 3.0
At market value 257,419 33.0
-------------------
Total with adjustment or at market
value 370,295 47.5
Subject to discretionary withdrawal
(without adjustment) at book value
with minimal or no charge or
adjustment 347,883 44.7
Not subject to discretionary withdrawal 60,995 7.8
-------------------
Total annuity reserves and deposit
fund liabilities-before reinsurance 779,173 100.0%
=====
Less reinsurance ceded -
--------
Net annuity reserves and deposit fund
liabilities $779,173
========
At December 31, 1995:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 67,407 8.1%
At book value less 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 61,710 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
========
</TABLE>
The Company sold $358,339,000 of guaranteed investment contracts, assumed by the
Company through a coinsurance agreement with General American Life Insurance
Company, to Integrity as of June 30, 1996.
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, 1996 is as follows:
<TABLE>
<CAPTION>
*Nonindexed
Guaranteed Nonguaranteed
More Separate
than 4% Accounts Total
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Premiums, deposits and other
considerations $32,363 $ 70,537 $102,900
==========================================
Reserves for separate accounts with
assets at fair value $90,084 $257,514 $347,598
==========================================
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $89,668 $ - $ 89,668
At book value without market value
adjustment and with current
surrender charge of 5% or more 416 257,514 257,930
------------------------------------------
Total with adjustment or at market
value 90,084 257,514 347,598
Not subject to discretionary
withdrawal - - -
------------------------------------------
Total separate accounts reserves $90,084 $257,514 $347,598
==========================================
</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, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------
(In Thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $102,901 $ 96,982
Transfers from separate accounts (37,150) (21,800)
-------------------
Net transfers to separate accounts 65,751 75,182
Reconciling adjustments:
Mortality and expense charges reported as other revenues 3,194 1,928
Other revenues 213 56
-------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 69,158 $ 77,166
===================
</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 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.
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Bonds $451,439 $457,875 $635,249 $666,955
Preferred stocks 50,715 50,454 14,428 15,964
Mortgage loans 3,929 3,929 5,318 5,318
Liabilities:
Life and annuity reserves for
investment-type contracts $432,013 $426,516 $472,037 $474,465
Separate accounts annuity reserves 347,503 347,072 248,398 247,220
</TABLE>
Bonds and Preferred Stocks
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
Mortgage Loans on Real Estate
Pursuant to the terms of ARM's acquisition of the Company, payments of principal
and interest on mortgage loans acquired on November 26, 1993 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 single premium immediate annuities is based on discounted
cash flow calculations using a market yield rate for assets with similar
durations. The fair value of the remaining annuities is based on the cash
surrender value of the underlying policies.
24
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
Separate Accounts Annuity Reserves
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
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
1996 and 1995, the Company was charged $6,008,000 and $5,641,000, respectively,
for these services in accordance with the requirements of applicable insurance
law and regulations.
25
<PAGE>
CROSS REFERENCE SHEET - IQ The SmartAnnuity
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information required By Form N-4
PART A: INFORMATION REQUIRED IN PROSPECTUS - IQ The SmartAnnuity
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Prospectus
<S> <C> <C>
1. Cover Page Cover Page
2. Definitions Part 1 - Summary
3. Synopsis Part 1 - Summary; Table of Annual Fees and
Expenses; Examples
4. Condensed Financial Information Part 1 - Financial Information
5. General Description of Registrant, Part 2 - National Integrity and the Separate Account;
Annuity Contracts Part 3 - Your Investment Options
6. Deductions Part 4 - Deductions and Charges
7. General Description of Variable Part 5 - Terms of Your Variable
Annuity contracts Annuity Contract
8. Annuity Period Part 5 - Terms of Your Variable
Annuity Contract
9. Death Benefit Part 5 - Terms of Your Variable
Annuity Contract
10. Purchases and Contract Value Part 5 - Terms of Your Variable
Annuity Contract
11. Redemptions Part 5 - Terms of Your Variable
Annuity Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement Table of Contents
of Additional Information
</TABLE>
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - IQ The SmartAnnuity
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Statement of Additional
Information
<S> <C> <C>
15. Cover Page Cover Page
16. Table of Contents Cover Page
17. General Information and History Part 1 - National Integrity and Custodian
18. Services Part 1 - National Integrity and Custodian
19. Purchase of Securities Being Offered Part 2 - Distribution of the Contracts
20. Underwriters Part 2 - Distribution of the Contracts
21. Calculation of Performance Data Part 3 - Performance Information
22. Annuity Payments Part 4 - Determination of Annuity Unit Values
23. Financial Statements Part 5 - Financial Statements
</TABLE>
<PAGE>
Prospectus
==========
IQ The SmartAnnuity
Flexible Premium Variable Annuity
issued by National Integrity Life Insurance Company
This prospectus describes a flexible premium variable annuity offered by
National Integrity Life Insurance Company, an indirect wholly owned subsidiary
of ARM Financial Group, Inc. The individual contracts and group certificates
(contracts) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Contributions under the contracts may be allocated to the various
investment divisions of our Separate Account I (Variable Account Options, or
individually, Option) or to our Guaranteed Rate Options (GROs), or both.
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III)(the Funds or Fund).The Funds are part of the Fidelity Investments(R)
group of companies. The values allocated to the Options reflect the investment
performance of the Funds' portfolios. The prospectus for the Funds describes the
investment objectives, policies and risks of each of the Funds' portfolios.
There are thirteen Variable Account Options, which invest in the following
portfolios:
<TABLE>
<CAPTION>
<S> <C>
. VIP Money Market Portfolio . VIP II Investment Grade Bond Portfolio
. VIP High Income Portfolio . VIP II Asset Manager Portfolio
. VIP Equity-Income Portfolio . VIP II Index 500 Portfolio
. VIP Growth Portfolio . VIP II Contrafund Portfolio
. VIP Overseas Portfolio . VIP II Asset Manager: Growth Portfolio
. VIP III Balanced Portfolio . VIP III Growth Opportunities Portfolio
. VIP III Growth & Income Portfolio
</TABLE>
Your allocation to a GRO accumulates at a fixed interest rate we declare at the
beginning of the duration you select. A market value adjustment (Market Value
Adjustment) will be made for withdrawals, surrenders, transfers and certain
other transactions before the expiration of your GRO Account, but your value
under a GRO Account may not be decreased below an amount equal to your
allocation plus interest compounded at an annual effective rate of 3% (Minimum
Value), less previous withdrawals.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current prospectus for the Funds, which you should also read.
For further information and assistance, you should contact our Administrative
Office at National Integrity Life Insurance Company, 200 Park Avenue, 20th
Floor, New York, New York 10166. You may also call the following toll-free
number: 1-800-433-1778.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated May 1, 1997, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part 1 - Summary Page
<S> <C>
Your Variable Annuity Contract............................................. 1
Your Benefits.............................................................. 1
How Your Contract is Taxed................................................. 1
Your Contributions......................................................... 1
Your Investment Options.................................................... 1
Variable Account Options................................................... 1
Account Value, Adjusted Account Value and Cash Value....................... 2
Transfers.................................................................. 2
Charges and Fees........................................................... 2
Withdrawals................................................................ 3
Your Initial Right to Revoke............................................... 3
Table of Annual Fees and Expenses.......................................... 4
Financial Information...................................................... 8
Part 2 - National Integrity And The Separate Account
National Integrity Life Insurance Company.................................. 9
The Separate Account and the Variable Account Options...................... 9
Assets of Our Separate Account............................................. 9
Changes In How We Operate.................................................. 9
Part 3 - Your Investment Options
The Funds.................................................................. 10
The Funds' Investment Adviser............................................ 11
Investment Objectives of the Portfolios.................................. 12
Guaranteed Rate Options.................................................... 14
Renewals of GRO Accounts................................................. 15
Market Value Adjustments................................................. 15
Part 4 - Deductions and Charges
Separate Account Charges................................................... 16
Annual Administrative Charge............................................... 16
Fund Charges............................................................... 16
State Premium Tax Deduction................................................ 17
Transfer Charge............................................................ 18
Tax Reserve................................................................ 18
Part 5 - Terms of Your Variable Annuity
Contributions Under Your Contract.......................................... 18
Your Account Value......................................................... 19
Your Purchase of Units in Our Separate Account............................. 19
How We Determine Unit Value................................................ 19
Transfers.................................................................. 20
Withdrawals................................................................ 21
Assignments................................................................ 21
Death Benefits and Similar Benefit Distributions........................... 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Annuity Benefits......................................................... 22
Annuities................................................................ 22
Annuity Payments......................................................... 23
Timing of Payment........................................................ 23
How You Make Requests and Give Instructions.............................. 23
Part 6 - Voting Rights
Fund Voting Rights....................................................... 23
How We Determine Your Voting Shares...................................... 24
How Fund Shares Are Voted................................................ 24
Separate Account Voting Rights........................................... 24
Part 7 - Tax Aspects of the Contracts
Introduction............................................................. 24
Your Contract is an Annuity.............................................. 25
Taxation of Annuities Generally.......................................... 25
Distribution-at-Death Rules.............................................. 26
Diversification Standards................................................ 26
Tax-Favored Retirement Programs.......................................... 27
Individual Retirement Annuities........................................ 27
Simplified Employee Pensions........................................... 27
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans............................................. 28
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations............................................. 28
Distributions Under Tax-Favored Retirement Programs...................... 28
Federal and State Income Tax Withholding................................. 29
Impact of Taxes to National Integrity.................................... 29
Transfers Among Investment Options....................................... 29
Part 8 - Additional Information
Systematic Withdrawals................................................... 29
Dollar Cost Averaging.................................................... 30
Individual Asset Rebalancing............................................. 30
Ibbotson Asset Allocation and Rebalancing Program........................ 30
Performance Information.................................................. 30
</TABLE>
Appendix A - Illustration of a Market Value Adjustment................. 30
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
<PAGE>
SAI Table of Contents
Part 1 - National Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
ATTN: Request for SAI of Separate Account I
Name:_____________________________________________________________________
Address:__________________________________________________________________
City:________________________________ State:_________ Zip:________________
<PAGE>
PART 1 - SUMMARY
Your Variable Annuity Contract
In this prospectus, we, our and us mean National Integrity Life Insurance
Company (National Integrity), a subsidiary of Integrity Life Insurance Company
(Integrity) and an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of contracts.
When we use the words contract or certificate, we are referring to both the
individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, you
and your mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin.
Your retirement or endowment date (Retirement Date) will be no later than your
90th birthday or earlier, if required by law, unless you notify us of a
different date.
Your Benefits
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part 7, "Tax Aspects of the
Contracts" for detailed information.
How Your Contract is Taxed
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part 7, "Tax Aspects of the Contracts."
Your Contributions
The minimum initial contribution in most states is currently $1,000. Subsequent
contributions of at least $100 can be made. Special rules for lower minimum
initial and subsequent contributions apply for certain tax-favored retirement
plans. See "Contributions Under Your Contract" in Part 5.
Your Investment Options
You may allocate contributions to the Variable Account Options or to the GROs,
or both. The Variable Account Options and the GROs are together referred to as
the Investment Options. Contributions may be allocated to up to nine Investment
Options at any one time. See "Contributions Under Your Contract" in Part 5. To
select Investment Options most suitable for you, see Part 3, "Your Investment
Options."
Variable Account Options
The Variable Account Options (also referred to as Divisions) invest in shares of
corresponding investment portfolios of the Funds, each a "series" type of mutual
fund. Each investment portfolio is referred to as a Portfolio. The investment
objective of each Variable Account Option and its corresponding Portfolio is the
same. Your value in a Variable Account Option will vary depending on the
performance of the corresponding Portfolio. For a full description of the Funds,
see the Funds' prospectus and the Funds' Statement of Additional Information.
1
<PAGE>
Account Value, Adjusted Account Value and Cash Value
The sum of your values under the GROs plus your values in the Variable Account
Options is referred to as the Account Value. Your Adjusted Account Value is your
Account Value, as increased or decreased (but not below the Minimum Value) by
any Market Value Adjustments. Your Cash Value is equal to your Adjusted Account
Value, and will be reduced by the pro rata portion of the annual administrative
charge, if applicable. See "Charges and Fees" below.
Transfers
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may be
arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under special services we offer to dollar cost
average or rebalance your investment in the Variable Account Options. See Part
8, "Dollar Cost Averaging," "Individual Asset Rebalancing," and "Ibbotson Asset
Allocation and Rebalancing Program."
Charges and Fees
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value of the assets
in each Variable Account Option is made daily. We make this charge to cover
mortality and expense risks (1.20%) and certain administrative expenses (.15%).
The charge will never be greater than an effective annual rate of 1.35% of the
Account Value of the assets in each Variable Account Option. See Part 4,
"Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts invested
by the Separate Account in the Funds. For providing investment management
services to the Portfolios of the Funds, Fidelity Management and Research
Company (Fidelity Management) receives fees from the Portfolios based on the
average net assets of each Portfolio. The highest annual rate at which any of
the Portfolios paid advisory fees in 1996 was .76% of average net assets.
Advisory fees cannot be increased without the consent of Fund shareholders. See
"Table of Annual Fees and Expenses" below and "The Funds' Investment Adviser" in
Part 3.
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part 4.
Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. Most withdrawals made
by you prior to age 59-1/2 are also subject to a 10% federal tax penalty. In
addition, some tax-favored retirement programs limit withdrawals. See Part 7,
"Tax Aspects of the Contracts." For partial withdrawals, the total amount
deducted from your Account Value will include the withdrawal amount requested,
any applicable Market Value Adjustment in excess of any free withdrawal amount
(as defined below), so that the net amount you receive will be the amount
requested.
The free withdrawal amount is a non-cumulative amount which you may take as a
partial withdrawal each contract year without your GRO Account being subject to
any Market Value Adjustment. It is equal to 10% of the Account Value, minus
cumulative prior withdrawals in the current contract year. However, as
explained above, a tax penalty still applies if you are under age 59-1/2.
2
<PAGE>
Your Initial Right to Revoke
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. The 10-day period may be extended if required
by state law. We will refund all your contributions with an adjustment for any
investment gain or loss on the contributions put into each Variable Account
Option from the date units were purchased until the date your contract is
received by us, including any charges deducted. If state law instead requires a
refund of your contributions without any adjustment, we will return that amount
to you. For allocations to GROs, we will refund to you the amount of your
contributions.
3
<PAGE>
Table of Annual Fees and Expenses
Contract Owner Transaction Expenses
- -----------------------------------
<TABLE>
<CAPTION>
<S> <C>
Sales Load on Purchases..................................... $ 0
Exchange Fee (1)............................................ $ 0
Annual Administrative Charge (2)............................ $30
</TABLE>
Separate Account Annual Expenses (as a
percentage of average account value) (3)
- ----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Mortality and Expense Risk Fees............................. 1.20%
Administrative Expenses..................................... .15%
-----
Total Separate Account Annual Expenses...................... 1.35%
=====
</TABLE>
Fund Annual Expenses After Reimbursement
(as a percentage of average net assets) (4)
- -------------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market................ .21% .09% .30%
VIP High Income................. .59% .12% .71%(5)
VIP Equity-Income............... .51% .07% .58%
VIP Growth...................... .61% .08% .69%
VIP Overseas.................... .76% .17% .93%
VIP II Investment Grade Bond.... .45% .13% .58%
VIP II Asset Manager............ .64% .10% .74%(5)(6)
VIP II Index 500................ .13% .15% .28%(6)
VIP II Contrafund............... .61% .13% .74%(5)
VIP II Asset Manager: Growth.... .65% .22% .87%(5)(6)
VIP III Balanced................ .48% .24% .72%(5)
VIP III Growth Opportunities.... .61% .16% .77%(5)
VIP III Growth & Income......... .50% .20% .70%(5)(7)
</TABLE>
- -----------
(1) After the first twelve transfers during a contract year, National Integrity
has the right to impose a transfer charge of $20 per transfer. This charge would
not apply to transfers made for dollar cost averaging, individual asset
rebalancing, Ibbotson Asset Allocation and Rebalancing Program, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
(2) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to your
Retirement Date. See "Deductions and Charges -Annual Administrative Charge" in
Part 4.
(3) See "Deductions and Charges - Separate Account Charges" in Part 4.
(4) In the Funds' prospectus, see "Management, Distribution and Service Fees."
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce funds' expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented in
the table would have been .56% for VIP Equity-Income Portfolio, .67% for VIP
Growth Portfolio, .92% for VIP Overseas Portfolio, .73% for VIP II Asset Manager
Portfolio, .71% for VIP II Contrafund Portfolio, .85% for VIP II Asset Manager:
Growth Portfolio, and .76% for VIP III Growth Opportunities Portfolio, and .71%
for VIP III Balanced Portfolio.
4
<PAGE>
(6) The investment adviser agreed to reimburse a portion of VIP II Index 500
Portfolio's expenses during the period. Without this reimbursement, the fund's
management fee, other expenses and total expenses would have been .28%, .15%,
and .43%, respectively.
(7) Annualized
Examples
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $40,000 average contract value and a 5% annual
rate of return on assets.
Expenses per $1,000 investment if you surrender your contract at the end of the
- -------------------------------------------------------------------------------
applicable period:
- -----------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Portfolio 1 year 3 years 5 years 10 years
- ------------------------------ ------ ------- ------- --------
VIP Money Market.............. $17.66 $54.61 $ 93.86 $203.09
VIP High Income............... $21.86 $67.34 $115.29 $246.89
VIP Equity-Income............. $20.53 $63.32 $108.53 $233.20
VIP Growth.................... $21.65 $66.72 $114.25 $244.80
VIP Overseas.................. $24.11 $74.13 $126.63 $269.66
VIP II Investment Grade Bond.. $20.53 $63.32 $108.53 $233.20
VIP II Asset Manager.......... $22.17 $68.27 $116.84 $250.03
VIP II Index 500.............. $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund............. $22.17 $68.27 $116.84 $250.03
VIP II Asset Manager: Growth.. $23.50 $72.28 $123.55 $263.50
VIP III Balanced.............. $21.96 $67.65 $115.81 $247.94
VIP III Growth Opportunities.. $22.47 $69.19 $118.39 $253.15
VIP III Growth & Income....... $21.76 $67.03 $114.77 $245.84
</TABLE>
Expenses per $1,000 investment if you do not surrender your contract at the end
- -------------------------------------------------------------------------------
of the applicable period:
- ------------------------
Same expenses per $1,000 investment as shown in table immediately above.
Expenses per $1,000 investment if you elect the normal form of annuity at the
- -----------------------------------------------------------------------------
end of the applicable period:
- ----------------------------
Same expenses per $1,000 investment as shown in table immediately above.
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment advisory fees and other expenses of the
Funds as they were for the year ended December 31, 1996, except for VIP III
Growth & Income Portfolio, which were based on estimated current expenses.
Actual Fund expenses may be greater or less than those on which these examples
were based. The annual rate of return assumed in the examples is not an estimate
or guarantee of future investment performance. The table also assumes an
estimated $40,000 average contract value, so that the administrative charge per
$1,000 of net asset value in the Separate Account is $0.75. Such per $1,000
charge would be higher for smaller Account Values and lower for higher values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
5
<PAGE>
Financial Information
The table below shows the unit value for each Variable Account Option at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the end of each period. The unit value at the
beginning of each period is the unit value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
Money High Equity- Investment
Market Income Income Growth Overseas Grade Bond
Division Division Division Division Division Division
---------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Date of Inception $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
December 31, 1987 - - - - - -
Number of Units - - - - - -
December 31, 1988 - - - - $ 9.79 $ 10.05
Number of Units - - - - 1,646 1,287
December 31, 1989 - - $ 10.99 $ 11.13 $ 12.08 $ 11.48
Number of Units - - 12,808 91 1,646 1,286
December 31, 1990 $ 10.17 - $ 9.54 $ 11.76 $ 11.13 $ 12.06
Number of Units 2,001 - 10,281 90 1,697 1,283
December 31, 1991 $ 10.64 - $ 13.63 $ 19.12 $ 13.63 $ 12.25
Number of Units 3,961 - 12,059 927 2,789 -
December 31, 1992 $ 10.90 - $ 15.72 $ 20.62 $ 12.01 $ 13.44
Number of Units 2,744 - 32,842 30,140 3,816 5,995
December 31, 1993 $ 11.10 $ 11.22 $ 18.33 $ 24.29 $ 16.25 $ 14.72
Number of Units 109,685 120,243 192,745 136,418 97,667 52,787
December 31, 1994 $ 11.42 $ 10.90 $ 19.37 $ 23.95 $ 16.31 $ 13.98
Number of Units 782,370 512,098 503,403 372,307 432,518 97,548
December 31, 1995 $ 11.93 $ 12.97 $ 25.81 $ 31.99 $ 17.65 $ 16.18
Number of Units 1,692,564 1,131,907 1,316,163 657,586 426,045 264,608
December 31, 1996 $ 12.40 $ 14.58 $ 29.09 $ 36.19 $ 19.71 $ 16.47
Number of Units 1,453,359 1,605,055 1,895,597 942,118 596,757 340,273
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP III
Growth & Income Option was December 31, 1996. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively.
6
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Asset
Asset Index Contra- Manager Growth Growth
Manager 500 fund Growth Balanced Income Opportunities
Division Division Division Division Division Division Division
---------- -------- ---------- -------- -------- -------- -------------
Date of Inception $ 10.00 $ 10.00 $ 10.00 $ 10.00 $10.00 $10.00 $10.00
December 31, 1987 $ 7.92 - - - - - -
Number of Units 15,626 - - - - - -
December 31, 1988 $ 8.89 - - - - - -
Number of Units 23,806 - - - - - -
December 31, 1989 $ 11.05 - - - - - -
Number of Units 26,296 - - - - - -
December 31, 1990 $ 10.90 - - - - - -
Number of Units 33,770 - - - - - -
December 31, 1991 $ 13.45 - - - - - -
Number of Units 28,066 - - - - - -
December 31, 1992 $ 14.85 - - - - - -
Number of Units 57,934 - - - - - -
December 31, 1993 $ 17.73 $ 10.65 - - - - -
Number of Units 744,402 16,821 - - - - -
December 31, 1994 $ 16.43 $ 10.62 - - - - -
Number of Units 1,706,592 99,982 - - - - -
December 31, 1995 $ 18.95 $ 14.37 $ 13.31 $ 12.02 - - -
Number of Units 1,460,833 293,436 954,037 85,146 - - -
December 31, 1996 $ 21.42 $ 17.41 $ 15.92 $ 14.22 - - -
Number of Units 1,351,936 738,488 1,865,749 282,677 - - -
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP III
Growth & Income Option was December 31, 1996. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively.
7
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National Integrity Life Insurance Company
National Integrity is a stock life insurance company organized under the laws of
New York. Our home office is located in New York, New York. We are authorized to
sell life insurance and annuities in eight states and the District of Columbia.
In addition to the contracts, we sell flexible premium annuity contracts with an
underlying investment medium other than the Funds, and fixed single premium
annuity contracts. We are currently licensed to sell variable contracts in five
states and the District of Columbia. In addition to issuing annuity products, we
have entered into agreements with other insurance companies to provide
administrative and investment support for products to be designed, underwritten
and sold by these companies.
National Integrity is an indirect wholly owned subsidiary of ARM. ARM
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets. At December 31, 1996, ARM had $4.8
billion of assets under management.
The Separate Account and the Variable Account Options
The Separate Account is established and maintained under the insurance laws of
the State of New York. It is a unit investment trust registered with the
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (1940 Act). A unit investment trust is a type of investment company. SEC
registration does not involve any supervision by the SEC of the management or
investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio of the Funds. We may establish
additional Options, some of which may not be available for your allocations. The
Variable Account Options currently available to you are listed on the cover page
of this prospectus. Prior to September 3, 1991, the Portfolios then offered
invested in shares of corresponding portfolios of Prism Investment Trust.
Assets of Our Separate Account
Under New York law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate in
the Separate Account in proportion to the amounts relating to their contracts.
The Separate Account's assets supporting the variable portion of these variable
contracts may not be used to satisfy liabilities arising out of any other
business of ours. Under certain unlikely circumstances, one Variable Account
Option may be liable for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may permit charges owed to us to
stay in the Separate Account, and thus may participate proportionately in the
Separate Account. Amounts in the Separate Account in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(General Account).
Changes In How We Operate
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. We may:
- - add Options to, or remove Options within our Separate from, our Separate
Account, Account, or withdraw combine two or more Options assets relating
to your contract from one Option and put them into another;
8
<PAGE>
- - register or end the registration of the Separate Account under the 1940
Act;
- - operate our Separate Account under at any time (the direction of a
committee or committee may be discharge such a committee composed of a
majority of persons who are "interested persons" of National Integrity
under the 1940 Act);
- - restrict or eliminate any voting Separate Account; rights of Owners or
others who have voting rights that affect our
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
- - operate our Separate Account or including a form that one or more of the
Options in any allows us to make direct other form the law allows,
investments. We may make any legal investments we wish. In choosing these
investments, we will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
The Funds
Each of the Funds is an open-end diversified management investment company
registered under the 1940 Act. Such registration does not involve supervision by
the SEC of the investments or investment policies of the Funds. The Funds are
each a "series" type of investment company with diversified portfolios. The
Funds do not impose a sales charge or "load" for buying and selling their
shares. The shares of the Portfolios of the Funds are bought and sold by the
Separate Account at their respective net asset values.
The Funds are designed to serve as investment vehicle for variable annuity and
variable life contracts of insurance companies. Shares of the Portfolios of the
Funds currently are available to the separate accounts of a number of insurance
companies, both affiliated and unaffiliated with Fidelity Management or National
Integrity. The Board of Trustees of each of the Funds is responsible for
monitoring the Fund for the existence of any material irreconcilable conflict
between the interests of the policyowners of all separate accounts investing in
the Fund and determining what action, if any, should be taken in response. If we
believe that a Fund's response to any of those events insufficiently protects
our contract owners, we will see to it that appropriate and available action is
taken to protect our contract owners. See "The Fund and the Fidelity
Organization" in the Funds' prospectus for a further discussion of the risks
associated with the offering of Fund shares to our Separate Account and the
separate accounts of other insurance companies.
Shares of Portfolios of the Funds are made available to the Separate Account
under three essentially identical Participation Agreements (Participation
Agreement or Agreements). The Participation Agreements are among the applicable
Fund, Fidelity Distributors Corporation which is the principal underwriter for
shares of the Funds (Distributor), and National Integrity. If state or federal
law precludes the sale of the Funds' or any Portfolio's shares to the Separate
Account, or in certain other circumstances, sales of shares to the Separate
Account may be suspended and/or the Participation Agreements may be terminated
as to the Funds or the affected Portfolio. Also, the Participation Agreements
may be terminated by any party thereto with one year's written notice.
Notwithstanding termination of the Participation Agreement, the Fund and the
Distributor are obligated to continue to make the Funds' shares available for
contracts outstanding on the date the Participation Agreement terminates, unless
the Participation Agreement was terminated due to an irreconcilable conflict
among contractowners of different separate accounts. If for any reason the
shares of any Portfolio are no longer available for purchase by the Separate
Account for outstanding contracts, the parties to the Participation Agreements
have agreed to cooperate to comply with the 1940 Act in arranging for the
substitution of another funding medium as soon as reasonably practicable and
without disruption of sales of shares to the Separate Account or any Variable
Account Option.
The Funds' Investment Adviser. Fidelity Management & Research Company (Fidelity
Management), a registered investment adviser under the Investment Advisers Act
of 1940, serves as the investment adviser to each Fund. Fidelity Management,
whose principal address is 82 Devonshire Street, Boston,
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<PAGE>
Massachusetts, is a wholly owned subsidiary of FMR Corp. and is part of Fidelity
in the United States. Investments(R), one of Fidelity Investments(R) includes a
number of different companies, which provide a variety of financial services and
products to individuals and corporations.
Fidelity Management provides investment research and portfolio management
services to mutual funds and other clients. At December 31, 1996, Fidelity
Management advised funds having more than 23 million shareholder accounts with a
total value of more than $354 billion. For certain of the Portfolios, Fidelity
Management has entered into sub-advisory agreements with affiliated companies
that are part of the Fidelity Investments(R) organization. Fidelity Management,
not the Portfolios, pays the sub-advisers for their services to the Portfolios.
The Portfolios of the Funds pay monthly advisory fees to Fidelity Management.
The advisory fee payable by each of the Portfolios, other than the VIP Money
Market Portfolio and the VIP II Index 500 Portfolio, is composed of a group fee
rate and an individual fund fee rate. The group fee rate is based on the average
monthly net assets of all mutual funds advised by Fidelity Management. For the
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Asset Manager, VIP II
Contrafund, and VIP II Asset Manager: Growth Portfolios, the group fee rate
cannot rise above .52%. For the VIP High Income and VIP II Investment Grade Bond
Portfolios, the group fee rate cannot rise above .37%. The group fee rate drops
as total assets under management increase.
The VIP Money Market Portfolio's advisory fee is made up of two components: a
basic fee rate and an income-based component. The basic fee rate is the sum of a
group fee rate as described above (but capped at a maximum of .37%) and an
individual fund fee rate of .03%. The income based component is 6% of that
portion of the fund's gross yield which exceeds a 5% return (but capped at a
maximum of .24%).
The VIP II Index 500 Portfolio pays a monthly fee at the annual rate of .28% of
the Portfolio's average net assets.
Set forth in the table below is the individual fund fee rate for the portfolios
and their 1996 aggregate advisory rate, comprised of the individual and group
rates, as a percentage of average net assets, and the VIP II Index 500
Portfolio's 1996 advisory rate as a percentage of average net assets.
<TABLE>
<CAPTION>
1996
Portfolio Individual Rate Aggregate Rate
- --------- --------------- --------------
<S> <C> <C>
VIP Money Market .03% .21%
VIP High Income .45% .59%
VIP Equity-Income .20% .51%
VIP Growth .30% .61%
VIP Overseas .45% .76%
VIP II Investment Grade
Bond .30% .45%
VIP II Asset Manager .25% .64%
VIP II Index 500 N/A .13%
VIP II Contrafund .30% .61%
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
VIP II Asset Manager:
Growth .30% .65%
VIP III Balanced .20% .48%
VIP III Growth
Opportunities .30% .61%
VIP III Growth & Income .20% .50%
</TABLE>
Investment Objectives of the Portfolios. Set forth below is a summary of the
investment objectives of the Portfolios of the Funds. There can be no assurance
that these objectives will be achieved. You should read the Funds' prospectus
carefully before investing.
VIP Money Market Portfolio
--------------------------
VIP 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.
VIP High Income Portfolio
-------------------------
VIP 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. In view of the types of securities in which this Portfolio
invests, you should read the complete risk disclosure for this Portfolio in the
Funds' prospectus before investing in it.
VIP Equity-Income Portfolio
---------------------------
VIP 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.
VIP Growth Portfolio
--------------------
VIP 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.
VIP Overseas Portfolio
----------------------
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in securities from at least three countries outside North America.
VIP II Investment Grade Bond Portfolio
--------------------------------------
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in 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 VIP
II Investment Grade Bond Portfolio purchases only securities rated A or better
by Moody's Investors
11
<PAGE>
Service, Inc. or Standard & Poor's Corporation or unrated securities judged by
Fidelity Management to be of equivalent quality.
VIP II Asset Manager Portfolio
---------------------------
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market 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 50% in equities, 40% in
intermediate to long-term bonds and 10% in short-term money market fixed income
instruments.
VIP II Index 500 Portfolio
---------------------------
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II Contrafund Portfolio
---------------------------
VIP II Contrafund Portfolio is a growth fund which seeks to increase the value
of your 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. VIP II 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.
VIP II Asset Manager: Growth Portfolio
--------------------------------------
VIP II Asset Manager: Growth Portfolio is an asset allocation fund which seeks
to maximize total return over the long term through investments in stocks,
bonds, and short-term money market instruments. The fund has a neutral mix which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
----- -----------
<S> <C> <C>
Stock Class 0-100% 70%
Bond Class 0-100% 25%
Short-Term/
Money Market Class 0-100% 5%
</TABLE>
VIP III Growth Opportunities Portfolio
--------------------------------------
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. It has the flexibility to adjust its investment mix between growth,
cyclical and value stocks as market conditions change. The portfolio seeks
growth through either appreciation of the security itself or an increase in the
company's earning or gross sales.
VIP III Balanced Portfolio
---------------------------
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a diversified portfolio of equity and fixed-income securities. It uses a
balanced approach to provide the best possible total return from investments in
foreign and domestic equity securities, convertible securities, preferred and
common stocks paying any combination of dividends and capital gains, and fixed
income securities.
12
<PAGE>
VIP III Growth & Income Portfolio
---------------------------------
VIP III Growth & Income Portfolio seeks long-term growth of capital with some
current income. It invests primarily in stocks of companies that offer potential
for growth in earnings while paying dividends, but offer the potential for
capital appreciation on future income. Investments may include common and
preferred stocks, convertible securities, fixed-income securities and foreign
securities.
Guaranteed Rate Option
Because of applicable exemptive and exclusionary provisions, interests in
contracts attributable to GROs have not been registered under the Securities Act
of 1933 ("1933 Act"), nor under the Investment Company Act of 1940 ("1940 Act").
Thus, neither such contracts nor our General Account, which guarantees the
values and benefits under those contracts, are generally subject to regulation
under the provisions of the 1933 Act or the 1940 Act. Accordingly, we have been
advised that the staff of the Securities and Exchange Commission has not
reviewed the disclosure in this prospectus relating to the GROs or the General
Account. Disclosures regarding the GROs or the General Account may, however, be
subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
We offer GROs with durations of three, five, seven and ten years. We may from
time to time change the durations available. Each allocation to a GRO locks in a
fixed effective annual interest rate declared by us (Guaranteed Interest Rate)
for the duration you select (your GRO Account). The duration of your GRO Account
is the Guarantee Period. Each contribution or transfer to a GRO establishes a
new GRO Account at the then-current Guaranteed Interest Rate declared by us. We
will not declare an interest rate less than 3%. Each GRO Account expires at the
end of the duration you have selected. See "Renewals of GRO Accounts" below.
Values and benefits under your contract attributable to GROs are guaranteed by
the reserves in our GRO separate account as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO Value. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO which will exceed the Guaranteed Interest Rate credited
during the remaining years of the Guarantee Period (Enhanced Rate). This
Enhanced Rate will be guaranteed for the Guaranteed Period's first year and
declared at the time of purchase. We reserve the right to declare and credit
additional interest based on Contribution, Account Value, withdrawal dates,
economic conditions or on any other lawful, nondiscriminatory basis (Additional
Interest). Any Enhanced Rate and Additional Interest credited to your GRO
Account will be separate from the Guaranteed Interest Rate and not used in the
Market Value Adjustment formula. The Enhanced Rate or Additional Interest may
not be made applicable under contracts issued in certain states.
Each group of GRO Accounts of the same duration is considered one GRO, (i.e. all
of your three-year GRO Accounts are one GRO while all of your five-year GRO
Accounts are another GRO.)
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
Allocations to GROs may not be made under contracts issued in certain
states.
Renewals of GRO Accounts. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO
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<PAGE>
Accounts. You must notify us prior to the expiration of your GRO Accounts of any
changes you desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew a GRO Account that expires
after your Retirement Date.
Market Value Adjustments. A Market Value Adjustment is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account. The Minimum Value for partial withdrawals or transfers will be
calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
MVA = GRO Value x [(1 + A)/N/12/ / (1 + B + .0025)/N/12/ - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
14
<PAGE>
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges
National Integrity deducts from the unit value every calendar day an amount
equal to an effective annual rate of 1.35% of the Account Value in the Variable
Account Options. This daily expense rate cannot be increased without your
consent. Various portions of this total charge, as described below, pay for
certain services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse National
Integrity for expenses actually incurred, without profit.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for National Integrity's assuming the
expense risk (.85%) and the mortality risk (.35%) under the contract. The
expense risk is the risk that our actual expenses of administering the contracts
will exceed the annual administrative expense charge. In this context, mortality
risk refers to the cost of insuring the risk National Integrity takes that
annuitants, as a class of persons, will live longer than estimated and therefore
require National Integrity to pay out more annuity benefits than anticipated.
The relative proportion of the mortality and expense risk charges may be
modified, but the total effective annual risk charge of 1.20% of the value of
the Variable Account Options may not be increased on your Contract.
National Integrity may realize a gain from these daily charges to the extent
they are not needed to meet the actual expenses incurred.
Annual Administrative Charge
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, National Integrity charges an annual
administrative charge of $30. This charge is deducted from your Account Value in
each Investment Option on a pro-rata basis. The portion of the charge applicable
to the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to GROs is withdrawn in dollars. The annual
administrative charge will be pro-rated based on the number of days that have
elapsed in the contract year in the event of the Annuitant's retirement, death,
or termination of a contract during a contract year. The annual administrative
charge is waived for employees of National Integrity or Integrity, the parent of
National Integrity, who purchase contracts under the salary allotment program of
either company.
Fund Charges
Our Separate Account purchases shares of the Funds at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Funds. The amount charged for
investment management may not be increased without the prior approval of the
Funds' respective shareholders. See "The Funds" in Part 3.
State Premium Tax Deduction
National Integrity will not deduct state premium taxes from your contributions
before applying the contributions to the Investment Options, unless required to
pay such taxes under applicable state law. If the Annuitant elects an annuity
benefit, National Integrity will deduct any applicable state premium taxes from
the amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
15
<PAGE>
Transfer Charge
No charge is made for your first twelve transfers (excluding dollar cost
averaging and individual asset rebalancing transfers) among the Variable Account
Options or the GROs during a contract year. We are, however, permitted to charge
up to $20 for each additional transfer during that contract year. (No transfer
charge will apply to transfers under our (i) Dollar Cost Averaging, (ii)
Individual Asset Rebalancing, or (iii) the Ibbotson Asset Allocation and
Rebalancing Program, nor will such transfers count towards the twelve transfers
you may make in a contract year before we may impose a transfer charge.) See
"Transfers" in Part 5. Transfers from a GRO may be subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3.
Tax Reserve
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000.
We will accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Special Rules for Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution made for
you. Contributions may also be limited by various laws or prohibited by National
Integrity for all Annuitants under the contract. If your contributions are made
under a tax-favored retirement program, we will not measure them against the
maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have received (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options, provided that at any time you may have
amounts in not more than nine Investment Options. For purposes of calculating
the nine Investment Options, each of your GRO Accounts counts as one Investment
Option. Wire transfers of federal funds are deemed received on the day of
transmittal if credited to our account by 3 p.m. Eastern Time, otherwise they
are deemed received on the next Business Day. Contributions by check or mail are
deemed received not later than the second Business Day after they are delivered
to our Administrative Office. A Business Day is any day other than a weekend or
a national bank holiday.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
16
<PAGE>
Your Account Value
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Market Value Adjustments, if applicable, are made as of the effective date of
the transaction. Charges against our Separate Account are reflected daily. Any
amount allocated to a Variable Account Option will go up or down in value
depending on the investment experience of that Option. For contributions
allocated to the Variable Account Options, there are no guaranteed values. The
value of your contributions allocated to GROs is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part
3.
Your Purchase of Units in Our Separate Account
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Funds which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Funds' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, will not vary because of changes in unit values.
Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
How We Determine Unit Value
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a net investment factor for each Option as follows:
- - the close of business that day (before giving effect to any transactions
for that day, such as contributions or withdrawals). For this purpose, we
use the share value reported to us by the First, we take the value of the
shares belonging to the Option in the corresponding Portfolio at Funds.
- - Next, we add any dividends or capital gains distributions by the Fund on
that day.
- - Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- - on the last day on which a unit value was determined (after giving effect
to any transactions on Then, we divide this amount by the value of the
amounts in the Option at the close of business that day).
17
<PAGE>
- - Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Fund, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
Transfers
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to National Integrity's then current transfer restrictions.
Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO that you have
not elected before) at the then-current Guaranteed Interest Rate, unless
National Integrity otherwise consents. Transfers from a GRO other than within 30
days prior to the expiration date of a GRO Account are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. For amounts in GROs,
transfers will be made according to the order in which monies were originally
allocated to any GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our Dollar Cost Averaging or Individual Asset Rebalancing programs, or the
Ibbotson Asset Allocation and Rebalancing Program described in Part 8. Once
annuity payments begin, transfers are no longer permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN Code). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 a.m.- 5:00 p.m., Eastern Time, on any day
we are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 p.m. Eastern Time will be processed using unit
values as of the close of business on the next Business Day after the day you
call. All transfers will be confirmed in writing.
Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. Withdrawals from your
GRO Account in excess of the free withdrawal amount will be adjusted for any
applicable Market Value Adjustment. See "Guaranteed Rate Options" in Part 3.
Most withdrawals made by you prior to age 59-1/2 are also subject to a 10%
federal tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts" for further information
regarding various tax consequences associated with the contracts.
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Assignments
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part 7, "Tax
Aspects of the Contracts." National Integrity will not be bound by an assignment
unless it is in writing and we have received it at the Administrative Office.
Death Benefits and Similar Benefit Distributions
A death benefit is available to a beneficiary if the Annuitant dies prior to the
Retirement Date.
If the Annuitant is under the age of 80 at the time of death, the amount of the
death benefit is the greatest of:
. your Account Value
. the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
. your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
If the Annuitant is 80 or older at the time of death, the amount of the death
benefit will be your Account Value.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
Annuity Benefits
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 90th birthday or earlier, if required by law. The
terms of the contracts applicable to the various retirement programs, along with
the federal tax laws, establish certain minimum and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment.
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Annuities
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Separate Account Divisions. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 90th birthday or earlier, if
required by law. You will receive a lump sum benefit if you do not make an
election by such date.
We currently offer the following types of annuities:
A period certain annuity provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the payee) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
A period certain life annuity provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The normal form of annuity is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A life income annuity provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
Annuity Payments
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If National Integrity's
current annuity rates then in effect would yield a larger payment, those current
rates will apply instead of the tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The number
of units purchased is equal to the amount of the first annuity payment divided
by the new annuity unit value for the valuation period which includes the due
date of the first annuity payment. The amount of the first annuity payment is
determined in the same manner for a variable annuity as it is for a fixed
annuity. The number of annuity units stays the same for the annuity payment
period but the new annuity unit value changes to reflect the investment income
and the realized and unrealized capital gains and losses of the Variable Account
Option or Options selected, after charges made against it. Annuity unit values
assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall depending on whether the actual
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rate of net investment return is higher or lower than the assumed base rate. In
the SAI, see "Determination of Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
Timing of Payment
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits National
Integrity to defer action in order to protect persons with interests in the
Separate Account. National Integrity can defer payment of your GROs for up to
six months, and interest will be paid on any such payment delayed for 30 days or
more.
How You Make Requests and Give Instructions
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
PART 6 - VOTING RIGHTS
Fund Voting Rights
National Integrity is the legal owner of the shares of the Funds held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Funds' Board of Directors, to ratify the
selection of independent auditors for the Funds, and on any other matters
described in the Funds' current prospectus or requiring a vote by shareholders
under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in our Separate Account, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of the Funds in our own right or
to restrict Owner voting, we may do so.
How We Determine Your Voting Shares
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by the
Funds' Board for the Funds' shareholders' meeting. The record date for this
purpose must be no more than 60
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days before the meeting of the Funds. We count fractional shares. After annuity
payments have commenced, voting rights are calculated in a similar manner based
on the actuarially determined value of your interest in each Variable Account
Option.
How Fund Shares Are Voted
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of the Funds are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by National Integrity from its
Owners.
Separate Account Voting Rights
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and upon the tax and employment status of the individuals
concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. NATIONAL INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
Your Contract is an Annuity
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (nonqualified annuity), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (qualified annuity). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
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Taxation of Annuities Generally
Section 72 of the Internal Revenue Code of 1986, as amended (the Code), governs
the taxation of annuities. In general, an Owner is not taxed on increases in
value under a contract until some form of withdrawal or distribution is made
under the contract. However, under certain circumstances, the increase in value
may be subject to current federal income tax. For example, corporations,
partnerships, trusts and other non-natural persons cannot defer the taxation of
current income credited to the contract unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or divorced spouse), any increase in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract equals
the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion Ratio). The remainder of each payment will be ordinary
income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies National Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by National Integrity or its affiliates to one
Annuitant during any calendar year are treated as a single contract in measuring
the taxable income that results from surrenders and withdrawals under any one of
the contracts.
Distribution-at-Death Rules
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies on
or after the Retirement Date and before the entire interest in the contract has
been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
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If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Funds monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
of the investments of a segregated asset account may cause the investor (i.e.,
the Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
Tax-Favored Retirement Programs
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. Therefore, no attempt is made to provide more than
general information about the use of contracts with the various types of
qualified plans.
National Integrity reserves the right to change its administrative rules, such
as minimum contribution amounts, as needed to comply with the Code as to tax-
favored retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract.
Individual Retirement Annuities
- -------------------------------
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-favored retirement
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program to an IRA contract. Your IRA contract will be issued with a rider
outlining the special terms of your contract which apply to IRAs.
Simplified Employee Pensions
- ----------------------------
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAs) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing Plans
- --------------------------------------------------------------------------------
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with such plans
should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity does not administer such plans.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
- -------------------------------------------------------------------------
Organizations
- -------------
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. If the plan is in
existence on August 20, 1996, the employer need not establish a trust, custodial
account, or annuity contract until January 1, 1999. Loans to employees may be
permitted under such plans; however, a Section 457 plan is not required to allow
loans. Contributions to a contract in connection with an eligible government
plan are subject to limitations. Those who intend to use the contracts in
connection with such plans should seek competent advice. The Company reserves
the right to request documentation to substantiate that a qualified plan exists
and is being properly administered. National Integrity does not administer such
plans.
Distributions Under Tax-Favored Retirement Programs
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
IRA holders, to begin receiving distributions by April 1 of the calendar year
following the later of either (i) the calendar year in which the employee
reaches age 70-1/2, or (ii) the calendar year in which the employee retires.
Additional distribution rules apply after the participant's death. Failure to
make mandatory distributions may result in the imposition of a 50% penalty tax
on any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all plans (other than 457
plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
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Distributions from a tax-favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
Federal and State Income Tax Withholding
National Integrity will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a contract unless the
distributee notifies National Integrity at or before the time of the
distribution of an election not to have any amounts withheld. In certain
circumstances, National Integrity may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic payments
(including withdrawals prior to the maturity date) is 10%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
Impact of Taxes to National Integrity
The contracts provide that National Integrity may charge the Separate Account
for taxes. National Integrity can also set up reserves for taxes.
Transfers Among Investment Options
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. You may
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also specify an account for direct deposit of your systematic withdrawals. To
enroll under our systematic withdrawal program, you must deliver the appropriate
administrative form to our Administrative Office. Withdrawals may begin not less
than one business day after our receipt of the form. You or we may terminate
your participation in the program upon one day's prior written notice, and we
may terminate or amend the systematic withdrawal program at any time. If on any
withdrawal date you do not have sufficient values to make all of the withdrawals
you have specified, no withdrawals will be made and your enrollment in the
program will be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case a Market Value Adjustment will not be
made from your GRO Account. Amounts withdrawn from your GRO Account under the
systematic withdrawal program in excess of the free withdrawal amount will be
subject to a Market Value Adjustment if applicable. Withdrawals also may be
subject to the 10% federal tax penalty for early withdrawals under the contracts
and to income taxation. See Part 7, "Tax Aspects of the Contracts."
Dollar Cost Averaging
We offer a dollar cost averaging program under which allocations to the VIP
Money Market Option are automatically transferred on a monthly, quarterly, semi-
annual or annual basis to one or more other Variable Account Options. You must
specify a dollar amount to be transferred into each Variable Account Option, and
the current minimum transfer to each Option is $250. No transfer charge will
apply to transfers under our dollar cost averaging program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the VIP Money Market Option to transfer to
each Variable Account Option specified, no transfer will be made and your
enrollment in the program will be ended.
Individual Asset Rebalancing
We offer an individual asset rebalancing program whereby you can select the
frequency for rebalancing. Frequencies available include rebalancing monthly,
quarterly, semi-annually or annually. The value in the Variable Account Options
will be automatically rebalanced by transfers among such Variable Account
Options, and you will receive a confirmation notice after each rebalancing.
Transfers will occur only to and from those Variable Account Options where you
have current contribution allocations. No transfer charge will apply to
transfers under our Individual Asset Rebalancing program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
GROs are not eligible for the Individual Asset Rebalancing program.
To enroll under our Individual Asset Rebalancing program, you must deliver the
appropriate administrative form to our Administrative Office. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work in concert with the
Individual Asset Rebalancing program. You should, therefore, monitor your use of
such other programs, transfers, and withdrawals while the Individual Asset
Rebalancing program is in effect. This program is not available in concert with
the Ibbotson Asset Allocation and Rebalancing Program. You or we may terminate
your participation in the program upon one day's prior written notice, and we
may terminate or amend the Individual Asset Rebalancing program at any time.
Ibbotson Asset Allocation and Rebalancing Program
We also offer an Asset Allocation and Rebalancing Program designed by Ibbotson
Associates (Ibbotson Model(s)). Ibbotson Associates is an independent research
and consulting firm, specializing in the strategic asset allocation
decision.
27
<PAGE>
You may select one of three proposed Ibbotson Models: Aggressive, Moderate or
Conservative. Your current contribution allocations will be initially allocated
as recommended by Ibbotson and approved by you, among the Options currently
established for each Ibbotson Model as indicated below.
To ensure conformity with current Ibbotson Model instructions, the value in the
Variable Account Options will be automatically rebalanced annually by transfers
among such Variable Account Options. You will receive a confirmation notice
after each rebalancing. GRO Accounts attributable to the Ibbotson Model will not
rebalance. Instead, GRO Accounts shall renew for the same duration at the then-
current Guaranteed Interest Rate. See "Guaranteed Rate Options - Renewals of GRO
Accounts" in Part 3.
No transfer charge will apply to transfers under the Ibbotson Asset Allocation
and Rebalancing Program, nor will such transfers count toward the twelve
transfers you may make in a contract year before we may impose a transfer
charge. See "Transfers" in Part 4.
To enroll under the Ibbotson Asset Allocation and Rebalancing Program, you must
deliver the appropriate administrative form to our Administrative Office. You
should be aware that other allocation programs, such as dollar cost averaging,
as well as transfers and withdrawals that you make, may not work in concert with
the Individual Asset Rebalancing program. You should, therefore, monitor your
use of such other programs, transfers, and withdrawals while the Individual
Asset Rebalancing program is in effect. This program is not available in concert
with the Individual Asset Rebalancing program. We reserve the right to terminate
or amend this program in whole or in part, or to place restrictions on
contributions to the program. This program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
CONSERVATIVE MODEL
<TABLE>
<CAPTION>
Fund Allocation Percentage
---- ---------------------
<S> <C>
VIP III Balanced 10%
VIP Equity Income 20%
VIP Growth 0%
VIP II Index 500 0%
VIP Overseas 5%
VIP II Investment Grade Bond 30%
GRO - 3 Year 35%
----
100%
</TABLE>
MODERATE MODEL
<TABLE>
<CAPTION>
Fund Allocation Percentage
---- ---------------------
<S> <C>
VIP III Balanced 10%
VIP Equity Income 25%
VIP Growth 10%
VIP II Index 500 15%
VIP Overseas 15%
VIP II Investment Grade Bond 15%
GRO - 3 Year 30%
----
100%
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE MODEL
Fund Allocation Percentage
---- ---------------------
<S> <C>
VIP III Balanced 0%
VIP Equity Income 20%
VIP Growth 30%
VIP II Index 500 20%
VIP Overseas 20%
VIP II Investment Grade Bond 0%
GRO - 3 Year 10%
----
100%
</TABLE>
Performance Information
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. Performance data for any Option reflects only the performance of a
hypothetical investment in the Option during the particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time period, and it
should not be considered as a representation of performance to be achieved in
the future.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses. Total returns
also may be shown that do not take into account the annual administrative charge
applicable where the Account Value is less than $50,000 at the end of a contract
year.
A cumulative total return reflects an Option's performance over a stated period
of time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise yield. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses.
The VIP Money Market Option may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Option over
a specified 7-day period. Effective yield is calculated in a similar manner
except that income earned is assumed to be reinvested. The VIP II Investment
Grade Bond and VIP High Income Option may advertise a 30-day yield which
reflects the income generated by an investment in such Option over a specified
30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
29
<PAGE>
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment may affect the
values of a contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate
is the same rate used in the Example under "Table of Annual Fees and Expenses"
in this Prospectus. In these examples, the withdrawal occurs three years after
the initial contribution. The Market Value Adjustment operates in a similar
manner for transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account.
Example of a Downward Market Value Adjustment:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0551589 = [(1 + .05)/48/12/ / (1 + .0625 + .0025)/48/12/] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
Thus, the amount payable on a full withdrawal would be:
$54,688.58 = $57,881.25 - $3,192.67
30
<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment would be:
$20,783.91 = $20,000.00 + $783.91
The ending Account Value would be:
$37,097.34 = $57,881.25 - $20,783.91
Example of an Upward Market Value Adjustment:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
.0290890 = [(1 + .05)/48/12/ / (1 + .04 + .0025)/48/12/] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
Thus, the amount payable on a full withdrawal would be:
$57,564.96 = $57,881.25 + $1,683.71
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment would be:
$19,586.59 = $20,000.00 - $413.41
31
<PAGE>
The ending Account Value would be:
$38,294.66 = $57,881.25 - $19,586.59
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
32
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
FOR
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - National Integrity and Custodian............................. 2
Part 2 - Distribution of the Contracts................................ 2
Part 3 - Performance Information...................................... 3
Part 4 - Determination of Annuity Unit Values......................... 10
Part 5 - Financial Statements......................................... 11
</TABLE>
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, 1997.
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.
<PAGE>
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. (ARM), 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 owns 100% of the stock of (i) ARM Securities Corporation (ARM
Securities), a Minnesota corporation, 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 current and former 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 provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by National
Integrity for management services in 1995 and 1996, including services
applicable to the Registrant, were $5,640,827 and $6,007,766, respectively.
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.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
2
<PAGE>
We generally pay a maximum distribution allowance of 6.5% of initial
contributions. The amount of distribution allowances paid was $2,229,269,
$2,217,123, and $912,740 for the years ended December 31, 1996, 1995, and 1994,
respectively. No distribution allowances were retained by ARM Securities during
these years. 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 VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and 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.
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 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 inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
Yields
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses. Yields are annualized
and stated as a percentage.
Current yield and effective yield are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-
3
<PAGE>
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
4
<PAGE>
The table below provides average annual total returns for each Option for the
One and Three Year Periods Ended December 31, 1996 and from inception through
December 31, 1996. 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 and Three Year Periods Ended 12/31/96 and
Since Inception*
<TABLE>
<CAPTION>
Period Since One Year Three Year
Option Inception Period Period
- ------ --------- ------ ------
<S> <C> <C> <C>
VIP Equity-Income 16.19% 12.73% 16.64%
VIP II Asset Manager 9.83% 13.04% 6.51%
VIP Growth 15.07% 13.14% 14.22%
VIP Overseas 7.81% 11.67% 6.64%
VIP II Investment Grade
Bond 5.65% 1.78% 3.80%
VIP II Index 500 15.98% 21.15% 17.79%
VIP High Income 10.41% 12.48% 9.13%
VIP II Asset Manager:
Growth 20.48% 18.30% n/a
VIP II Contrafund 28.17% 19.66% n/a
VIP III Balanced n/a n/a n/a
VIP III Growth & Income n/a n/a n/a
VIP III Growth
Opportunities n/a n/a n/a
</TABLE>
*The inception date for each Option is set forth in the table below.
5
<PAGE>
The table below provides cumulative total returns for each Option from inception
through December 31, 1996, and for the One and Three Year Periods Ended December
31, 1996. The performance information is based on the historical investment
experience of the Options and does not indicate or represent future experience.
<TABLE>
<CAPTION>
Cumulative Total Returns for Period Since Inception to 12/31/96, and for the
One and Three Year Periods Ended 12/31/96
Period
Since One Three Inception
Option Inception Year Year Date*
- ------ --------- ---- ---- -----
<S> <C> <C> <C> <C>
VIP Equity-Income 122.58% 12.73% 58.68% 09/03/91
VIP II Asset Manager 64.84% 13.04% 20.83% 09/03/91
VIP Growth 111.35% 13.14% 49.02% 09/03/91
VIP Overseas 49.30% 11.67% 21.26% 09/03/91
VIP II Investment Grade Bond 29.84% 1.78% 11.85% 04/02/92
VIP II Index 500 74.10% 21.15% 63.44% 04/06/93
VIP High Income 45.83% 12.48% 29.98% 03/12/93
VIP II Asset Manager:
Growth 42.22% 18.30% n/a 02/10/95
VIP II Contrafund 59.21% 19.66% n/a 02/16/95
VIP III Balanced n/a n/a n/a 12/31/96
VIP III Growth & Income n/a n/a n/a 12/31/96
VIP III Growth Opportunities n/a n/a n/a 12/31/96
</TABLE>
*Inception Dates reflect date of first trade.
6
<PAGE>
Performance Comparisons
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (Lipper) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in Lipper Performance Analysis.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as Barron's, Business Week, CDA Technologies, Inc., Changing
Times, Consumer's Digest, Dow Jones Industrial Average, Financial Planning,
Financial Times, Financial World, Forbes, Fortune, Global Investor, Hulbert's
Financial Digest, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Funds, The New York Times, Personal Investor, Stanger's Investment
Adviser, Value Line, The Wall Street Journal, Wiesenberger Investment Company
Service and USA Today.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
7
<PAGE>
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.
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.
8
<PAGE>
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 greater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
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.
9
<PAGE>
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 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 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% and 3.5% a year, respectively. For
each valuation period thereafter, it is the annuity value for the preceding
valuation period multiplied by the adjusted net investment factor under the
contracts. For each valuation period, the adjusted net investment factor is
equal to the net investment factor reduced for each day in the valuation period
by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in
10
<PAGE>
the contract or on our current rates, whichever is more favorable to the
participant. Where the Company's current annuity rates are used, contributions
in the current and five prior participation years will qualify for the Company's
current individual annuity rates applicable to funds derived from sources
outside the Company. The balance of the proceeds will qualify for the Company's
current individual annuity rates for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that,
each payment will be calculated by multiplying the number of annuity units
credited by the average annuity unit value for the second calendar month before
the due date of the payment. The number of annuity units credited equals the
initial periodic payment divided by the annuity unit value for the valuation
period that includes the due date of the first annuity payment. The average
annuity unit value is the average of the annuity unit values for the valuation
periods ending in that month. Each business day together with any non-business
day or consecutive non-business day immediately preceding such business day
will constitute a valuation period.
Illustration of Changes in Annuity Unit Values. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units
credited under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date the Company
receives a written request for lump sum payment of remaining values. Assets held
in the Account at least equal to all statutory reserves required for such
Separate Account.
PART 5 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 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 as of December 31, 1996, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1996 and 1995 included in this SAI have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports included
herein.
11
<PAGE>
The financial statements of National Integrity should be distinguished from the
financial statements of the Separate Account and should be considered only as
they relate 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.
12
<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
December 31, 1996
With Report of Independent Auditors
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1996
Contents
Report of Independent Auditors.......................................... 1
Audited Financial Statements
Statement of Assets and Liabilities..................................... 2
Statement of Operations................................................. 4
Statements of Changes in Net Assets..................................... 6
Notes to Financial Statements........................................... 10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of 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, 1996, 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,
1996, 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, 1996, and the results of their operations and changes in
their net assets for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
Louisville, Kentucky
April 18, 1997
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High 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 $197,164,560 in the aggregate) $18,020,587 $23,407,036 $55,149,674 $34,096,543 $11,759,340
Liabilities
Payable to (receivable from) the general
account of National Integrity (1,065) 5,334 6,757 1,293 (2,740)
--------------------------------------------------------------------------
Net assets $18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080
===========================================================================
Unit value $ 12.40 $ 14.58 $ 29.09 $ 36.19 $ 19.71
===========================================================================
Units outstanding $ 1,453,359 1,605,055 1,895,597 942,118 596,757
===========================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1996
<TABLE>
<CAPTION>
Asset
Investment Asset Manager:
Grade Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments in Fidelity VIP Funds at value
(cost of $197,164,560 in the aggregate) $ 5,602,752 $28,963,476 $12,856,944 $ 4,019,997 $29,705,335 $223,581,684
Liabilities
Payable to (receivable from) the general
account of National Integrity (1,544) 5,007 (132) 330 2,611 15,851
-----------------------------------------------------------------------------------
Net assets $ 5,604,296 $28,958,469 $12,857,076 $ 4,019,667 $29,702,724 $223,565,833
===================================================================================
Unit value $ 16.47 $ 21.42 $ 17.41 $ 14.22 $ 15.92
===================================================================
Units outstanding 340,273 1,351,936 738,488 282,677 1,865,749
===================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High Income Income Growth Overseas
Division Division Division Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from Fidelity VIP Funds $990,302 $1,503,172 $1,662,157 $1,563,686 $ 202,159
Expenses
Mortality and expense risk and administrative
charges 258,367 258,372 623,813 389,332 138,984
--------------------------------------------------------------------
Net investment income (loss) 731,935 1,244,800 1,038,344 1,174,354 63,175
Realized and unrealized gain (loss) on
investments
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853
Net unrealized appreciation (depreciation)
of investments:
Beginning of period - 1,197,030 4,753,760 3,418,140 497,261
End of period - 1,536,022 8,336,245 4,306,351 1,370,759
--------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period - 338,992 3,582,485 888,211 873,498
--------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments - 911,057 4,476,304 2,073,552 1,027,351
--------------------------------------------------------------------
Net increase in net assets resulting from operations $731,935 $2,155,857 $5,514,648 $3,247,906 $1,090,526
====================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Investment Asset
Grade Asset Manager:
Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from Fidelity VIP Funds $221,647 $1,820,860 $ 207,812 $197,529 $ 127,036 $ 8,496,360
Expenses
Mortality and expense risk and
administrative charges 70,736 390,908 115,631 28,143 290,294 2,564,580
---------------------------------------------------------------------------
Net investment income (loss) 150,911 1,429,952 92,181 169,386 (163,258) 5,931,780
Realized and unrealized gain (loss)
on investments
Net realized gain on sales of investments 66,281 130,034 511,372 29,931 370,212 3,912,908
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 305,849 2,437,834 449,723 10,050 728,190 13,797,837
End of period 211,915 4,378,137 1,532,542 170,065 4,575,088 26,417,124
---------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (93,934) 1,940,303 1,082,819 160,015 3,846,898 12,619,287
---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (27,653) 2,070,337 1,594,191 189,946 4,217,110 16,532,195
---------------------------------------------------------------------------
Net increase in net assets resulting from operations $123,258 $3,500,289 $1,686,372 $359,332 $4,053,852 $22,463,975
===========================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market High 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) $ 731,935 $ 1,244,800 $ 1,038,344 $ 1,174,354 $ 63,175
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853
Change in net unrealized appreciation/
depreciation during the period - 338,992 3,582,485 888,211 873,498
---------------------------------------------------------------------
Net increase in net assets resulting from operations 731,935 2,155,857 5,514,648 3,247,906 1,090,526
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 13,022,443 5,768,611 16,528,721 9,117,366 2,244,838
Contract terminations and benefits (2,565,173) (2,122,255) (2,744,148) (2,172,101) (543,454)
Net transfers among investment options (13,359,842) 2,918,655 1,873,529 2,865,903 1,450,476
---------------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions (2,902,572) 6,565,011 15,658,102 9,811,168 3,151,860
---------------------------------------------------------------------
Increase (decrease) in net assets (2,170,637) 8,720,868 21,172,750 13,059,074 4,242,386
Net assets, beginning of year 20,192,289 14,680,834 33,970,167 21,036,176 7,519,694
---------------------------------------------------------------------
Net assets, end of year $ 18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080
=====================================================================
Unit transactions
Contributions 1,070,667 420,641 613,841 264,112 120,141
Terminations and benefits (209,764) (152,014) (101,953) (62,070) (27,727)
Net transfers (1,100,108) 204,521 67,546 82,490 78,298
---------------------------------------------------------------------
Net increase (decrease) in units (239,205) 473,148 579,434 284,532 170,712
=====================================================================
</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, 1996
<TABLE>
<CAPTION>
Asset
Investment Asset Manager:
Grade Bond Manager Index 500 Growth Contrafund
Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 150,911 $1,429,952 $ 92,181 $ 169,386 $ (163,258) $ 5,931,780
Net realized gain on sales of investments 66,281 130,034 511,372 29,931 370,212 3,912,908
Change in net unrealized appreciation/
depreciation during the period (93,934) 1,940,303 1,082,819 160,015 3,846,898 12,619,287
----------------------------------------------------------------------------
Net increase in net assets resulting from operations 123,258 3,500,289 1,686,372 359,332 4,053,852 22,463,975
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 1,384,320 2,057,176 5,841,031 1,297,372 9,673,035 66,934,913
Contract terminations and benefits (297,734) (2,120,090) (484,894) (89,733) (1,301,783) (14,441,365)
Net transfers among investment options 113,095 (2,161,691) 1,597,892 1,429,241 4,579,388 1,306,646
----------------------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 1,199,681 (2,224,605) 6,954,029 2,636,880 12,950,640 53,800,194
----------------------------------------------------------------------------
Increase (decrease) in net assets 1,322,939 1,275,684 8,640,401 2,996,212 17,004,492 76,264,169
Net assets, beginning of year 4,281,357 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
----------------------------------------------------------------------------
Net assets, end of year $5,604,296 $28,958,469 $12,857,076 $4,019,667 $29,702,724 $223,565,833
============================================================================
Unit transactions
Contributions 86,373 104,501 371,841 99,473 677,612
Terminations and benefits (17,903) (107,819) (30,376) (6,955) (89,447)
Net transfers 7,195 (105,579) 103,587 105,013 323,547
--------------------------------------------------------------
Net increase (decrease) in units 75,665 (108,897) 445,052 197,531 911,712
==============================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Money Equity-
Market High 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.
8
<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 Manager:
Grade Bond Asset Manager Index 500 Growth
Division Division Division Division*
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 14,363 $ 195,610 $ (9,282) $ 38,507
Net realized gain (loss) on sales of investments (1,976) 67,575 163,144 15,291
Change in net unrealized appreciation/
depreciation during the period 344,325 3,725,015 455,826 10,050
-----------------------------------------------------------
Net increase in net assets resulting from operations 356,712 3,988,200 609,688 63,848
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders $2,299,947 5,153,894 1,801,990 852,854
Contract terminations and benefits (76,202) (2,134,550) (154,064) (51,829)
Net transfers among investment options 337,449 (7,356,843) 897,468 158,582
-----------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 2,561,194 (4,337,499) 2,545,394 959,607
-----------------------------------------------------------
Increase (decrease) in net assets 2,917,906 (349,299) 3,155,082 1,023,455
Net assets, beginning of year 1,363,451 28,032,084 1,061,593 -
-----------------------------------------------------------
Net assets, end of year $4,281,357 $27,682,785 $4,216,675 $1,023,455
===========================================================
Unit transactions
Contributions 150,331 306,214 136,806 75,747
Terminations and benefits (4,694) (124,737) (11,135) (4,392)
Net transfers 21,423 (427,236) 67,783 13,791
-----------------------------------------------------------
Net increase (decrease) in units 167,060 (245,759) 193,454 85,146
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Contrafund
Division* Total
------------------------------
<S> <C> <C>
Increase (decrease) in net assets from operations
Net investment income (loss) $ 90,265 $ 1,725,405
Net realized gain (loss) on sales of investments 214,827 1,237,615
Change in net unrealized appreciation/
depreciation during the period 728,190 15,185,552
------------------------------
Net increase in net assets resulting from operations 1,033,282 18,148,572
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 9,594,998 65,835,986
Contract terminations and benefits (235,829) (7,080,428)
Net transfers among investment options 2,305,781 (293,420)
------------------------------
Net increase (decrease) in net assets derived
from contract related transactions 11,664,950 58,462,138
------------------------------
Increase (decrease) in net assets 12,698,232 76,610,710
Net assets, beginning of year - 70,690,954
------------------------------
Net assets, end of year $12,698,232 $147,301,664
==============================
Unit transactions
Contributions 777,515
Terminations and benefits (17,708)
Net transfers 194,230
-----------
Net increase (decrease) in units 954,037
===========
</TABLE>
*For the period February 6, 1995 (commencement of operations) to December 31,
1995.
See accompanying notes.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1996
1. Organization and Significant Accounting Policies
Organization and Nature of Operations
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 premium
variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended. The operations of the Separate
Account are part of 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
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets.
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 rate options of National Integrity's
Separate Account GRO. 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"). The contract
holder's account value in a Separate Account division will vary depending on the
performance of the corresponding portfolio. The Separate Account currently has
ten investment divisions available. The Separate Account introduced three new
investment divisions to contract holders on December 31, 1996 which include the
Balanced Portfolio, the Growth and Income Portfolio, and the Growth
Opportunities Portfolio from the Fidelity VIP Funds. The investment objective of
each division and its corresponding portfolio are the same. Set forth below is a
summary of the investment objectives of the operative portfolios of the Fidelity
VIP Funds at December 31, 1996 for this Separate Account.
10
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. It invests
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 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.
11
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
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 50% in equities, 40% in
intermediate to long-term bonds and 10% in short-term fixed income
instruments. The 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.
Index 500 Portfolio seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's 500 Composite Stock Price Index while keeping
transaction costs and other expenses low.
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 70%, 25% 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 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.
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
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 and distributions from the Fidelity VIP Fund portfolios
are reinvested in the respective portfolios and are reflected in the unit value
of the divisions of the Separate Account.
Unit Value
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Taxes
Operations of the Separate Account are included in the income tax return of
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Investments
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1996 and the cost of shares held
at December 31, 1996 for each division were as follows:
<TABLE>
<CAPTION>
Division Purchases Sales Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $30,714,814 $32,878,326 $18,020,587
High Income 22,332,381 14,511,994 21,871,014
Equity-Income 20,475,054 3,770,667 46,813,429
Growth 15,553,784 4,565,309 29,790,192
Overseas 4,779,899 1,565,635 10,388,581
Investment Grade Bond 2,497,921 1,148,199 5,390,837
Asset Manager 4,139,075 4,931,455 24,585,339
Index 500 9,140,212 2,094,301 11,324,402
Asset Manager: Growth 3,049,651 243,187 3,849,932
Contrafund 14,227,273 1,433,356 25,130,247
</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, 1996 and 1995
with Report of Independent Auditors
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1996 and 1995
<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 (Statutory Basis).............................9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
National Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of National
Integrity Life Insurance Company as of December 31, 1996 and 1995, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
generally accepted accounting principles. 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 effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of National Integrity Life Insurance Company at December 31, 1996 and 1995, or
the results of its operations or its cash flows for the years then ended.
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, 1996 and 1995, 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 12, 1997
2
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Admitted assets
Cash and investments:
Bonds $451,439 $635,249
Preferred stocks 50,715 14,428
Mortgage loans 3,929 5,318
Policy loans 24,981 22,606
Cash and short-term investments 14,570 20,268
Other invested assets 36 8,827
------------------
Total cash and investments 545,670 706,696
Separate accounts assets 370,988 265,264
Receivable for investments sold 4,576 -
Accrued investment income 6,513 7,959
Federal income tax recoverable 438 -
Other admitted assets 1,740 -
------------------
Total admitted assets $929,925 $979,919
==================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $513,639 $671,322
Unpaid claims 124 1,813
Deposits on policies to be issued 645 -
------------------
Total policy and contract liabilities 514,408 673,135
Separate accounts liabilities 370,988 265,264
Accounts payable and accrued expenses 213 264
Transfers to separate accounts due or accrued, net (21,247) (16,329)
Reinsurance balances payable 589 98
Federal income taxes - 1,005
Asset valuation reserve 1,773 1,969
Interest maintenance reserve 8,914 6,992
Payable for investments purchased - 6,082
Other liabilities 6,016 2,300
------------------
Total liabilities 881,654 940,780
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued, and outstanding 2,000 2,000
Paid-in surplus 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (13,723) (22,855)
------------------
Total capital and surplus 48,271 39,139
------------------
Total liabilities and capital and surplus $929,925 $979,919
==================
</TABLE>
See accompanying notes.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 8,640 $ 1,262
Deposit-type funds 352,899 261,378
Net investment income 53,553 46,548
Amortization of the interest maintenance reserve 1,001 823
Other revenues 5,653 3,913
-----------------------
Total premiums and other revenues 421,746 313,924
Benefits paid or provided:
Death benefits 8,260 9,098
Annuity benefits 12,106 3,581
Surrender benefits 101,241 119,789
Payments on supplementary contracts 1,879 1,869
Increase in insurance and annuity reserves 192,985 80,945
Other benefits 7,818 1,492
-----------------------
Total benefits paid or provided 324,289 216,774
Insurance and other expenses:
Commissions 5,817 4,809
General expenses 8,051 8,150
Taxes, licenses and fees 349 301
Net transfers to separate accounts 69,158 77,166
Other expenses 3,110 -
-----------------------
Total insurance and other expenses 86,485 90,426
Gain from operations before federal income taxes
and net realized capital losses 10,972 6,724
Federal income tax expense (benefit) (444) 991
-----------------------
Gain from operations before net realized capital losses 11,416 5,733
Net realized capital losses, less capital gains
tax expense (1996-$544; 1995-$1,800)
and excluding net gains (losses) transferred
to the interest maintenance reserve
(1996-$2,923; 1995-$(2,850)| (2,500) (900)
-----------------------
Net income $ 8,916 $ 4,833
=======================
</TABLE>
See accompanying notes.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Special Total
Common Paid-In Surplus Unassigned Capital and
Stock Surplus Funds Surplus Surplus
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $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
Net income 8,916 8,916
Decrease in nonadmitted assets 19 19
Decrease in asset valuation reserve 197 197
------------------------------------------------------------
Balance, December 31, 1996 $2,000 $59,244 $ 750 $ (13,723) $ 48,271
============================================================
</TABLE>
See accompanying notes.
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Operations:
Premiums, policy proceeds, and other considerations received $ 361,539 $ 262,639
Net investment income received 53,492 47,165
Commission and expense allowances received on reinsurance ceded 644 6
Benefits paid (125,238) (134,780)
Insurance expenses paid (14,170) (13,461)
Other income received net of other expenses paid 5,009 3,942
Net transfers to separate accounts (74,076) (83,932)
-----------------------
Net cash provided by operations 207,200 81,579
Investment activities:
Proceeds from sales, maturities, or repayments of investments:
Bonds 455,716 339,361
Preferred stocks 19,067 6,913
Mortgage loans 1,389 1,326
Other invested assets 8,826 -
-----------------------
Total investment proceeds 484,998 347,600
Taxes paid on capital gains (1,212) -
-----------------------
Net proceeds from sales, maturities, or repayments of investments 483,786 347,600
Cost of investments acquired:
Bonds 626,879 416,110
Preferred stocks 55,045 7,818
Other invested assets - 8,841
Miscellaneous proceeds 36 -
-----------------------
Total cost of investments acquired 681,960 432,769
Net increase in policy loans and premium notes 2,375 2,876
-----------------------
Net cash used in investment activities (200,549) (88,045)
Financing and miscellaneous activities:
Other cash provided:
Other sources 3,826 7,899
-----------------------
Total other cash provided 3,826 7,899
-----------------------
7
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Other cash applied:
Other applications, net 16,175 2,236
-----------------------
Total other cash applied 16,175 2,236
-----------------------
Net cash provided by (used in) financing and miscellaneous activities (12,349) 5,663
-----------------------
Net decrease in cash and short-term investments (5,698) (803)
Cash and short-term investments at beginning of year 20,268 21,071
-----------------------
Cash and short-term investments at end of year $ 14,570 $ 20,268
=======================
See accompanying notes.
8
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
1. Organization and Accounting Policies
Organization
National Integrity Life Insurance Company ("National Integrity" or the
"Company") is a wholly owned subsidiary 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 the National Association of Insurance Commissioners (the
"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 stock
are based on values specified by the NAIC, rather than on actual or estimated
market values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is reported
as a liability rather than unassigned surplus.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity 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 include provisions when
there has been a decline in asset values deemed other than temporary.
Policy Acquisition Costs
Costs of acquiring and renewing business are expensed when incurred. Under
GAAP, acquisition costs related to investment-type products, to the extent
recoverable from future gross profits, are amortized generally in proportion
to the emergence of future gross profits over the estimated term of the
underlying policies.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally receivables greater
than 90 days past due, are excluded from the accompanying balance sheets and
are charged directly to unassigned surplus.
Premiums
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and therefore
not recognized as premium revenue; benefits paid equal to the policy account
value are accounted for as a return of deposit instead of benefit expense.
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1.Organization and Accounting Policies (continued)
Benefit Reserves
Certain policy reserves are calculated using statutorily prescribed interest
and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
Federal Income Taxes
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 8,916 $ 4,833
Deferred policy acquisition costs, net of
amortization 5,187 7,614
Adjustments to customer deposits (441) (3,669)
Adjustments to invested asset carrying values
at acquisition date (160) (180)
Amortization of value of insurance in force (1,470) (2,905)
Amortization of interest maintenance reserve (1,001) (823)
Adjustments for realized investment gains (losses) 852 (747)
Adjustments for federal income tax benefit (expense) (2,185) 564
Other (200) 356
-----------------------
Net income, GAAP basis $ 9,498 $ 5,043
=======================
</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,
1996 1995
-------------------
(In Thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 48,271 $ 39,139
Adjustments to customer deposits (27,233) (26,792)
Adjustments to invested asset carrying values
at acquisition date (5,197) (5,889)
Asset valuation reserve and interest maintenance
reserve 19,369 20,567
Value of insurance in force 13,913 15,383
Deferred policy acquisition costs 23,728 18,541
Net unrealized gains on available-for-sale securities 1,416 5,577
Other (2,650) (246)
-------------------
Shareholder's equity, GAAP basis $ 71,617 $ 66,280
===================
</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 are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Preferred stocks are reported at cost.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the specific
identification method.
Benefits
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the New York Insurance Department. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserves. 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.
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 financial
statements 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. Fees charged on separate account
policyholder deposits are included in other revenues.
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 these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation of the 1996 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
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. Permitted Statutory Accounting Practices (continued)
administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future. 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 effective for 1999, 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 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, 1996:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 16,243 $ 415 $ 110 $ 16,548
Foreign governments 12,363 643 - 13,006
Public utilities 40,882 379 644 40,617
Other corporate securities 127,264 396 6,534 121,126
Asset-backed securities 10,311 - - 10,311
Mortgage-backed securities 244,376 - - 244,376
--------------------------------------------
Total bonds $451,439 $1,833 $7,288 $445,984
============================================
</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, 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
Assets-backed securities 27,695 - - 27,695
Mortgage-backed
securities 298,588 - - 298,588
-------------------------------------------
Total bonds $635,249 $7,042 $1,716 $640,575
===========================================
</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, 1996 and 1995, the fair
value of investments in bonds includes $312,677,000 and $426,972,000,
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, 1996, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
--------------------
(In Thousands)
<S> <C> <C>
Years to maturity:
After one through five $ 20,176 $ 16,110
After five through ten 32,815 31,575
After ten 143,761 143,612
Asset-backed securities 10,311 10,311
Mortgage-backed securities 244,376 244,376
-------------------
Total $451,439 $445,984
===================
</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 1996 and 1995 were
$755,711,000 and $286,601,000; gross gains of $7,901,000 and $4,404,000, and
gross losses of $4,450,000 and $5,621,000 were realized on those sales,
respectively.
At December 31, 1996 and 1995, bonds with an admitted asset value of $1,234,000
and $1,235,000, 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 since 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 was 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 1996, 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 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,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Income:
Bonds $47,487 $43,591
Preferred stocks 4,150 1,282
Mortgage loans 610 565
Policy loans 1,886 1,751
Short-term investments and cash 1,277 773
Other investment income 3 383
------------------
Total investment income 55,413 48,345
Investment expenses (1,860) (1,797)
------------------
Net investment income $53,553 $46,548
==================
</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 risks under certain of its
insurance products with other insurance companies through reinsurance
agreements. Through these reinsurance agreements substantially all mortality
risks associated with single premium endowment and variable annuity deposits and
substantially all risks associated with variable life business have been
reinsured with non-affiliated insurance companies. A contingent liability exists
with respect to insurance ceded which would become a liability should the
reinsurer be unable to meet the obligations assumed under these reinsurance
agreements. 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 zero and
$117,770,000 at December 31, 1996 and 1995, respectively.
The effect of reinsurance on premiums and amounts earned is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $115,547 $145,630
Reinsurance assumed 246,571 117,175
Reinsurance ceded (580) (165)
-----------------------------------
Net premiums and amounts earned $361,538 $262,640
===================================
</TABLE>
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 after
consolidated losses and credits.
19
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
5. Federal Income Taxes (continued)
Income before income taxes differs from taxable income principally due to value
of insurance in-force, interest maintenance reserves and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
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 laws, 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.
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, 1996 and 1995, 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, 1996 and 1995, the Company's annuity reserves, including
separate accounts, 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, 1996:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 89,668 11.5%
At book value less surrender charge
of 5% or more 23,208 3.0
At market value 257,419 33.0
-------------------
Total with adjustment or at market
value 370,295 47.5
Subject to discretionary withdrawal
(without adjustment) at book value
with minimal or no charge or
adjustment 347,883 44.7
Not subject to discretionary withdrawal 60,995 7.8
-------------------
Total annuity reserves and deposit
fund liabilities-before reinsurance 779,173 100.0%
=====
Less reinsurance ceded -
--------
Net annuity reserves and deposit fund
liabilities $779,173
========
At December 31, 1995:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 67,407 8.1%
At book value less 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 61,710 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
========
</TABLE>
The Company sold $358,339,000 of guaranteed investment contracts, assumed by the
Company through a coinsurance agreement with General American Life Insurance
Company, to Integrity as of June 30, 1996.
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, 1996 is as follows:
<TABLE>
<CAPTION>
*Nonindexed
Guaranteed Nonguaranteed
More Separate
than 4% Accounts Total
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Premiums, deposits and other
considerations $32,363 $ 70,537 $102,900
==========================================
Reserves for separate accounts with
assets at fair value $90,084 $257,514 $347,598
==========================================
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $89,668 $ - $ 89,668
At book value without market value
adjustment and with current
surrender charge of 5% or more 416 257,514 257,930
------------------------------------------
Total with adjustment or at market
value 90,084 257,514 347,598
Not subject to discretionary
withdrawal - - -
------------------------------------------
Total separate accounts reserves $90,084 $257,514 $347,598
==========================================
</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, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------
(In Thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $102,901 $ 96,982
Transfers from separate accounts (37,150) (21,800)
-------------------
Net transfers to separate accounts 65,751 75,182
Reconciling adjustments:
Mortality and expense charges reported as other revenues 3,194 1,928
Other revenues 213 56
-------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 69,158 $ 77,166
===================
</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 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.
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Bonds $451,439 $457,875 $635,249 $666,955
Preferred stocks 50,715 50,454 14,428 15,964
Mortgage loans 3,929 3,929 5,318 5,318
Liabilities:
Life and annuity reserves for
investment-type contracts $432,013 $426,516 $472,037 $474,465
Separate accounts annuity reserves 347,503 347,072 248,398 247,220
</TABLE>
Bonds and Preferred Stocks
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
Mortgage Loans on Real Estate
Pursuant to the terms of ARM's acquisition of the Company, payments of principal
and interest on mortgage loans acquired on November 26, 1993 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 single premium immediate annuities is based on discounted
cash flow calculations using a market yield rate for assets with similar
durations. The fair value of the remaining annuities is based on the cash
surrender value of the underlying policies.
24
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
Separate Accounts Annuity Reserves
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
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
1996 and 1995, the Company was charged $6,008,000 and $5,641,000, respectively,
for these services in accordance with the requirements of applicable insurance
law and regulations.
25
<PAGE>
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements included in Part A:
----------------------------------------
Part 1 - Financial Information
Financial Statements included in Part B:
----------------------------------------
Separate Account I:
-------------------
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Year Ended December 31, 1996
Statements of Changes in Net Assets for the Years Ended
December 31, 1996 and 1995
Notes to Financial Statements
National Integrity Life Insurance Company:
------------------------------------------
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1996 and 1995
Statements of Operations (Statutory Basis) for the Years Ended
December 31, 1996 and 1995
Statements of Changes in Capital and Surplus (Statutory Basis) for
the Years Ended December 31, 1996 and 1995
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1996 and 1995
Notes to Financial Statements
(b) Exhibits:
---------
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of National Integrity
Life Insurance Company (National Integrity) authorizing the
establishment of Separate Account I, the Registrant.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-8905), filed on September
19, 1986.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement among National
Integrity, Integrity Financial Services, Inc. ("IFS") (the
previous principal underwriter) and broker dealers.
Incorporated by reference from post-effective amendment no. 5
to Registrant's Form N-4 registration statement (File No. 33-
8905) filed on March 2, 1992.
3.(b) Form of Variable Contract Principal Underwriter Agreement with
ARM Securities Corporation. Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-
56658), filed on May 1, 1996.
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-
51126), filed on August 20, 1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658), filed on December 31, 1992.
4.(c) Form of variable annuity certificate. Incorporated by reference
from Registrant's Form N-4 registration statement (File No. 33-
56658), filed on December 31, 1992.
<PAGE>
4.(d) Form of riders to certificate for qualified plans. Incorporated
by reference from amendment no. 1 to Registrant's Form S-1
registration statement (File No. 33-51122), filed on November
10, 1992.
5. Form of application. Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-
56658), filed on December 31, 1992.
6.(a) Certificate of Incorporation of National Integrity.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-33119), filed on January
19, 1990.
6.(b) By-Laws of National Integrity. Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-
33119), filed on January 19, 1990.
7. Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA) effective
January 1, 1995 (filed herewith). Incorporated by reference
from Registrant's Form N-4 registration statement (File No. 33-
56658), filed on April 28, 1995.
8.(a) Participation Agreement Among Variable Insurance Products Fund,
Fidelity Distributors Corporation ("FDC") and National
Integrity, dated November 20, 1990. Incorporated by reference
from post-effective amendment no. 5 to Registrant's Form N-4
registration statement (File No. 33-8905), filed on March 2,
1992.
8.(b) Participation Agreement Among Variable Insurance Products Fund
II, FDC and National Integrity, dated November 20, 1990.
Incorporated by reference from post-effective amendment no. 5
to Registrant's Form N-4 registration statement (File No. 33-
8905), filed on March 2, 1992.
8.(c) Amendment No. 1 to Participation Agreements Among Variable
Insurance Products Fund, Variable Insurance Products Fund II,
FDC, and National Integrity. Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-
56658), filed on May 1, 1996.
8.(d) Participation Agreement Among Variable Insurance Products Fund
III, FDC and National Integrity, dated February 1, 1997 (filed
herewith).
9. Opinion and Consent of Kevin L. Howard (filed herewith).
10. Consents of Ernst & Young LLP (filed herewith).
11. Not applicable.
12. Not applicable.
13. Schedule for computation of performance quotations.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-56658), filed on May 1,
1996.
14. Not applicable.
2
<PAGE>
<TABLE>
<CAPTION>
Item 25. Directors and Officers of the Depositor
---------------------------------------
Set forth below is information regarding the directors and principal
officers of National Integrity, the Depositor.
Directors:
- ----------
Name and Principal Business Address Position and Offices with National
- ----------------------------------- ----------------------------------
Integrity
---------
<S> <C>
Debra E. Abramovitz Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Kenneth F. Clifford Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
James S. Cole Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Warren M. Foss Director
Bear Stearnes Co.
245 Park Avenue, 3rd Floor
New York, New York 10167
John Franco Director, Co-Chairman of the
ARM Financial Group, Inc Board and Co-Chief Executive
515 West Market Street Officer
Louisville, Kentucky 40202
Dudley J. Godfrey, Jr. Director
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
Donald B. Henderson, Jr. Director
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019-4513
Edward D. Powers Director
6064 Shipyard Lane
Easton, Maryland 21601
Colin G. Raymond Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Martin H. Ruby Director, Co-Chairman of the
ARM Financial Group Inc. Board and Co-Chief Executive
515 West Market Street Officer
Louisville, Kentucky 40202
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Directors, continued
- --------------------
Name and Principal Business Address Position and Offices with National
- ----------------------------------- ----------------------------------
Integrity
---------
<S> <C>
Irwin T. Vanderhoof Director
18 Two Bridges Road
Towaco, New Jersey
Peter R. Vogelsang Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Emad A. Zikry Director, President and
ARM Capital Advisors, Inc. Chief Investment Officer
200 Park Avenue, 20th Floor
New York, New York 10166
</TABLE>
<TABLE>
<CAPTION>
Selected Officers: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville, Kentucky
40202.)
Name and Principal Business Address Position and Offices with National
- ----------------------------------- ----------------------------------
Integrity
---------
<S> <C>
Robert H. Scott Executive Vice President,
General Counsel and Secretary
Dennis L. Carr Executive Vice President and
Chief Actuary
David E. Ferguson Executive Vice President and
Chief Technology Officer
John R. Lindholm Executive Vice President and
Chief Marketing Officer
Edward L. Zeman Executive Vice President and
Chief Financial Officer
John R. McGeeney Executive Vice President-Retail
Business Division
Daniel R. Gattis Executive Vice President-
Institutional Business Group
Rose M. Culbertson Tax Officer
Peter S. Resnik Treasurer
Barry G. Ward Controller
</TABLE>
Item 26. Persons Controlled by or Under Common Control with National Integrity
---------------------------------------------------------------------
or Registrant
- -------------
National Integrity, the depositor of Separate Account I, is a wholly owned
subsidiary of Integrity Life Insurance Company, an Ohio stock life insurance
corporation. 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. (ARM), 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 owns 100% of the stock of (i) ARM Securities
Corporation (ARM Securities), a Minnesota corporation 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 disbursing agency. Approximately 91% of the
4
<PAGE>
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 current and former 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.
The following is a complete list of the subsidiaries of Morgan Stanley. All
subsidiaries are wholly owned by their immediate parent company and are
incorporated in Delaware, except where noted otherwise in parentheses.
MORGAN STANLEY GROUP INC.
- -------------------------
Fourth Street Development Co. Incorporated
Fourth Street Ltd.
Jolter Investments Inc.
Morgan Rundle Inc.
MR Ventures Inc.
Morgan Stanley ABS Capital Inc.
Morgan Stanley Advisory Partnership Inc.
Morgan Stanley Asset Management (CPO) Inc.
Morgan Stanley Asset Management Inc.
Morgan Stanley Asset Management Holdings Inc.
*Miller Anderson & Sherrerd, LLP (Pennsylvania)
Morgan Stanley Baseball, Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital I Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Capital Partners III, Inc.
Morgan Stanley Capital Services Inc.
Morgan Stanley Commercial Mortgage Capital, Inc.
Morgan Stanley Commodities Management, Inc.
Morgan Stanley Derivative Products Inc.
Morgan Stanley Developing Country Debt II, Inc.
Morgan Stanley Emerging Markets Inc.
Morgan Stanley Equity (C.I.) Limited (Jersey, Channel Islands)
Morgan Stanley Equity Investors Inc.
Morgan Stanley Finance (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Global Emerging Markets, Inc.
Morgan Stanley Insurance Agency Inc.
Morgan Stanley (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley LEF I, Inc.
Morgan Stanley Leveraged Capital Fund Inc.
Morgan Stanley Leveraged Equity Fund II, Inc.
Morgan Stanley Capital Partners Asia Limited (Hong Kong)
Morgan Stanley Leveraged Equity Holdings Inc.
Morgan Stanley Market Products Inc.
Morgan Stanley Mortgage Capital Inc. (New York)
Morgan Stanley Overseas Finance Ltd. (Caymen Islands)
Morgan Stanley Overseas Services (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Real Estate Investment Management Inc.
5
<PAGE>
Morgan Stanley Real Estate Fund, Inc.
MSREF I, L.L.C.
MSREF I-CO, L.L.C.
Morgan Stanley Real Estate Investment Management II, Inc.
MSREF II-CO, L.L.C.
Morgan Stanley Realty Incorporated
Brooks Harvey & Co., Inc.
Morgan Stanley Realty of California Inc. (California)
Morgan Stanley Realty of Illinois Inc.
Brooks Harvey of Florida, Inc. (Florida)
Brooks Harvey & Co. of Hawaii, Inc.
Morgan Stanley Realty Japan Ltd. (Japan)
BH-MS Realty Inc.
BH-MS Leasing Inc.
BH-Sartell Inc.
The Morgan Stanley Scholarship Fund, Inc. (Not-for-Profit)
Morgan Stanley Senior Funding, Inc.
Morgan Stanley Services Inc.
Morgan Stanley Technical Services Inc.
Morgan Stanley Technical Services MB/VC Inc.
Morgan Stanley Trust Company (New York)
Morgan Stanley Venture Capital Inc.
Morgan Stanley Venture Capital II, Inc.
Morgan Stanley Venture Capital III, Inc.
Morgan Stanley Ventures Inc.
Morstan Development Company, Inc.
Moranta, Inc. (Georgia)
Porstan Development Company, Inc. (Oregon)
MS 10020, Inc.
MS 10036, Inc.
MS Financing Inc.
Morgan Stanley 750 Building Corp.
MS Tokyo Properties Ltd. (Japan)
MS Holdings Incorporated
MS Venture Capital (Japan) Inc.
MSAM Holdings II, Inc.
VK/AC Holding, Inc.
Van Kampen American Capital, Inc.
ACCESS Investor Services, Inc.
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc. (New York)
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Asset Management, Inc.
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Exchange Corp. (California)
Van Kampen American Capital Insurance Agency of Illinois, Inc. (Illinois)
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Van Kampen American Capital Recordkeeping Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company (Texas)
Van Kampen Merritt Equity Holdings Corp.
Van Kampen Merritt Equity Advisors Corp.
VKAC Cayman Limited (Cayman Islands)
VK/AC System, Inc.
MSBF Inc.
MSCP III Holdings, Inc.
MSIT Holdings, Inc.
MSPL Co. Inc.
6
<PAGE>
MSREF II, Inc.
MSREF II, L.L.C.
MSUH Holdings I, Inc.
MSUH Holdings II, Inc.
MS SP Urban Horizons, Inc.
MS Urban Horizons, Inc.
PG Holdings, Inc.
PG Investors, Inc.
PG Investors II, Inc.
Pierpont Power, Inc. (New York)
Romley Computer Leasing Inc.
Strategic Investments I, Inc.
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
- -------------------------------------------------
(The general partner of which is Morgan Stanley Leveraged Equity Fund II, Inc.)
American Italian Pasta Company
Amerin Corporation
Amerin Guaranty Corporation
ARM Financial Group, Inc.
CIMIC Holdings Limited
Consolidated Hydro, Inc.
Fort Howard Corporation
Hamilton Services Limited
PageMart Nationwide, Inc.
PSF Finance L.P.
Premium Standard Forms, Inc.
Container Corporation of America
Risk Management Solutions
Silgan Holding Inc.
Silgan Corporation
Sullivan Holdings Inc.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
- -----------------------------------------
(The general partner of the general partner which is Morgan Stanley Capital
Partners III, Inc.)
ARM Financial Group, Inc.
CSG Systems International, Inc.
The Compucare Company
Highlands Gas Corporation
ECO II Holdings
PSF Finance, L.P.
Premium Standard Forms, Inc.
Nokia Aluminum
SITA Telecommunications Holdings, N.V.
MORGAN STANLEY & CO. INCORPORATED
- ---------------------------------
(100% owned by Morgan Stanley Group Inc.)
Morgan Stanley Flexible Agreements Inc.
MS Securities Services Inc.
Prime Dealer Services Corp.
MORGAN STANLEY INTERNATIONAL INCORPORATED
- -----------------------------------------
(100% owned by Morgan Stanley Group Inc.)
Bank Morgan Stanley AG (Switzerland)
Morgan Stanley AOZT (Russia)
Morgan Stanley Asia (China) Limited (Hong Kong)
Morgan Stanley Asia Holdings I Inc.
Morgan Stanley Asia Holdings II Inc.
7
<PAGE>
Morgan Stanley Asia Holdings III Inc.
Morgan Stanley Asia Holdings IV Inc.
Morgan Stanley Asia Holdings V Inc.
Morgan Stanley Asia Holdings VI Inc.
Morgan Stanley Asia Pacific (Holdings) Limited (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) I LLC (Cayman Islands)
Morgan Stanley Asia Limited (Hong Kong)
Morgan Stanley Futures (Hong Kong) Limited (Hong Kong)
Morgan Stanley Hong Kong Securities Limited (Hong Kong)
Morgan Stanley Pacific Limited (Hong Kong)
Morgan Stanley Asia Regional (Holdings) II LLC (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) III LLC (Cayman Islands)
Morgan Stanley Japan Limited (Hong Kong)
Morgan Stanley Asia Pacific (Holdings) I Limited (Cayman Islands)
Morgan Stanley Asia (Taiwan) Ltd. (Republic of China)
Morgan Stanley Asset & Investment Trust Management Co., Limited (Japan)
Morgan Stanley Australia Limited (Australia)
Morgan Stanley Bank Luxembourg S.A. (Luxembourg)
Morgan Stanley Canada Limited (Canada)
Morgan Stanley Capital SA (France)
Morgan Stanley Capital (Luxembourg) S.A. (Luxembourg)
Morgan Stanley Financial Services Beteiligungs GmbH (Germany)
Morgan Stanley Financial Services GmbH & Co. KG (Germany)
Morgan Stanley Group (Europe) Plc (England)
Morgan Stanley Asset Management Limited (England)
Morgan Stanley Capital Group Limited (England)
Morgan Stanley (Europe) Limited (England)
Morgan Stanley Finance plc (England)
Morgan Stanley Properties Limited (England)
Morgan Stanley Property Management (UK) Limited (England)
Morgan Stanley Services (UK) Limited (England)
Morgan Stanley UK Group (England)
Morgan Stanley & Co. International Limited (England)
Morgan Stanley International Nominees Limited (England)
Morgan Stanley & Co. Limited (England)
Morgan Stanley Securities Limited (England)
Morstan Nominees Limited (England)
MS Leasing UK Limited (England)
Morgan Stanley Holding (Deutschland) GmbH (Germany)
Morgan Stanley Bank AG (Germany)
Morgan Stanley Hong Kong Nominees Limited (Hong Kong)
Morgan Stanley International Insurance Ltd. (Bermuda)
Morgan Stanley Latin America Incorporated
Morgan Stanley Administadora de Carteiras Ltda. (Brazil)
Morgan Stanley do Brasil Limitada (Brazil)
MS Carbocol Advisors Incorporated
Morgan Stanley Mauritius Company Limited (Mauritius)
***Morgan Stanley Asset Management India Private Limited (India)
***Morgan Stanley India Securities Private Limited (India)
Morgan Stanley India Private Limited (India)
Morgan Stanley Offshore Investment Company Ltd. (Cayman Islands)
Morgan Stanley S.A. (France)
Morgan Stanley SICAV Management S.A. (Luxembourg)
Morgan Stanley South Africa (Pty) Limited (South Africa)
Morgan Stanley SPV I (Cayman Islands) LLC (Cayman Islands)
Farlington Corporation (Ireland)
Morgan Stanley SPV II (Cayman Islands) LLC (Cayman Islands)
Morgan Stanley (Structured Products) Jersey Limited (Jersey, Channel Islands)
Morgan Stanley Wertpapiere GmbH (Germany)
8
<PAGE>
MS Italy (Holdings) Inc.
Banca Morgan Stanley SpA (Italy)
MS LDC, Ltd.
MSAM/Kokusai (Cayman Islands), Inc. (Cayman Islands)
MSL Incorporated
- -----------------------
* 95% owned by Morgan Stanley Asset Management Holdings Inc., 3% owned by MSL
Incorporated and 2% owned by MS Holdings Incorporated.
** 25% owned by Morgan Stanley Asia Pacific (Holdings) I Limited.
*** 25% owned by non-Morgan Stanley entities.
[There are no subsidiaries of National Integrity. The financial
statements for National Integrity are not consolidated with any affiliate.]
Item 27. Number of Contract Owners
-------------------------
As of March 31, 1997 there were 5,261 contract owners of GrandMaster
II, 38 contract owners of GrandMaster III, and no contract owners of IQ The
SmartAnnuity of Separate Account I of National Integrity.
Item 28. Indemnification
---------------
By-Laws of National Integrity. National Integrity's By-Laws provide, in Article
VII, as follows:
7.1 Indemnification of Directors, Officers, Employees and
Incorporators. To the extent permitted by the law of the State of New York and
subject to all applicable requirements thereof:
(a) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate, is or was a director, officer, employee or
incorporator of the Company shall be indemnified by the Company;
(b) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate serves or served any other organization in
any capacity at the request of the Company may be indemnified by the
Company; and
(c) the related expenses of any such person in any other of said
categories may be advanced by the Company.
By-Laws of ARM Securities. ARM Securities' By-Laws provide, in Sections 4.01
and 4.02, as follows:
Section 4.01 Indemnification. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
Section 4.02 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
Agreements. National Integrity and ARM Securities, including each director,
officer, and controlling person of National Integrity and ARM Securities, are
entitled to indemnification against certain liabilities as described in Sections
5.2, 5.3 and 5.5 of the Selling Agreement and Section 9 of the Form of Variable
Contract Selling Agreement incorporated as Exhibit 3(a) to this Registration
Statement. Those sections are incorporated by reference into this response. In
addition, National Integrity and ARM Securities, including each director,
officer and controlling person of National Integrity and ARM Securities, are
entitled to indemnification against
9
<PAGE>
certain liabilities as described in Article VIII of the Participation Agreements
incorporated as Exhibits 8(a) and 8(b) to this Registration Statement. That
article is incorporated by reference into this response. Certain officers and
directors of National Integrity are officers and directors of ARM Securities
(see Item 25 and Item 29 of this Part C).
Insurance. The directors and officers of National Integrity and ARM Securities
are insured under a policy, issued by National Union. The total annual limit on
such policy is $10 million, and the policy insures the officers and directors
against certain liabilities arising out of their conduct in such capacities.
Undertaking. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 29. Principal Underwriters
----------------------
(a) ARM Securities is the principal underwriter for Separate Account
I. ARM Securities also serves as an underwriter for Separate Account II of
National Integrity, Separate Accounts I and II of Integrity, and The Legends
Fund, Inc. National Integrity is the Depositor of Separate Accounts I, II and
VUL.
(b) The names and business addresses of the officers and directors
of, and their positions with, ARM Securities, are as follows:
Name and Principal Business Address Position and Offices with ARM Securities
- ----------------------------------- ----------------------------------------
Edward J. Haines Director and President
515 West Market Street
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General
515 West Market Street Counsel and Compliance Officer
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Walter W. Balek Vice President
200 East Wilson Bridge Road
Worthington, Ohio 43085
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 93710
10
<PAGE>
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
Rose M. Culbertson Tax Officer
515 West Market Street
Louisville, Kentucky 40202
William H. Guth Operations Officer
200 East Wilson Bridge Road
Worthington, Ohio 43085
David L. Anders Marketing Officer
515 West Market Street
Louisville, Kentucky 40202
Robert L. Maddox Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
Sheri L. Bean Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
are maintained by National Integrity at 515 West Market Street, Louisville,
Kentucky 40202 or 200 Park Avenue, 20th Floor, New York, New York 10166.
Item 31. Management Services
-------------------
The contract under which management-related services are provided to
National Integrity is discussed under Part 1 of Part B.
Item 32. Undertakings
------------
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement
as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable
annuity contracts may be accepted;
(b) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included
in the prospectus that the applicant can remove to send for a
Statement of Additional Information; and
11
<PAGE>
(c) to deliver any Statement of Additional Information and any
financial statements required to be made available under this Form
promptly upon written or oral request.
National Integrity represents that aggregate charges under variable
annuity contracts described in this Registration Statement are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by National Integrity.
12
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant and the Depositor certify that they meet all of the
requirements for effectiveness of this post-effective amendment to their
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and have duly caused this amendment to the Registration Statement to be signed
on their behalf, in the City of Louisville and State of Kentucky on this 29th
day of April, 1997.
SEPARATE ACCOUNT I OF
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: National Integrity Life Insurance Company
(Depositor)
By: /s/ Emad A. Zikry
--------------------------------
Emad A. Zikry
President and Chief Investment Officer
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Emad A. Zikry
--------------------------------
Emad A. Zikry
President and Chief Investment Officer
13
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Depositor has duly caused this amendment to the Registration
Statement to be signed on its behalf, in the City of Louisville and State of
Kentucky on this 29th day of April, 1997.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Emad A. Zikry
--------------------------------
Emad A. Zikry
President and Chief Investment Officer
As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ Emad A. Zikry
------------------------
Emad A. Zikry, President and Chief Investment
Officer
Date: 04/29/97
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 04/29/97
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
-----------------------
Barry G. Ward, Controller
Date: 04/29/97
<TABLE>
<CAPTION>
DIRECTORS:
<S> <C>
/s/ Debra E. Abramovitz /s/ Warren M. Foss
- ------------------------ -----------------------
Debra E. Abramovitz Warren M. Foss
Date: 04/29/97 Date: 04/29/97
/s/ Kenneth F. Clifford /s/ Colin F. Raymond
- ----------------------- -----------------------
Kenneth F. Clifford Colin F. Raymond
Date: 04/29/97 Date: 04/29/97
/s/ James S. Cole /s/ Martin H. Ruby
- ----------------------------- -----------------------
James S. Cole Martin H. Ruby
Date: 04/29/97 Date: 04/29/97
/s/ John Franco /s/ Irwin T. Vanderhoof
- ----------------------------- ------------------------
John Franco Irwin T. Vanderhoof
Date: 04/29/97 Date: 04/29/97
/s/ Dudley J. Godfrey, Jr. /s/ Peter R. Vogelsang
- ----------------------------- -----------------------
Dudley J. Godfrey, Jr. Peter R. Vogelsang
Date: 04/29/97 Date: 04/29/97
/s/ Donald B. Henderson, Jr. /s/ Emad A. Zikry
- ----------------------------- -----------------------
Donald B. Henderson, Jr. Emad A. Zikry
Date: 04/29/97 Date: 04/29/97
/s/ Edward D. Powers
- ------------------------------
Edward D. Powers
Date: 04/29/97
</TABLE>
14
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
8.(d) Participation Agreement Among Variable Insurance Products Fund III, FDC
and National Integrity, dated February 1, 1997.
9. Opinion and Consent of Kevin L. Howard.
10. Consents of Ernst & Young LLP.
15
<PAGE>
Ex 8(d)
PARTICIPATION AGREEMENT
-----------------------
Among
VARIABLE INSURANCE PRODUCTS FUND III,
------------------------------------
FIDELITY DISTRIBUTORS CORPORATION
---------------------------------
and
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
-----------------------------------------
THIS AGREEMENT, made and entered into as of the 1st day of February, 1997 by
and among NATIONAL INTEGRITY LIFE INSURANCE COMPANY, (hereinafter the
"Company"), a corporation, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereinafter referred to as the "Account"),
and the VARIABLE INSURANCE PRODUCTS FUND III, an unincorporated business trust
organized under the laws of the Commonwealth of Massachusetts (hereinafter the
"Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a
Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and the
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series of
shares, each representing the interest in a particular managed portfolio of
securities and other assets, any one or more of which may be made available
under this Agreement, as may be amended from time to time by mutual agreement of
the parties hereto (each such series hereinafter referred to as a "Portfolio");
and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-6422), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"); and
<PAGE>
WHEREAS, the Fund is registered as an open-end management investment company
under the 1940 Act and its shares are registered under the Securities Act of
1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated asset
account, established by resolution of the Board of Directors of the Company, on
the date shown for such Account on Schedule A hereto, to set aside and invest
assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company intends to purchase shares in the Portfolios on behalf of each
Account to fund certain of the aforesaid variable life and variable annuity
contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of the Fund
which each Account orders, executing such orders on a daily basis at the net
asset value next computed after receipt by the Fund or its designee of the order
for the shares of the Fund. For purposes of this Section 1.1, the Company shall
be the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund; provided that the
Fund receives notice of such order by 9:00 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
<PAGE>
1.2. The Fund agrees to make its shares available indefinitely for purchase
at the applicable net asset value per share by the Company and its Accounts on
those days on which the Fund calculates its net asset value pursuant to rules of
the Securities and Exchange Commission and the Fund shall use reasonable efforts
to calculate such net asset value on each day which the New York Stock Exchange
is open for trading. Notwithstanding the foregoing, the Board of Trustees of
the Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be sold
only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any full
or fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund or
its designee of the request for redemption. For purposes of this Section 1.5,
the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such request for
redemption on the next following Business Day.
1.6. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule A attached hereto and incorporated herein by this reference,
as such Schedule A may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement (a list
of such funds appearing on Schedule C to this Agreement); or (d) the Fund or
Underwriter consents to the use of such other investment company.
<PAGE>
1.7. The Company shall pay for Fund shares on the next Business Day after an
order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds
so wired, such funds shall cease to be the responsibility of the Company and
shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Shares
ordered from the Fund will be recorded in an appropriate title for each Account
or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Fund's shares. The Company hereby elects to
receive all such income dividends and capital gain distributions as are payable
on the Portfolio shares in additional shares of that Portfolio. The Company
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Boston time)
and shall use its best efforts to make such net asset value per share available
by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Section 4240 of the New York Insurance Law and has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act, duly authorized for issuance
and sold in compliance with the laws of the State of and all applicable federal
and state securities laws and that the Fund is and shall remain registered under
the 1940 Act. The Fund shall amend the Registration Statement for its shares
under the 1933 Act and the 1940 Act from time to time as required in order to
effect the continuous offering of its shares. The Fund shall register and
qualify the shares for sale in accordance with the laws of the various states
only if and to the
<PAGE>
extent deemed advisable by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment, annuity or life insurance contracts, under applicable provisions of
the Code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of and the Fund and the Underwriter represent that their respective
operations are and shall at all times remain in material compliance with the
laws of the State of to the extent required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of and all applicable state and
federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly existing
under the laws of the Commonwealth of Massachusetts and that it does and will
comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the State of and
any applicable state and federal securities laws.
<PAGE>
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, and that said bond is
issued by a reputable bonding company, includes coverage for larceny and
embezzlement, and is in an amount not less than $5 million. The Company agrees
to make all reasonable efforts to see that this bond or another bond containing
these provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many printed copies of
the Fund's current prospectus and Statement of Additional Information as the
Company may reasonably request. If requested by the Company in lieu thereof,
the Fund shall provide camera-ready film containing the Fund's prospectus and
Statement of Additional Information, and such other assistance as is reasonably
necessary in order for the Company once each year (or more frequently if the
prospectus and/or Statement of Additional Information for the Fund is amended
during the year) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document, and to have the Statement of
Additional Information for the Fund and the Statement of Additional Information
for the Contracts printed together in one document. Alternatively, the Company
may print the Fund's prospectus and/or its Statement of Additional Information
in combination with other fund companies' prospectuses and statements of
additional information. Except as provided in the following three sentences,
all expenses of printing and distributing Fund prospectuses and Statements of
Additional Information shall be the expense of the Company. For prospectuses
and Statements of Additional Information provided by the Company to its existing
owners of Contracts in order to update disclosure annually as required by the
1933 Act and/or the 1940 Act, the cost of printing shall be borne by the Fund.
If the Company chooses to receive camera-ready film in lieu of receiving printed
copies of the Fund's prospectus, the Fund will reimburse the Company in an
amount equal to the product of A and B where A is the number of such
prospectuses distributed to owners of the Contracts, and B is the Fund's per
unit cost of typesetting and printing the Fund's prospectus. The same
procedures shall be followed with respect to the Fund's Statement of Additional
Information.
The Company agrees to provide the Fund or its designee with such information
as may be reasonably requested by the Fund to assure that the Fund's expenses do
not include the cost of printing any prospectuses or Statements of Additional
Information other than those
<PAGE>
actually distributed to existing owners of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter or the Company (or in
the Fund's discretion, the Prospectus shall state that such Statement is
available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with copies of its
proxy statements, reports to shareholders, and other communications (except for
prospectuses and Statements of Additional Information, which are covered in
Section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii) vote Fund shares for which no instructions have been received in a
particular separate account in the same proportion as Fund shares
of such portfolio for which instructions have been received in
that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material in
which the Fund or its investment adviser or the Underwriter is named, at least
fifteen Business Days prior to its use. No such material shall be used if the
Fund or its designee reasonably objects to such use within fifteen
<PAGE>
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee or
by the Underwriter, except with the permission of the Fund or the Underwriter or
the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause to
be furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s),
is named at least fifteen Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within fifteen Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the SEC or
other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public,
<PAGE>
including brochures, circulars, research reports, market letters, form letters,
seminar texts, reprints or excerpts of any other advertisement, sales
literature, or published article), educational or training materials or other
communications distributed or made generally available to some or all agents or
employees, and registration statements, prospectuses, Statements of Additional
Information, shareholder reports, and proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation to the
Company under this agreement, except that if the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 to finance distribution expenses,
then the Underwriter may make payments to the Company or to the underwriter for
the Contracts if and in amounts agreed to by the Underwriter in writing and such
payments will be made out of existing fees otherwise payable to the Underwriter,
past profits of the Underwriter or other resources available to the Underwriter.
No such payments shall be made directly by the Fund.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type and printing the proxy
materials and reports to shareholders (including the costs of printing a
prospectus that constitutes an annual report), the preparation of all statements
and notices required by any federal or state law, and all taxes on the issuance
or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h) of
the Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance within the grace period afforded by Regulation
1.817-5.
<PAGE>
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
<PAGE>
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board informs the Company in writing
that it has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until
the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict. In the event that the Board determines that any proposed
action does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs the Company in writing
of the foregoing determination, provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund and each
trustee of the Board and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this
<PAGE>
Section 8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the Registration Statement or
prospectus for the Contracts or contained in the Contracts or sales literature
for the Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in conformity
with information furnished to the Company by or on behalf of the Fund for use
in the Registration Statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or otherwise
for use in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration Statement,
prospectus or sales literature of the Fund not supplied by the Company, or
persons under its control) or wrongful conduct of the Company or persons under
its control, with respect to the sale or distribution of the Contracts or Fund
Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or sales
literature of the Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such a statement or omission was made in reliance upon information furnished
to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or
<PAGE>
assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations or duties under this Agreement or to the
Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company of
any such claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the Company
to such party of the Company's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of
the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement
or prospectus or sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon
the
<PAGE>
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Underwriter or Fund by or
on behalf of the Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration
Statement, prospectus or sales literature for the Contracts not
supplied by the Underwriter or persons under its control) or wrongful
conduct of the Fund, Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of the Contracts or
Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or
sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement (including
a failure, whether unintentional or in good faith or otherwise, to
comply with the diversification requirements specified in Article VI of
this Agreement); or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Underwriter in this Agreement or arise out
of or result from any other material breach of this Agreement by the
Underwriter; as limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have
<PAGE>
notified the Underwriter in writing within a reasonable time after the summons
or other first legal process giving information of the nature of the claim shall
have been served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent), but failure
to notify the Underwriter of any such claim shall not relieve the Underwriter
from any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, the
Underwriter will be entitled to participate, at its own expense, in the defense
thereof. The Underwriter also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After notice from
the Underwriter to such party of the Underwriter's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Underwriter will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and each
of its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.3) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Fund) or litigation (including legal and other expenses) to which
the Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross negligence, bad
faith or willful misconduct of the Board or any member thereof, are related to
the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement (including
a failure to comply with the diversification requirements specified in
Article VI of this Agreement);or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith,
<PAGE>
or gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company, the Fund, the Underwriter or each
Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the Fund of
the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and
1940 acts, and the rules and regulations and rulings thereunder, including such
exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the first
to occur of:
(a) termination by any party for any reason by six months advance written
notice delivered to the other parties; or
<PAGE>
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably available
to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the use of such
shares as the underlying investment media of the Contracts issued or to be
issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company under Subchapter M of
the Code or under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements specified in Article VI
hereof; or
(f) termination by either the Fund or the Underwriter by written notice to the
Company, if either one or both of the Fund or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company and/or its affiliated companies has suffered a
material adverse change in its business, operations, financial condition
or prospects since the date of this Agreement or is the subject of
material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the subject
of material adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to the
Company, if the Company gives the Fund and the Underwriter the written
notice specified in Section 1.6(b) hereof and at the time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however any termination under this
Section 10.1(h) shall be effective forty five (45) days after the notice
specified in Section 1.6(b) was given.
10.2. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this
<PAGE>
Agreement, for all Contracts in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Contracts"). Specifically,
without limitation, the owners of the Existing Contracts shall be permitted to
reallocate investments in the Fund, redeem investments in the Fund and/or invest
in the Fund upon the making of additional purchase payments under the Existing
Contracts. The parties agree that this Section 10.2 shall not apply to any
terminations under Article VII and the effect of such Article VII terminations
shall be governed by Article VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the Contracts
(as opposed to Fund shares attributable to the Company's assets held in the
Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act.
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Fund or the
Underwriter 90 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
National Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
Attention: Compliance Officer
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
<PAGE>
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter, if such assignee is duly licensed and registered
to perform the obligations of the Underwriter under this Agreement.
<PAGE>
12.9. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory accounting
principles) and annual report (prepared under generally accepted
accounting principles ("GAAP"), if any), as soon as practical and in
any event within 90 days after the end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if any), as
soon as practical and in any event within 45 days after the end of
each quarterly period:
(c) any financial statement, proxy statement, notice or report of the
Company sent to stockholders and/or policyholders, as soon as
practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial reports
of the Company filed with the Securities and Exchange Commission or
any state insurance regulator, as soon as practical after the filing
thereof; but this subparagraph shall not apply to any offerings of
insurance products other than the Contracts;
(e) any other report submitted to the Company by independent accountants
in connection with any annual, interim or special audit made by them
of the books of the Company, as soon as practical after the receipt
thereof, but this subparagraph shall not require the Company to
disclose any information that would otherwise be confidential or
privileged.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified below.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
By: /S/ JOHN R. McGEENEY
----------------------------
Name: John R. McGeeney
----------------------------
Title: Executive Vice President
----------------------------
<PAGE>
VARIABLE INSURANCE PRODUCTS FUND III
By: \s\ J. Gary Burkhead
--------------------------
J. Gary Burkhead
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: \s\ Paul J. Hondros
--------------------------
Paul J. Hondros
President
<PAGE>
Schedule A
----------
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Separate Account I NIL95, NIL11960CNQ, NIL11960-VA,
(5-19-86) NIL96
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by the
Company either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide the last Annual Report to the Company
pursuant to the terms of Section 3.3 of the Agreement to which this
Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided and
paid for by the Insurance Company). Contents of envelope sent to Customers
by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be supplied
by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but not including) the meeting,
counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they
<PAGE>
are sent back to Customer with an explanatory letter, a new Card and return
envelope. The mutilated or illegible Card is disregarded and considered to
be not received for purposes of vote tabulation. Any Cards that have
"kicked out" (e.g. mutilated, illegible) of the procedure are "hand
verified," i.e., examined as to why they did not complete the system. Any
questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity Legal
must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
NONE
<PAGE>
April 21, 1997
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
Re: Separate Account I of National Integrity Life Insurance Company (the
"Separate Account")
Dear Sirs:
This opinion is furnished in connection with the Registration Statement on Form
N-4 for the Separate Account and National Integrity Life Insurance Company
("National Integrity"), filed under the Securities Act of 1933 and the
Investment Company Act of 1940.
The Registration Statement covers an indefinite number of units of interest in
the Separate Account. Contributions to be received under individual variable
annuity contracts ("Contracts") and group variable annuity certificates
("Certificates") offered by National Integrity may be allocated to the Separate
Account to support reserves for such Contracts and Certificates.
I have examined all such corporate records of National Integrity and such other
documents and such laws as I consider appropriate as a basis for the opinion
hereinafter expressed. On the basis of such examination, it is my opinion that:
1. National Integrity is a corporation duly organized and validly existing
under the laws of the State of New York.
2. The Separate Account was established and is maintained pursuant to the laws
of the State of New York, under which income, gains and losses, whether or
not realized, from assets allocated to such Separate Account are, in
accordance with the contracts and certificates, credited to or charged
against the Separate Account without regard to other income, gains or
losses of National Integrity. Although contractual obligations with respect
to the funds of the Separate Account constitute corporate obligations of
National Integrity, the specific amounts payable from accumulations in the
Separate Account in accordance with the Contracts and Certificates depend
upon the investment experience of the Separate Account.
3. Assets allocated to the Separate Account will be owned by National
Integrity; National Integrity will not be a trustee with respect thereto.
The Contracts and Certificates provide that the portion of the assets of
the Separate Account equal to the reserves and other Contract and
Certificate liabilities with respect to the Separate Account will not be
chargeable with liabilities arising out of any other business National
Integrity may conduct, and that National Integrity reserves the right to
transfer assets of the Separate Account in excess of such reserves and
other Contract and Certificate liabilities to the General Account of
National Integrity.
<PAGE>
4. When issued and sold as described above, the Contracts and Certificates
will be duly authorized and will constitute validly issued and binding
obligations of National Integrity in accordance with their terms.
Purchasers of the Contracts and Certificates will be subject only to the
deductions, charges and fees set forth in the Prospectus.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Kevin L. Howard
Kevin L. Howard
<PAGE>
Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
and to the use of our report dated April 18, 1997, with respect to the financial
statements of Separate Account I of National Integrity Life Insurance Company in
Post-Effective Amendment No. 7 to the Registration Statement (Form N-4 No.
33-56658) and Amendment No. 16 to the Registration Statement (Form N-4 No.
811-4846) and related Prospectuses of National Integrity Life Insurance Company.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 25, 1997
<PAGE>
Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
and to the use of our report dated February 12, 1997, with respect to the
statutory basis financial statements of National Integrity Life Insurance
Company in Post-Effective Amendment No. 7 to the Registration Statement (Form
N-4 No. 33-56658) and Amendment No. 16 to the Registration Statement (Form N-4
No. 811-4846) and related Prospectuses of National Integrity Life Insurance
Company.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 25, 1997
