<PAGE>
As filed with the Securities and Exchange Commission
on May 5, 1998
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. 10 [X]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 [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.
<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
Form N-4 Item No. Location in Prospectus
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
Annuity Contracts Separate Account; 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 Table of Contents
Statement of Additional
Information
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - GRANDMASTER II
Form N-4 Item No. Location in Statement of Additional
Information
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 Part 2 - Distribution of the Contracts
Offered
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
<PAGE>
PART A
<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-Registered Trademark- 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 Portfolio
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). Withdrawal charges and an annual administrative charge may be
applicable, which may invade principal.
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, 1998, 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 CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1998.
<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. . . . . . . . . . . . . . . . . . . . . . . . 10
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 . . . . . . . . . . . . . . . . . . . . 14
Market Value Adjustments . . . . . . . . . . . . . . . . . . . . 15
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . 15
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . 16
Reduction or Elimination of Separate Account or Administrative Charges . 16
Fund Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . 16
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . 16
Reduction or Elimination of the Contingent Withdrawal Charge . . . . . . 17
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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 . . . . . . . . . . . . . 19
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . 19
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . 21
<PAGE>
PAGE
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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
Traditional Individual Retirement Annuities . . . . . . . . . . . . 26
Roth Individual Retirement Annuities. . . . . . . . . . . . . . . . 27
SIMPLE Individual Retirement Annuities. . . . . . . . . . . . . . . 27
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
Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . . . 30
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . 30
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . 30
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . 31
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . 37
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . 37
Appendix A - Illustration of a Market Value Adjustment . . . . . . . . 38
</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
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
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 (Grandmaster II)
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. If a Joint Owner is named, the
contract rights are shared with the Owner. Contract changes or any transactions
allowed under the contract require both signatures. The rules governing
distribution at death apply when the first Owner dies. See Section 7,
"DISTRIBUTION-AT-DEATH RULES."
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 "Customized 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 1997 was .75% 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. Unless specifically
instructed otherwise, National Integrity will make withdrawals (including any
applicable charges) from the Investment Option in the same ratio the Annuitant's
Account Value in each Investment Option bares to the Annuitant's total Account
Value. 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.
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.
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.
TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses
- -----------------------------------
<TABLE>
<S> <C>
Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (1) . . . . . . . . . . . . . . . . . . . . .7% Maximum
Exchange Fee (2). . . . . . . . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge (3). . . . . . . . . . . . . . . . . $30
</TABLE>
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ----------------------------------------
<TABLE>
<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 (6) Expenses Expenses
- --------- -------- -------- --------
<S> <C> <C> <C>
VIP Money Market ................ .21% .10% .31%
VIP High Income ................. .59% .12% .71%(6)
VIP Equity-Income ............... .50% .08% .58%
VIP Growth ...................... .60% .09% .69%
VIP Overseas .................... .75% .17% .92%
VIP II Investment Grade Bond .... .44% .14% .58%
VIP II Asset Manager ............ .55% .10% .65%(6)(7)
VIP II Index 500 ................ .24% . 4% .28%(7)
VIP II Contrafund ............... .60% .11% .71%(6)
VIP II Asset Manager: Growth .... .60% .17% .77%(6)(7)
VIP III Balanced ................ .45% .16% .61%(6)
VIP III Growth Opportunities .... .60% .14% .74%(6)
VIP III Growth & Income ......... .49% .21% .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, 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, asset rebalancing, or
systematic transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
3
<PAGE>
(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."
(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 whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would have
been .57% for VIP Equity-Income Portfolio, .67% for VIP Growth Portfolio, .90%
for VIP Overseas Portfolio, .64% for VIP II Asset Manager Portfolio, .68% for
VIP II Contrafund Portfolio, .76% for VIP II Asset Manager: Growth Portfolio,
and .73% for VIP III Growth Opportunities Portfolio, and .60% 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 .27%, .13%,
and .40%, 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>
4
<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.
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.
<TABLE>
<CAPTION>
UNIT VALUES AND UNITS OUTSTANDING
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
December 31, 1997 $12.90 $16.93 $36.77 $44.09 $21.69 $17.72
Number of Units 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402
</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 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>
<TABLE>
<CAPTION>
UNIT VALUES AND UNITS OUTSTANDING
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 - - -
December 31, 1997 $25.50 $22.79 $19.50 $17.55 $11.36 $12.19 $11.99
Number of Units 1,277,528 1,458,28038 2,463,777 447,420 175,229 321,915 320,952
</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, 1997, ARM had $6.9
billion of assets under management.
National Integrity is currently evaluating, on an ongoing basis, its computer
systems and the systems of other companies on which National Integrity's
operations rely to determine if they will function properly with respect to
dates in the year 2000 and beyond. These activities are designed to ensure that
there is no adverse effect on National Integrity's core business operations.
While National Integrity believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which National Integrity's operations rely will be converted on a
timely basis and will not have a material effect on National Integrity.
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:
8
<PAGE>
- add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940
Act;
- operate our Separate Account under the direction of a committee or
discharge 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-Registered Trademark-, one of the largest investment management
organizations in the United States. Fidelity Investments-Registered Trademark-
includes a number of different companies, which provide a variety of financial
services and products to individuals and corporations.
9
<PAGE>
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-Registered Trademark- 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.
The VIP Money Market Portfolio's advisory fee is made up of three components: a
group fee rate, an individual fund fee rate (0.03%), and an income-based
component of 6% of the fund's gross income in excess of a 5% yield. The maximum
income-based component is 0.24% of the fund's average net assets.
Pursuant to approval of shareholders of VIP II Index 500 at a shareholder
meeting held on November 19, 1997, effective December 1, 1997 Bankers Trust
Company ("BT") has been appointed as the fund's sub-adviser. BT chooses the
fund's investments and acts as the fund's custodian. BT, a New York banking
corporation with principal offices at 130 Liberty Street, New York, New York
10006, is a wholly owned subsidiary of Bankers Trust New York Corporation.
Index 500's management fees are paid out of the fund's assets to Fidelity
Management and BT. The fund also incurs other expenses for services such as
maintaining shareholder records and furnishing shareholder account statements
and financial reports. Management and sub-advisory fees are calculated and paid
every month to Fidelity Management and BT, respectively. The fund pays the fees
at the annual rate of 0.24% of its average net assets. These fees include a
management fee of 0.24% payable to Fidelity Management, and estimated
sub-advisory fees of less than 0.01% payable to BT (representing 40% of net
income from securities lending). For investment management, securities lending
and custodial services to the fund, Fidelity Management pays BT fees at an
annual rate of 0.006% of the average net assets of the fund. In addition, the
fund pays BT fees equal to 40% of net income from the fund's securities lending
program. The remaining 60% of net income from the fund's securities lending
program goes to the fund. FMR has voluntarily agreed, subject to revision or
termination, to reimburse the fund if and to the extent that its aggregate
operating expenses, including management fees (but excluding sub-advisory fees
associated with securities lending, interest taxes, brokerage commissions, and
extraordinary expenses), are in excess of an annual rate of 0.28% of the average
net assets of the fund.
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 earn a high 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 a high 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.
10
<PAGE>
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 equity securities. The Portfolio has the flexibility, however,
to invest the balance in all types of domestic and foreign securities, including
bonds.
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 foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in a broad range
of investment-grade fixed-income securities.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments. 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 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:
11
<PAGE>
<TABLE>
<CAPTION>
Range Neutral Mix
-------- -----------
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. Although the Portfolio invests in common stock and securities
convertible into common stock, it has the ability to purchase other securities,
such as preferred stock and bonds, that may produce capital growth.
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 high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. 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 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
12
<PAGE>
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.
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.
Withdrawal charges and the administrative expense charge may invade principal.
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:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if 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.
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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.
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 Life Insurance
Company (INTEGRITY), the parent of National Integrity, who purchase contracts
under the salary allotment program of either company.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
The separate account or administrative charges may be reduced or eliminated when
contract sales are made to individuals or to a group of individuals in such a
manner that results in savings of expenses. The entitlement to such a reduction
will be based on: (1) the size and type of the group of individuals to whom the
contract is offered; and/or (2) the amount of expected contributions. Any
reduction or elimination of the separate account or administrative charges will
not unlawfully discriminate against any person.
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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 upon the "age" of the
contributions included in the withdrawal--that is, the number of years that have
elapsed since 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 contribution year. No withdrawal charge applies when you
withdraw contributions made earlier than your fifth prior contribution year. For
purposes of calculating the withdrawal charge, (1) the oldest contributions will
be treated as the first withdrawn and more recent contributions next, and (2)
partial withdrawals up to the free withdrawal amount 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 and
administrative expense 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>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
- ------------------------------- ----------------------
<S> <C>
Current . . . . . . . . . . . . . . . . . . . 7%
First Prior . . . . . . . . . . . . . . . . . 6
Second Prior. . . . . . . . . . . . . . . . . 5
Third Prior . . . . . . . . . . . . . . . . . 4
Fourth Prior. . . . . . . . . . . . . . . . . 3
Fifth Prior . . . . . . . . . . . . . . . . . 2
Sixth Prior and Earlier . . . . . . . . . . . 0
</TABLE>
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.
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REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We may reduce or eliminate the contingent withdrawal charge when sales of the
contracts are made to individuals or a group of individuals in such a manner
that results in savings of expenses. The entitlement to such a reduction in the
contingent withdrawal charge will be based on the following: (1) the size and
type of the group of individuals to whom the contract is offered; (2) the amount
of expected contributions; and/or (3) whether there is a prior or existing
relationship with Integrity, such as being an employee of Integrity or an
affiliate, receiving distributions or making internal transfers from other
contracts issued by Integrity, or making transfers of amounts held under
qualified plans sponsored by Integrity or an affiliate. Any reduction or
elimination of the contingent withdrawal charge will not unlawfully discriminate
against any person.
TRANSFER CHARGE
No charge is made for your first twelve transfers (excluding dollar cost
averaging and Customized 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.
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 defined as any day that the New
York Stock Exchange is open.
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. We will accept changes by
telephone transfer. See "Transfers" in Part 5.
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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).
- 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.
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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 Customized 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 9:00 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 (or the close of the New York
Stock Exchange, if earlier) will be processed using unit values as of the close
of business on the next Business Day after the day you call. All transfers will
be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed not later than the next Business Day after
the requests are received by our Administrative Office.
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. Unless specifically
instructed otherwise, National Integrity will make withdrawals (including any
applicable charges) from the Investment Option in the same ratio the Annuitant's
Account Value in each Investment Option bares to the Annuitant's total Account
Value. 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.
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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.
See the Statement of Additional Information dated May 1, 1998 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
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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.
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.
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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 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 our understanding of the present federal income
tax laws as currently interpreted by the Internal Revenue Service (IRS) and
various courts. 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 tax 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:
Finally, the individual (or employer) may purchase the Annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules 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, 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.
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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) part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the taxpayer
or joint lives (or joint life expectancies) of the taxpayer and beneficiary; (4)
attributable to the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7); (5) from certain qualified plans (note, however, other
penalties may apply); (6) under a qualified funding asset (as defined in Section
130(d) of the Code); (7) purchased by an employer on termination of certain
types of qualified plans and held by the employer until the employee separates
from service; (8) under an immediate annuity as defined in Code Section
72(u)(4); or (9) purchase of a first home (distribution up to $10,000,
applicable to IRAs only).
However, the withdrawal provisions of your contract still apply. See
"Withdrawals" in Section 5.
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.
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.
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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.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may commence. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract which apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may commence. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose
of complying with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are 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
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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.
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
Traditional 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.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408 or a Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations
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order, in the form of a lump sum settlement or periodic annuity payments for a
fixed period of fewer than 10 years are subject to mandatory income tax
withholding of 20% of the taxable amount of the distribution, unless (1) the
distributee directs the transfer of such amounts in cash to another plan or
Traditional IRA; or (2) the payment is a minimum distribution required under
the Code. The taxable amount is the amount of the distribution less the amount
allocable to after-tax contributions. All other types of taxable distributions
are subject to withholding unless the distributee elects not to have withholding
apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
FEDERAL AND STATE INCOME TAX WITHHOLDING
When required, 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 Integrity at or before the time of the distribution of an
election not to have any amounts withheld. In certain circumstances, 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%. The withholding rate applicable to eligible rollover
distributions is 20% unless such distribution is paid directly to an eligible
retirement plan.
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
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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,
AN ADMINISTRATIVE EXPENSE 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."
INCOME PLUS WITHDRAWAL PROGRAM
We offer the Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals from your contract prior to your
reaching age 59-1/2. Income Plus Withdrawals are exempt from the 10% penalty
tax, normally applicable to early distributions made prior to age 59-1/2. See
"Taxation of Annuities Generally," in Section 7. Once distributions begin they
should not be changed or stopped until the later of age 59-1/2 or five years
from the date of the first distribution. If you change or stop the distribution
or take an additional withdrawal, you may be liable for the 10% penalty tax that
would have otherwise been due on all prior distributions made under the Income
Plus Program and for any interest thereon.
The Income Plus Withdrawal Program may be elected at any time if you are below
age 59-1/2. You can elect this option by submitting the proper election form to
our Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We will
calculate the amount of the distribution under a method selected by you. The
minimum Income Plus Withdrawal currently is $100. You must also specify an
account for direct deposit of your Income Plus Withdrawals.
To enroll under our Income Plus 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 seven Business Days prior
written notice, and we may terminate or amend the Income Plus 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. This program is not available in
concert with the Systematic Withdrawal Program, Dollar Cost Averaging or Asset
Allocation and Rebalancing Program.
Amounts withdrawn by you under the Income Plus 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 INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which 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.
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CUSTOMIZED ASSET REBALANCING
We offer an Customized 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 Customized 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.
Fixed Accounts are not eligible for the Customized Asset Rebalancing program.
To enroll under our Customized 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
Customized Asset Rebalancing program. You should, therefore, monitor your use of
such other programs, transfers, and withdrawals while the Customized 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 Customized Asset Rebalancing program at any time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates (MODEL(s)). Callan Associates is an independent research
and consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Models: Conservative, Moderately
Conservative, Moderate, Moderately Aggressive, or Aggressive. Your current
contribution allocations will be initially allocated among the Options
currently established for each Model. If we change the Model, your account
values will be automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
If you select this program, then unless you have terminated your participation,
your account values will be allocated and your variable portfolios will be
rebalanced automatically at least annually and more frequently if so determined
by the Asset Allocation & Rebalancing Program. The program automatically
applies to all contributions made to your annuity contract while you are still
participating. You will receive a confirmation notice after each rebalancing.
No transfer charge will apply to transfers under the 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
"Transfer Charges" in Part 4.
In each investor profile, a portion of all contributions is allocated to a
four-year Guaranteed Rate Option (GRO). The amount allocated to the GRO will
not be reallocated or rebalanced while participating in a specific investor
profile. You may cancel or change the investment profile you have selected at
any time. However, the GRO funds, if withdrawn or transferred, may be subject
to a market value adjustment (MVA) that may increase or decrease your account
value.
To enroll under the Asset Allocation and Rebalancing Program, contact our
Administrative Office to obtain the Universal Service form (Catalog 001519). 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 Customized Asset Rebalancing program. If, after selecting one of the five
models, you initiate a transaction that results in a reallocation outside one of
the Models, your participation in the Model program is automatically terminated.
You should, therefore, monitor your use of such other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. This
program is not available in concert with the Customized 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.
28
<PAGE>
<TABLE>
<CAPTION>
1998 GRAND MASTER CONSERVATIVE MODEL
Asset Class Allocation to Mutual Fund Fund allocation Fund allocation
----------- Asset Class ----------- as a % of Total as a % of the
Portfolio asset class
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 15 VIP Fidelity Equity-Income (Large Cap Value) 5 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 4 0
VIP II Fidelity Contrafund 4 0
VIP II Fidelity Index 500 2 0
Broad International Equity: 0 VIP Fidelity Overseas Portfolio 0
Domestic Core Fixed Income: 20 VIP II Fidelity Investment Grade Bond Portfolio 20 100
High Yield Fixed Income: 7 VIP High Income Portfolio 7 100
Cash Equivalents: 10 VIP Money Market Portfolio 10 100
Defensive Fixed: 48 3 Year GROs 0 100
5 Year GROs 48 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
1998 GRAND MASTER MODERATELY CONSERVATIVE MODEL
Asset Class Allocation to Mutual Fund Fund allocation Fund allocation
----------- Asset Class ----------- as a % of Total as a % of the
Portfolio asset class
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 17 VIP Fidelity Equity-Income (Large Cap Value) 7 0
VIP III Fidelity Growth and Income (Large Cap 0 0
Value)
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 3 0
VIP II Fidelity Contrafund 5 0
VIP II Fidelity Index 500 2 0
Broad International Equity: 10 VIP Fidelity Overseas Portfolio 10
Domestic Core Fixed Income: 42 VIP II Fidelity Investment Grade Bond Portfolio 42 100
High Yield Fixed Income: 6 VIP High Income Portfolio 6 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 25 3 Year GROs 0
5 Year GROs 25 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
1998 GRAND MASTER MODERATE MODEL
Asset Class Allocation to Mutual Fund Fund allocation Fund allocation
----------- Asset Class ----------- as a % of Total as a % of the
Portfolio asset class
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 28 VIP Fidelity Equity-Income (Large Cap Value) 10 0
VIP III Fidelity Growth and Income (Large Cap 0 0
Value)
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 6 0
VIP II Fidelity Contrafund 9 0
VIP II Fidelity Index 500 3 0
Broad International Equity: 17 VIP Fidelity Overseas Portfolio 17
Domestic Core Fixed Income: 40 VIP II Fidelity Investment Grade Bond Portfolio 40 100
High Yield Fixed Income: 5 VIP High Income Portfolio 5 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 10 3 Year GROs 0
5 Year GROs 10 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
1998 GRAND MASTER MODERATELY AGGRESSIVE MODEL
Asset Class Allocation to Mutual Fund Fund allocation Fund allocation
----------- Asset Class ----------- as a % of Total as a % of the
Portfolio asset class
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 41 VIP Fidelity Equity-Income (Large Cap Value) 15 0
VIP III Fidelity Growth and Income (Large Cap 0 0
Value)
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 10 0
VIP II Fidelity Contrafund 13 0
VIP II Fidelity Index 500 3 0
Broad International Equity: 26 VIP Fidelity Overseas Portfolio 26
Domestic Core Fixed Income: 28 VIP II Fidelity Investment Grade Bond Portfolio 28 100
High Yield Fixed Income: 0 VIP High Income Portfolio 0 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 5 3 Year GROs 0
5 Year GROs 5 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
1998 GRAND MASTER AGGRESSIVE MODEL
Asset Class Allocation to Mutual Fund Fund allocation Fund allocation
----------- Asset Class ----------- as a % of Total as a % of the
Portfolio asset class
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 51 VIP Fidelity Equity-Income (Large Cap Value) 18 0
VIP III Fidelity Growth and Income (Large Cap 0 0
Value)
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 10 0
VIP II Fidelity Contrafund 18 0
VIP II Fidelity Index 500 5 0
Broad International Equity: 33 VIP Fidelity Overseas Portfolio 33
Domestic Core Fixed Income: 11 VIP II Fidelity Investment Grade Bond Portfolio 11 100
High Yield Fixed Income: 0 VIP High Income Portfolio 0 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 5 3 Year GROs 0
5 Year GROs 5 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
33
<PAGE>
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 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.
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<CAPTION>
<S> <C>
Contribution:. . . . . . . . . . . . . . . . . . .$50,000.00
GRO Account duration:. . . . . . . . . . . . . . .6 Years
Guaranteed Interest Rate:. . . . . . . . . . . . .5% Annual Effective Rate
</TABLE>
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
34
<PAGE>
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:
36/12 36/12
-0.0483785 = [(1 + .05) / (1 + .065 + .0025) ]- 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:
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
35
<PAGE>
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:
36/12 36/12
0.0217384 = [(1 + .05) / (1 + .04 + .0025) ]- 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
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)
36
<PAGE>
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.
37
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
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>
<CAPTION>
Page
<S> <C>
Part 1 - National Integrity and Custodian. . . . . . . . . . . . . . . . . . . . . .2
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . . . . . .3
Part 3 - Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . .3
Part 4 - Determination of Annuity Unit Values. . . . . . . . . . . . . . . . . . . .8
Part 5 - Death Benefit Information for Contracts Issued Prior to
January 1, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Part 6 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
</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, 1998. 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 1-800-433-1778.
<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) Integrity 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.
On April 22, 1998, ARM filed a registration statement with the SEC for a
secondary offering of 10 million shares of its Class A Common Stock (the
"Secondary Offering"). The Morgan Stanley Stockholders propose to sell all 10
million shares and, if the underwriters' over-allotment is exercised, up to an
additional 1.5 million shares. The Secondary Offering is expected to be made in
May 1998 through a syndicate of underwriters led by Morgan Stanley & Co.
Incorporated.
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 1996 and 1997, including services
applicable to the Registrant, were $6,007,766 and $5,855,216 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.
2
<PAGE>
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.
We generally pay a maximum distribution allowance of 6% of initial
contributions. The amount of distribution allowances paid was $2,647,756,
$2,229,269, and $2,217,123 for the years ended December 31, 1997, 1996, and
1995, 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.
3
<PAGE>
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.
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
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.
4
<PAGE>
The performance information described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the Lehman Government Index.
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.
5
<PAGE>
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
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.
6
<PAGE>
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by National
Integrity or any of the Sub-Advisers derived from such indices or averages.
7
<PAGE>
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.
8
<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 - DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED PRIOR TO JANUARY 1, 1995
Notwithstanding anything in the prospectus to the contrary, for contracts issued
prior to January 1, 1995, the amount of the death benefit is the greatest of:
- your Account Value
- the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
PART 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.
9
<PAGE>
The financial statements of the Separate Account as of December 31, 1997, 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, 1997 and 1996 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.
10
<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . .1
Audited Financial Statements
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . . .2
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . .6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account I of National Integrity Life Insurance Company (comprising,
respectively, the Money Market, High Income, Equity-Income, Growth, Overseas,
Investment Grade Bond, Asset Manager, Index 500, Asset Manager: Growth,
Contrafund, Growth Opportunities, Balanced, and Growth & Income Divisions) as of
December 31, 1997, the related statement of operations for the year then ended
and statements of changes in net assets for the years ended December 31, 1997
and 1996. 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,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds") as of December 31, 1997, 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, 1997, and the results of their operations for the year
then ended, and changes in their net assets for the years ended December 31,
1997 and 1996, in conformity with generally accepted accounting principles.
Louisville, Kentucky
April 17, 1998
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(cost of $280,649,353
in the aggregate) $18,160,962 $35,694,592 $82,551,920 $45,270,816 $15,253,103 $7,146,341 $32,576,237
Receivable from (payable
to) the general account
of National Integrity (2,071) 3,126 3,054 3,265 2,862 1,942 727
-----------------------------------------------------------------------------------------------------
Net assets $18,158,891 $35,697,718 $82,554,974 $45,274,081 $15,255,965 $7,148,283 $32,576,964
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 12.90 $ 16.93 $ 36.77 $ 44.09 $ 21.69 $ 17.72 $ 25.50
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Units outstanding 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402 1,277,528
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
----------- ----------- ----------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(cost of $280,649,353
in the aggregate) $33,236,247 $7,850,886 $48,040,840 $3,847,508 $1,989,820 $3,924,602 $335,543,874
Receivable from
(payable to) the
general account of
National Integrity (2,046) 1,335 2,812 706 781 (458) 16,035
-----------------------------------------------------------------------------------------------------
Net assets $33,234,201 $7,852,221 $48,043,652 $3,848,214 $1,990,601 $3,924,144 $335,559,909
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 22.79 $ 17.55 $ 19.50 $ 11.99 $ 11.36 $ 12.19
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Units outstanding 1,458,280 447,420 2,463,777 320,952 175,229 321,915
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
Fidelity VIP Funds $ 985,156 $1,880,260 $ 5,754,472 $1,270,948 $1,059,390 $ 327,706 $3,540,050
EXPENSES
Mortality and expense
risk and administrative
charges 250,652 361,615 930,288 549,419 194,291 78,359 421,319
---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 734,504 1,518,645 4,824,184 721,529 865,099 249,347 3,118,731
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on sales
of investments - 760,264 1,220,503 2,802,454 603,432 34,624 929,804
Net unrealized appreciation
of investments
Beginning of period - 1,536,022 8,336,245 4,306,351 1,370,759 211,915 4,378,137
End of period - 3,206,551 17,861,921 8,568,899 1,076,735 349,438 5,692,094
---------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation during the
period - 1,670,529 9,525,676 4,262,548 (294,024) 137,523 1,313,957
---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 2,430,793 10,746,179 7,065,002 309,408 172,147 2,243,761
---------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 734,504 $3,949,438 $15,570,363 $7,786,531 $1,174,507 $421,494 $5,362,492
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP
Funds $ 485,571 $ 6,809 $ 936,877 $ - $ - $ 99,540 $16,346,779
EXPENSES
Mortality and expense risk and
administrative charges 303,413 87,509 526,524 19,432 10,036 17,962 3,750,819
------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 182,158 (80,700) 410,353 (19,432) (10,036) 81,578 12,595,960
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on sales of
investments 1,071,877 474,836 960,967 86,693 13,552 86,669 9,045,675
Net unrealized appreciation of
investments
Beginning of period 1,532,542 170,065 4,575,088 - - - 26,417,124
End of period 5,720,773 1,122,816 10,859,280 228,284 92,292 115,438 54,894,521
------------------------------------------------------------------------------------
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284 92,292 115,438 28,477,397
------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 5,260,108 1,427,587 7,245,159 314,977 105,844 202,107 37,523,072
------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $5,442,266 $1,346,887 $ 7,655,512 $295,545 $ 95,808 $283,685 $50,119,032
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</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, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 734,504 $ 1,518,645 $ 4,824,184 $ 721,529 $ 865,099 $ 249,347 $ 3,118,731
Net realized gain on sales of
investments - 760,264 1,220,503 2,802,454 603,432 34,624 929,804
Change in net unrealized appreciation
during the period - 1,670,529 9,525,676 4,262,548 (294,024) 137,523 1,313,957
------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 734,504 3,949,438 15,570,363 7,786,531 1,174,507 421,494 5,362,492
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 14,076,961 8,893,416 13,965,376 5,919,207 2,914,588 903,638 2,746,016
Contract terminations and benefits (2,421,910) (4,148,133) (3,205,355) (2,392,011) (1,275,749) (295,183) (3,098,725)
Net transfers among investment option (12,252,316) 3,601,295 1,081,673 (134,896) 680,539 514,038 (1,391,288)
------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (597,265) 8,346,578 11,841,694 3,392,300 2,319,378 1,122,493 (1,743,997)
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 137,239 12,296,016 27,412,057 11,178,831 3,493,885 1,543,987 3,618,495
Net assets, beginning of year 18,021,652 23,401,702 55,142,917 34,095,250 11,762,080 5,604,296 28,958,469
------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,158,891 $35,697,718 $82,554,974 $45,274,081 $15,255,965 $7,148,283 $32,576,964
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,114,197 558,880 422,804 144,679 132,358 53,477 116,674
Terminations and benefits (191,440) (271,245) (91,232) (58,086) (57,026) (17,510) (132,593)
Net transfers (968,450) 215,858 18,003 (1,855) 31,275 27,162 (58,489)
-----------------------------------------------------------------------------------------
Net increase (decrease) in units (45,693) 503,493 349,575 84,738 106,607 63,129 (74,408)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</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, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER:
INDEX 500 GROWTH CONTRAFUND GROWTH GROWTH &
DIVISION DIVISION DIVISION OPPORTUNITIES BALANCED INCOME TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 182,158 $ (80,700) $ 410,353 $ (19,432) $ (10,036) $ 81,578 $ 12,595,960
Net realized gain on sales of
investments 1,071,877 474,836 960,967 86,693 13,552 86,669 9,045,675
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284 92,292 115,438 28,477,397
----------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 5,442,266 1,346,887 7,655,512 295,545 95,808 283,685 50,119,032
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 9,004,723 2,970,634 10,325,955 2,953,975 1,711,873 2,726,972 79,113,334
Contract terminations and benefits (657,828) (406,304) (1,976,049) (36,079) (22,531) (40,093) (19,975,950)
Net transfers among investment options 6,587,964 (78,663) 2,335,510 634,773 205,451 953,580 2,737,660
----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 14,934,859 2,485,667 10,685,416 3,552,669 1,894,793 3,640,459 61,875,044
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 20,377,125 3,832,554 18,340,928 3,848,214 1,990,601 3,924,144 111,994,076
Net assets, beginning of year 12,857,076 4,019,667 29,702,724 - - - 223,565,833
----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $33,234,201 $7,852,221 $48,043,652 $3,848,214 $1,990,601 $3,924,144 $335,559,909
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 430,320 183,734 571,556 266,949 156,357 241,192
Terminations and benefits (30,797) (24,412) (101,248) (3,103) (2,031) (3,381)
Net transfers 320,269 5,421 127,720 57,106 20,903 84,104
--------------------------------------------------------------------------
Net increase (decrease) in units 719,792 164,743 598,028 320,952 175,229 321,915
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</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, 1996
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <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 $ 150,911
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853 66,281
Change in net unrealized appreciation
during the period - 338,992 3,582,485 888,211 873,498 (93,934)
----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 731,935 2,155,857 5,514,648 3,247,906 1,090,526 123,258
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 1,384,320
Contract terminations and benefits (2,565,173) (2,122,255) (2,744,148) (2,172,101) (543,454) (297,734)
Net transfers among investment options (13,359,842) 2,918,655 1,873,529 2,865,903 1,450,476 113,095
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,902,572) 6,565,011 15,658,102 9,811,168 3,151,860 1,199,681
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,170,637) 8,720,868 21,172,750 13,059,074 4,242,386 1,322,939
Net assets, beginning of year 20,192,289 14,680,834 33,970,167 21,036,176 7,519,694 4,281,357
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080 $5,604,296
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,070,667 420,641 613,841 264,112 120,141 86,373
Terminations and benefits (209,764) (152,014) (101,953) (62,070) (27,727) (17,903)
Net transfers (1,100,108) 204,521 67,546 82,490 78,298 7,195
----------------------------------------------------------------------------
Net increase (decrease) in units (239,205) 473,148 579,434 284,532 170,712 75,665
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</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, 1996
<TABLE>
<CAPTION>
ASSET
ASSET MANAGER:
MANAGER INDEX 500 GROWTH CONTRAFUND
DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,429,952 $ 92,181 $ 169,386 $ (163,258) $ 5,931,780
Net realized gain on sales of investments 130,034 511,372 29,931 370,212 3,912,908
Change in net unrealized appreciation
during the period 1,940,303 1,082,819 160,015 3,846,898 12,619,287
---------------------------------------------------------------
Net increase in net assets resulting from
operations 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 2,057,176 5,841,031 1,297,372 9,673,035 66,934,913
Contract terminations and benefits (2,120,090) (484,894) (89,733) (1,301,783) (14,441,365)
Net transfers among investment options (2,161,691) 1,597,892 1,429,241 4,579,388 1,306,646
---------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,224,605) 6,954,029 2,636,880 12,950,640 53,800,194
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,275,684 8,640,401 2,996,212 17,004,492 76,264,169
Net assets, beginning of year 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
---------------------------------------------------------------
NET ASSETS, END OF YEAR $28,958,469 $12,857,076 $4,019,667 $29,702,724 $223,565,833
---------------------------------------------------------------
---------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 104,501 371,841 99,473 677,612
Terminations and benefits (107,819) (30,376) (6,955) (89,447)
Net transfers (105,579) 103,587 105,013 323,547
-------------------------------------------------
Net increase (decrease) in units (108,897) 445,052 197,531 911,712
-------------------------------------------------
-------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity") established
Separate Account I (the "Separate Account") on May 19, 1986, under the insurance
laws of the State of New York, for the purpose of issuing flexible 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 growing asset accumulation business with particular emphasis
on retirement savings and investment products.
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 GPO.
The Separate Account investment divisions are invested in shares of
corresponding investment portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series"
type mutual funds managed by Fidelity Management and Research Company ("Fidelity
Management"). The contract holder's account value in a Separate Account division
will vary depending on the performance of the corresponding portfolio. The
Separate Account currently has thirteen 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, 1997 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 earn 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 earn 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 equity securities. The portfolio has the
flexibility, however, to invest the balance in all types of domestic and
foreign securities, including bonds.
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 at least 65% of its
assets in foreign securities.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital by investing in a broad
range of investment-grade fixed-income securities.
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 money
market 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
instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's 500 Composite Stock Price Index while
keeping transaction costs and other expenses low.
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks,
bonds, and short-term money market instruments. The portfolio has a
"neutral" mix of assets 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 not currently recognized by the public. This approach
focuses on companies that are currently out of public favor but show
potential for capital appreciation. The portfolio invests primarily in
common stocks and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks and securities convertible into common stock.
Although the portfolio invests in common stocks and securities convertible
into common stock, it has the ability to purchase other securities, such as
preferred stocks and bonds, that may produce capital growth.
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
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
GROWTH & INCOME PORTFOLIO seeks a high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. 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.
The assets of the Separate Account are owned by National Integrity. The portion
of the Separate Account's assets supporting the contracts may not be used to
satisfy liabilities arising out of any other business of National Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Fidelity VIP Funds are valued at the net asset
values of the respective portfolios, which approximates fair value. The
difference between cost and fair value is reflected as unrealized appreciation
and depreciation of investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends 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.
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
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.
14
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1997 and the cost of shares held
at December 31, 1997 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ---------------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Money Market $38,837,234 $38,696,859 $ 18,160,962
High Income 26,906,943 17,050,180 32,488,041
Equity-Income 20,821,044 4,164,977 64,689,999
Growth 11,346,814 7,237,543 36,701,917
Overseas 6,919,058 3,734,703 14,176,368
Investment Grade Bond 2,588,984 1,217,542 6,796,903
Asset Manager 8,167,251 6,798,251 26,884,143
Index 500 18,652,194 3,532,999 27,515,474
Asset Manager: Growth 4,339,551 1,936,249 6,728,070
Contrafund 13,824,141 2,733,795 37,181,560
Growth Opportunities 4,370,164 837,633 3,619,224
Balanced 1,999,529 115,553 1,897,528
Growth & Income 4,604,040 881,545 3,809,164
------------
$280,649,353
------------
------------
</TABLE>
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, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets (Statutory Basis) . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income (Statutory Basis) . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Capital and Surplus (Statutory Basis) . . . . . . 5
Statements of Cash Flows (Statutory Basis) . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8
<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, 1997 and 1996, and the
related statutory basis statements of income, 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, 1997 and 1996, or
the results of its operations or its cash flows for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National Integrity
Life Insurance Company at December 31, 1997 and 1996, 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.
Louisville, Kentucky
February 10, 1998
1
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 414,907 $ 451,439
Preferred stocks 21,792 50,715
Mortgage loans 3,242 3,929
Policy loans 26,396 24,981
Cash and short-term investments 12,078 14,570
Receivable for securities 1,941 4,522
Other invested assets 3,794 36
--------------------------------
Total cash and invested assets 484,150 550,192
Separate account assets 617,327 370,988
Accrued investment income 5,735 6,513
Federal income tax recoverable - 438
Other admitted assets 2,143 1,794
--------------------------------
Total admitted assets $ 1,109,355 $ 929,925
--------------------------------
--------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 446,610 $ 513,639
Unpaid claims 50 124
Deposits on policies to be issued 564 645
---------------------------------
Total policy and contract liabilities 447,224 514,408
Separate account liabilities 617,327 370,988
Accounts payable and accrued expenses 151 213
Transfers to separate accounts due or accrued, net (24,362) (21,247)
Reinsurance balances payable 511 589
Federal income taxes 5,645 -
Asset valuation reserve 1,570 1,773
Interest maintenance reserve 7,240 8,914
Other liabilities 32 6,016
---------------------------------
Total liabilities 1,055,338 881,654
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 (deficit) (7,977) (13,723)
---------------------------------
Total capital and surplus 54,017 48,271
---------------------------------
Total liabilities and capital and surplus $ 1,109,355 $ 929,925
---------------------------------
---------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
National Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 11,533 $ 8,640
Deposit-type funds 211,637 352,899
Net investment income 42,464 53,553
Amortization of the interest maintenance reserve 1,359 1,001
Other revenues 5,961 5,653
-------------------------------
Total premiums and other revenues 272,954 421,746
Benefits paid or provided:
Death benefits 1,268 921
Annuity benefits 12,687 19,445
Surrender benefits 123,520 101,241
Payments on supplementary contracts 1,648 1,879
Increase (decrease) in insurance and annuity reserves (66,954) 192,985
Other benefits 119 7,818
-------------------------------
Total benefits paid or provided 72,288 324,289
Insurance and other expenses:
Commissions 10,088 5,817
General expenses 11,146 8,051
Taxes, licenses and fees 794 349
Net transfers to separate accounts 163,896 69,158
Other expenses 3,542 3,110
-------------------------------
Total insurance and other expenses 189,466 86,485
-------------------------------
Gain from operations before federal income taxes
and net realized capital losses 11,200 10,972
Federal income tax expense (benefit) 3,621 (444)
-------------------------------
Gain from operations before net realized capital losses 7,579 11,416
Net realized capital losses, excluding realized
capital gains (losses) net of tax transferred to the
interest maintenance reserve (1997-($314); 1996-$2,923) (2,036) (2,500)
-------------------------------
Net income $ 5,543 $ 8,916
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
-------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 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
Net income 5,543 5,543
Decrease in asset valuation reserve 203 203
-------------------------------------------------------------------------
Balance, December 31, 1997 $ 2,000 $ 59,244 $ 750 $ (7,977) $ 54,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 223,170 $ 361,539
Net investment income received 42,944 53,492
Commission and expense allowances received on
reinsurance ceded 8 644
Benefits paid (139,316) (125,238)
Insurance expenses paid (22,090) (14,170)
Other income received net of other expenses paid 2,335 5,009
Net transfers to separate accounts (167,010) (74,076)
Federal income taxes (4,479) -
---------------------------------
Net cash provided by (used in) operations (64,438) 207,200
<CAPTION>
<S> <C> <C>
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments of investments:
Bonds 368,167 455,716
Preferred stocks 55,948 19,067
Mortgage loans 687 1,389
Other invested assets - 8,826
Miscellaneous proceeds 4,254 -
---------------------------------
Total investment proceeds 429,056 484,998
Benefits received (taxes paid) on capital gains 6,921 (1,212)
---------------------------------
Net proceeds from sales, maturities, or repayments
of investments 435,977 483,786
<CAPTION>
<S> <C> <C>
Cost of investments acquired:
Bonds 337,887 626,879
Preferred stocks 26,621 55,045
Other invested assets 3,794 -
Miscellaneous applications 405 36
---------------------------------
Total cost of investments acquired 368,707 681,960
Net increase in policy loans and premium notes 1,415 2,375
---------------------------------
Net cash provided by (used in) investment activities 65,855 (200,549)
</TABLE>
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Other sources 2,588 3,826
------------------------
Total other cash provided 2,588 3,826
------------------------
Other cash applied:
Other applications, net 6,497 16,175
------------------------
Total other cash applied 6,497 16,175
------------------------
Net cash used in financing and miscellaneous activities (3,909) (12,349)
------------------------
Net decrease in cash and short-term investments (2,492) (5,698)
Cash and short-term investments at beginning of year 14,570 20,268
------------------------
Cash and short-term investments at end of year $ 12,078 $ 14,570
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1997
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, specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products.
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
fair value based on the National Association of Insurance Commissioners
("NAIC") rating; for GAAP, such fixed maturity investments are designated
at purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity fixed investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized holding gains and losses reported in operations for those
designated as trading and as a separate component of shareholder's equity
for those designated as available-for-sale. In addition, fair values of
certain investments in bonds and stocks are based on values specified by
the NAIC, rather than on actual or estimated fair values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
formula and is reported as a liability rather than unassigned surplus.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the individual security sold using the seriatim method. The net
deferral is reported as the Interest Maintenance Reserve in the
accompanying balance sheets. Under GAAP, realized gains and losses are
reported in the income statement on a pretax basis in the period that the
asset giving rise to the gain or loss is sold and include provisions when
there has been a decline in asset values deemed other than temporary.
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 AND BENEFITS
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and
therefore not recognized as premium revenue; benefits paid equal to the
policy account value are accounted for as a return of deposit instead of
benefit expense.
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.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 5,543 $ 8,916
Deferred policy acquisition costs, net of amortization 10,157 5,187
Adjustments to customer deposits (5,781) (441)
Adjustments to invested asset carrying values
at acquisition date (38) (160)
Amortization of value of insurance in force (870) (1,470)
Amortization of interest maintenance reserve (1,359) (1,001)
Adjustments for realized investment gains 1,511 852
Adjustments for federal income tax expense (3,320) (2,185)
Other 166 (200)
------------------------
Net income, GAAP basis $ 6,009 $ 9,498
------------------------
------------------------
</TABLE>
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 54,017 $ 48,271
Adjustments to customer deposits (33,014) (27,233)
Adjustments to invested asset carrying values at
acquisition date (3,724) (5,197)
Asset valuation reserve and interest maintenance reserve 17,796 19,369
Value of insurance in force 13,043 13,913
Deferred policy acquisition costs 33,885 23,728
Net unrealized gains on available-for-sale securities 5,849 1,416
Other (5,793) (2,650)
------------------------
Shareholder's equity, GAAP basis $ 82,059 $ 71,617
------------------------
------------------------
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks and short-term investments are stated at values
prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost.
The discount or premium on bonds is amortized using the interest method.
For loan-backed bonds and structured securities, anticipated prepayments
are considered when determining the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities
are obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
11
<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 includes 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 reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
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.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 fair 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. Investments income and
interest credited on deposits held in guaranteed separate accounts are included
in the accompanying statements of income. The Company receives administrative
fees for managing the nonguaranteed separate accounts and other fees for
assuming mortality and certain expense risks. Such fees are included in other
revenues.
USE OF ESTIMATES
The preparation of financial statements 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 1997 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC is in the process of codifying statutory
accounting practices ("Codification"). Codification will likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Company uses to prepare its statutory basis financial statements. Codification
has been approved by the NAIC in March 1998, but it will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, New York must adopt Codification
as the prescribed basis of accounting on which domestic insurers must report
their statutory basis results to the Insurance Department. At this time it is
unclear whether New York will adopt Codification. The Company is monitoring
developments related to codification and assessing the potential effects any
changes would have on the Company's statutory basis financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1997:
Mortgage-backed securities $ 193,688 $ - $ - $ 193,688
Corporate securities 159,208 4,074 34 163,248
Asset-backed securities 27,370 - - 27,370
U.S. Treasury securities and
obligations of U.S. government
agencies 24,361 1,083 2 25,442
Foreign governments 10,280 - 437 9,843
-------------------------------------------------------
Total bonds $ 414,907 $ 5,157 $ 473 $ 419,591
-------------------------------------------------------
-------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
At December 31, 1996:
Mortgage-backed securities $ 244,376 $ - $ - $ 244,376
Corporate securities 168,146 775 7,178 161,743
Asset-backed securities 10,311 - - 10,311
U.S. Treasury securities and
obligations of U.S. government
agencies 16,243 415 110 16,548
Foreign governments 12,363 643 - 13,006
-------------------------------------------------------
Total bonds $ 451,439 $ 1,833 $ 7,288 $ 445,984
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
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, 1997 and 1996, the fair
value of investments in bonds includes $306.8 million and $312.7 million,
respectively, of bonds that were valued at amortized cost.
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1997, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED
COST FAIR VALUE
------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 1,304 $ 1,314
After one through five 13,493 13,513
After five through ten 39,042 39,192
After ten 140,010 144,514
Asset-backed securities 27,370 27,370
Mortgage-backed securities 193,688 193,688
------------------------------
Total $ 414,907 $ 419,591
------------------------------
------------------------------
</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 1997 and 1996 were $375.5
million and $755.7 million; gross gains of $8.6 million and $7.9 million, and
gross losses of $8.3 million and $4.5 million were realized on those sales,
respectively.
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
At December 31, 1997 and 1996, bonds with an admitted asset value of $1,235,000
and $1,234,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. 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 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
1997, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 34,854 $ 47,487
Preferred stocks 4,205 4,150
Mortgage loans 291 610
Policy loans 2,072 1,886
Cash and short-term investments 1,506 1,277
Other (3) 3
---------------------------
Total investment income 42,925 55,413
Investment expenses (461) (1,860)
---------------------------
Net investment income $ 42,464 $ 53,553
---------------------------
---------------------------
</TABLE>
16
<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 is not significant to the Company's premiums, benefits
or policy and contract liabilities.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed against
policyholders $ 210,910 $ 115,547
Reinsurance assumed 12,770 246,571
Reinsurance ceded (510) (580)
----------------------------
Net premiums, annuity considerations and
deposit-type funds $ 223,170 $ 361,538
----------------------------
----------------------------
</TABLE>
The Company sold guaranteed investment contract ("GIC") deposits totaling $358.3
million to Integrity as of June 30, 1996.
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.
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.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
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's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1997 and 1996, the adjusted capital
and surplus of the Company is substantially in excess of the minimum level of
RBC that would require regulatory response.
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1997 and 1996, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
---------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1997:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 219,464 22.9%
At book value less surrender charge of 5% or more 5,760 0.6
At market value 372,550 38.9
-------------------------
Total with adjustment or at market value 597,774 62.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 299,314 31.2
Not subject to discretionary withdrawal 61,448 6.4
-------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 958,536 100.0%
---------
---------
Less reinsurance ceded -
----------
Net annuity reserves and deposit fund liabilities $ 958,536
----------
----------
<CAPTION>
<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
----------
----------
</TABLE>
19
<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, 1997 is as follows:
<TABLE>
<CAPTION>
*NONINDEXED NONGUARANTEED
GUARANTEED SEPARATE
MORE THAN 4% ACCOUNTS TOTAL
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 122,664 $ 89,078 $ 211,742
--------------------------------------------------
--------------------------------------------------
Reserves for separate accounts with assets
at fair value $ 219,469 $ 372,669 $ 592,138
--------------------------------------------------
--------------------------------------------------
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 219,464 $ - $ 219,464
At book value without market value
adjustment and with current
surrender charge of 5% or more 5 - 5
At market value - 372,669 372,669
--------------------------------------------------
Total with adjustment or at market value 219,469 372,669 592,138
Not subject to discretionary withdrawal - - -
--------------------------------------------------
Total separate accounts reserves $ 219,469 $ 372,669 $ 592,138
--------------------------------------------------
--------------------------------------------------
</TABLE>
* Separate accounts with guarantees.
20
<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, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 211,743 $ 102,901
Transfers from separate accounts (52,365) (37,150)
-------------------------
Net transfers to separate accounts 159,378 65,751
Reconciling adjustments:
Mortality and expense charges reported as other revenues 4,417 3,194
Other revenues 101 213
-------------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 163,896 $ 69,158
-------------------------
-------------------------
</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.
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $ 414,907 $ 424,642 $ 451,439 $ 457,875
Preferred stocks 21,792 22,252 50,715 50,454
Mortgage loans 3,242 3,242 3,929 3,929
Liabilities:
Life and annuity reserves for
investment-type contracts $ 367,124 $ 367,374 $ 432,013 $ 426,516
Separate accounts annuity reserves 592,018 576,877 347,503 347,072
</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 estimate
or quoted market price of comparable investments.
MORTGAGE LOANS ON REAL ESTATE
The carrying amount of mortgage loans approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of deposit fund liabilities and the remaining
annuity reserves are based on the cash surrender value of the underlying
contracts.
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. RELATED PARTY TRANSACTIONS
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement and an Investment Advisory Agreement with ARM. Under these agreements,
ARM performs certain administrative investment advisory and special services for
the Company to assist with its business operations. The services include
policyholder services; accounting, tax and auditing; underwriting; marketing and
product development; functional support services; payroll functions; personnel
functions; administrative support services; and investment functions. During
1997 and 1996, the Company was charged $5.9 million and $6.1 million,
respectively, for these services in accordance with the requirements of
applicable insurance law and regulations.
11. YEAR 2000 (UNAUDITED)
The Company is currently evaluating on an ongoing basis, its computer systems
and the systems of other companies on which the Company's operations rely to
determine if they will function properly with respect to dates in the year 2000
and beyond. These activities are designed to ensure that there is no adverse
effect on the Company's core business operations. While the Company believes
its planning efforts are adequate to address its Year 2000 concerns, there can
be no guarantee that the systems of other companies on which the Company's
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Company's Year 2000 initiatives is not
expected to be material to the Company's results of operations or financial
condition.
23
<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
Form N-4 Item No. Location in Prospectus
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
Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Table of Contents
Statement of Additional
Information
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - GRANDMASTER III
Form N-4 Item No. Location in Statement of Additional
Information
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 Part 2 - Distribution of the Contracts
Offered
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
<PAGE>
PART A
<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-Registered Trademark- 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). Withdrawal charges and an annual administrative charge may be
applicable, which may invade principal.
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, 1998, 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 CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1998.
<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. . . . . . . . . . . . . . . . . . . . . . 10
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. . . . . . . . . . . . . . . . . . . . 14
Market Value Adjustments. . . . . . . . . . . . . . . . . . . . 15
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . 15
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . 16
Reduction or Elimination of Separate Account or
Administrative Charges . . . . . . . . . . . . . . . . . . . . . . 16
Fund Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . 16
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . 17
Reduction or Elimination of the Contingent Withdrawal Charges. . . . 17
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Death Benefits and Similar Benefit Distributions . . . . . . . . . . 21
<PAGE>
PAGE
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 23
How You Make Requests and Give Instructions. . . . . . . . . . . . . 24
PART 6 - VOTING RIGHTS
Fund Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . 24
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . 24
How Fund Shares Are Voted. . . . . . . . . . . . . . . . . . . . . . 24
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . 25
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . 25
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . 25
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . 26
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . 27
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . 27
Traditional Individual Retirement Annuities. . . . . . . . . . . . 27
Roth Individual Retirement Annuities . . . . . . . . . . . . . . . 28
SIMPLE Individual Retirement Annuities . . . . . . . . . . . . . . 28
Tax Sheltered Annuities. . . . . . . . . . . . . . . . . . . . . . 28
Simplified Employee Pensions . . . . . . . . . . . . . . . . . . . 28
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 . . . . . . . . . . . . . . . . . . . . 29
Distributions Under Tax-Favored Retirement Programs. . . . . . . . . 29
Federal and State Income Tax Withholding . . . . . . . . . . . . . . 30
Impact of Taxes to National Integrity. . . . . . . . . . . . . . . . 30
Transfers Among Investment Options . . . . . . . . . . . . . . . . . 30
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . 30
Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . 31
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . 31
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . 31
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . 32
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . 38
Performance Information. . . . . . . . . . . . . . . . . . . . . . . 38
Appendix A - Illustration of a Market Value Adjustment . . . . . . 39
</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
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 (Grandmaster III)
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. If a Joint Owner is named, the
contract rights are shared with the Owner. Contract changes or any transactions
allowed under the contract require both signatures. The rules governing
distribution at death apply when the first Owner dies. See Section 7,
"DISTRIBUTION-AT-DEATH RULES."
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," "Customized 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 1997 was .75% 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. Unless specifically
instructed otherwise, National Integrity will make withdrawals (including any
applicable charges) from the Investment Option in the same ratio the Annuitant's
Account Value in each Investment Option bares to the Annuitant's total Account
Value. 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 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
2
<PAGE>
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.
TABLE OF ANNUAL FEES AND EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<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% .10% .31%
VIP High Income. . . . . . . . . . .59% .12% .71%(6)
VIP Equity-Income. . . . . . . . . .50% .08% .58%
VIP Growth . . . . . . . . . . . . .60% .09% .69%
VIP Overseas . . . . . . . . . . . .75% .17% .92%
VIP II Investment Grade Bond . . . .44% .14% .58%
VIP II Asset Manager . . . . . . . .55% .10% .65%(6)(7)
VIP II Index 500 . . . . . . . . . .24% . 4% .28%(7)
VIP II Contrafund. . . . . . . . . .60% .11% .71%(6)
VIP II Asset Manager: Growth . . . .60% .17% .77%(6)(7)
VIP III Balanced . . . . . . . . . .45% .16% .61%(6)
VIP III Growth Opportunities . . . .60% .14% .74%(6)
VIP III Growth & Income. . . . . . .49% .21% .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.
3
<PAGE>
(2) After the first twelve transfers during a contract year, 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, asset rebalancing, 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."
(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 whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would have
been .57% for VIP Equity-Income Portfolio, .67% for VIP Growth Portfolio, .90%
for VIP Overseas Portfolio, .64% for VIP II Asset Manager Portfolio, .68% for
VIP II Contrafund Portfolio, .76% for VIP II Asset Manager: Growth Portfolio,
and .73% for VIP III Growth Opportunities Portfolio, and .60% 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 .27%, .13%,
and .40%, 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>
4
<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.
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
December 31, 1997 $12.90 $16.93 $36.77 $44.09 $21.69 $17.72
Number of Units 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402
</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 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>
ASSET GROWTH
ASSET INDEX CONTRA- MANAGER GROWTH OPPORTUNITIE
MANAGER 500 FUND GROWTH BALANCED INCOME S
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 - - -
December 31, 1997 $25.50 $22.79 $19.50 $17.55 $11.36 $12.19 $11.99
Number of Units 1,277,528 1,458,28038,488 2,463,777 447,420 175,229 321,915 320,952
</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, 1997, ARM had $6.9
billion of assets under management.
National Integrity is currently evaluating, on an ongoing basis, its computer
systems and the systems of other companies on which National Integrity's
operations rely to determine if they will function properly with respect to
dates in the year 2000 and beyond. These activities are designed to ensure that
there is no adverse effect on National Integrity's core business operations.
While National Integrity believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which National Integrity's operations rely will be converted on a
timely basis and will not have a material effect on National Integrity.
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:
8
<PAGE>
- add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940
Act;
- operate our Separate Account under the direction of a committee or
discharge 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-Registered Trademark-, one of the largest investment management
organizations in the United States. Fidelity Investments-Registered Trademark-
includes a number of different companies, which provide a variety of financial
services and products to individuals and corporations.
9
<PAGE>
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-Registered Trademark- 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.
The VIP Money Market Portfolio's advisory fee is made up of three components: a
group fee rate, an individual fund fee rate (0.03%), and an income-based
component of 6% of the fund's gross income in excess of a 5% yield. The maximum
income-based component is 0.24% of the fund's average net assets.
Pursuant to approval of shareholders of VIP II Index 500 at a shareholder
meeting held on November 19, 1997, effective December 1, 1997 Bankers Trust
Company ("BT") has been appointed as the fund's sub-adviser. BT chooses the
fund's investments and acts as the fund's custodian. BT, a New York banking
corporation with principal offices at 130 Liberty Street, New York, New York
10006, is a wholly owned subsidiary of Bankers Trust New York Corporation.
Index 500's management fees are paid out of the fund's assets to Fidelity
Management and BT. The fund also incurs other expenses for services such as
maintaining shareholder records and furnishing shareholder account statements
and financial reports. Management and sub-advisory fees are calculated and paid
every month to Fidelity Management and BT, respectively. The fund pays the fees
at the annual rate of 0.24% of its average net assets. These fees include a
management fee of 0.24% payable to Fidelity Management, and estimated
sub-advisory fees of less than 0.01% payable to BT (representing 40% of net
income from securities lending). For investment management, securities lending
and custodial services to the fund, Fidelity Management pays BT fees at an
annual rate of 0.006% of the average net assets of the fund. In addition, the
fund pays BT fees equal to 40% of net income from the fund's securities lending
program. The remaining 60% of net income from the fund's securities lending
program goes to the fund. FMR has voluntarily agreed, subject to revision or
termination, to reimburse the fund if and to the extent that its aggregate
operating expenses, including management fees (but excluding sub-advisory fees
associated with securities lending, interest taxes, brokerage commissions, and
extraordinary expenses), are in excess of an annual rate of 0.28% of the average
net assets of the fund.
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 earn a high 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 a high 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.
10
<PAGE>
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 equity securities. The Portfolio has the flexibility, however,
to invest the balance in all types of domestic and foreign securities, including
bonds.
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 foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in a broad range
of investment-grade fixed-income securities.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments. 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 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:
11
<PAGE>
<TABLE>
<CAPTION>
Range Neutral Mix
----- -----------
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. Although the Portfolio invests in common stock and securities
convertible into common stock, it has the ability to purchase other securities,
such as preferred stock and bonds, that may produce capital growth.
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 high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. 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.
12
<PAGE>
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 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.
Withdrawal charges and the administrative expense charge may invade principal.
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:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if 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.
13
<PAGE>
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.
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 Life Insurance
Company (INTEGRITY),the parent of National Integrity, who purchase contracts
under the salary allotment program of either company.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
The separate account or administrative charges may be reduced or eliminated when
contract sales are made to individuals or to a group of individuals in such a
manner that results in savings of expenses. The entitlement to such a reduction
will be based on: (1) the size and type of the group of individuals to whom the
contract is offered; and/or (2) the amount of expected contributions. Any
reduction or elimination of the separate account or administrative charges will
not unlawfully discriminate against any person.
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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 upon the "age" of the
contributions included in the withdrawal--that is, the number of years that have
elapsed since 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 contribution year. No withdrawal charge applies when you
withdraw contributions made earlier than your fifth prior contribution year. For
purposes of calculating the withdrawal charge, (1) the oldest contributions will
be treated as the first withdrawn and more recent contributions next, and (2)
partial withdrawals up to the free withdrawal amount 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 and
administrative expense 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>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
- ------------------------------- ----------------------
<S> <C>
Current. . . . . . . . . . . . . . . . . . . 7%
First Prior. . . . . . . . . . . . . . . . . 6
Second Prior . . . . . . . . . . . . . . . . 5
Third Prior. . . . . . . . . . . . . . . . . 4
Fourth Prior . . . . . . . . . . . . . . . . 3
Fifth Prior. . . . . . . . . . . . . . . . . 2
Sixth Prior and Earlier. . . . . . . . . . . 0
</TABLE>
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.
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REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We may reduce or eliminate the contingent withdrawal charge when sales of the
contracts are made to individuals or a group of individuals in such a manner
that results in savings of expenses. The entitlement to such a reduction in the
contingent withdrawal charge will be based on the following: (1) the size and
type of the group of individuals to whom the contract is offered; (2) the amount
of expected contributions; and/or (3) whether there is a prior or existing
relationship with Integrity, such as being an employee of Integrity or an
affiliate, receiving distributions or making internal transfers from other
contracts issued by Integrity, or making transfers of amounts held under
qualified plans sponsored by Integrity or an affiliate. Any reduction or
elimination of the contingent withdrawal charge will not unlawfully discriminate
against any person.
TRANSFER CHARGE
No charge is made for your first twelve transfers (excluding dollar cost
averaging and Customized 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)
Customized 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.
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
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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 defined as any day
that the New York Stock Exchange is open.
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. We will accept changes by
telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. 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.
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- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .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 Customized 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 9:00 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 (or the close of the New York
Stock Exchange, if earlier) will be processed using unit values as of the close
of business on the next Business Day after the day you call. All transfers will
be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed not later than the next Business Day after
the requests are received by our Administrative Office.
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. Unless specifically
instructed otherwise, National Integrity will make withdrawals (including any
applicable charges) from the Investment Option in the same ratio the Annuitant's
Account Value in each Investment Option bares to the Annuitant's total Account
Value. 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
We will pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day on which we receive due proof of
death. Similarly, if the Contract was issued on or after the youngest
Annuitant's 86th birthday, the death benefit is the contract account value at
the end of the business day on which we receive due proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the highest of:
a) the contract account value at the end of the business day on which we
receive due proof of death;
b) the total of all contributions; and
c) the highest contract account value on any contract anniversary which
occurred prior to the Annuitant's 81st birthday and prior to the
Annuitant's death, plus any subsequent contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). The amount of the
reduction will be determined by dividing the amount of the withdrawal by the
annuity account value on the transaction date and multiplying this percentage by
the then current guaranteed minimum death benefit.
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.
The death benefit described above becomes retroactive to all contracts issued on
or after January 1, 1997.
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 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."
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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 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.
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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 our understanding of the present federal income
tax laws as currently interpreted by the Internal Revenue Service (IRS)and
various courts. 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 tax 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:
Finally, the individual (or employer) may purchase the Annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules 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
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<PAGE>
distribution is made under the contract. However, under certain circumstances,
the increase in value may be subject to current federal income tax. For example,
corporations, partnerships, and other non-natural persons 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) part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the taxpayer
or joint lives (or joint life expectancies) of the taxpayer and beneficiary; (4)
attributable to the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7); (5) from certain qualified plans (note, however, other
penalties may apply); (6) under a qualified funding asset (as defined in Section
130(d) of the Code); (7) purchased by an employer on termination of certain
types of qualified plans and held by the employer until the employee separates
from service; (8) under an immediate annuity as defined in Code Section
72(u)(4); or (9) purchase of a first home (distribution up to $10,000,
applicable to IRAs only).
However, the withdrawal provisions of your contract still apply. See
"Withdrawals" in Section 5.
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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<PAGE>
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.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may commence. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract which apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up
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<PAGE>
to the deadline for filing his or her federal income tax return for that year
(without extensions). Roth IRAs are subject to limitations on the amount that
may be contributed, the persons who are eligible to contribute, and on the time
when a tax-favored distribution may commence. An individual may also rollover
amounts distributed from another Roth IRA or Traditional IRA to a Roth IRA
contract. Your Roth IRA contract will be issued with a rider outlining the
special terms of your contract which apply to Roth IRAs. Any amendment made for
the purpose of complying with provisions of the Code and related regulations may
be made without the consent of the Owner. The Owner will be deemed to have
consented to any other amendment unless the Owner notifies us that he or she
does not consent within 30 days from the date we mail the amendment to the
Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are 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.
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.
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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
Traditional 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.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408 or a Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional
IRA; or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
FEDERAL AND STATE INCOME TAX WITHHOLDING
When required, 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 Integrity at or before the time of the distribution of an
election not to have any amounts withheld. In certain circumstances, 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%. The withholding rate applicable to eligible rollover
distributions is 20% unless such distribution is paid directly to an eligible
retirement plan.
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.
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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."
INCOME PLUS WITHDRAWAL PROGRAM
We offer the Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals from your contract prior to your
reaching age 59-1/2. Income Plus Withdrawals are exempt from the 10% penalty
tax, normally applicable to early distributions made prior to age 59-1/2. See
"Taxation of Annuities Generally," in Section 7. Once distributions begin they
should not be changed or stopped until the later of age 59-1/2 or five years
from the date of the first distribution. If you change or stop the distribution
or take an additional withdrawal, you may be liable for the 10% penalty tax that
would have otherwise been due on all prior distributions made under the Income
Plus Program and for any interest thereon.
The Income Plus Withdrawal Program may be elected at any time if you are below
age 59-1/2. You can elect this option by submitting the proper election form to
our Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We will
calculate the amount of the distribution under a method selected by you. The
minimum Income Plus Withdrawal currently is $100. You must also specify an
account for direct deposit of your Income Plus Withdrawals.
To enroll under our Income Plus 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 seven Business Days prior
written notice, and we may terminate or amend the Income Plus 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
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enrollment in the program will be ended. This program is not available in
concert with the Systematic Withdrawal Program, Dollar Cost Averaging or Asset
Allocation and Rebalancing Program.
Amounts withdrawn by you under the Income Plus 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 INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which 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.
CUSTOMIZED ASSET REBALANCING
We offer an Customized 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 Customized 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.
Fixed Accounts are not eligible for the Customized Asset Rebalancing program.
To enroll under our Customized 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
Customized Asset Rebalancing program. You should, therefore, monitor your use of
such other programs, transfers, and withdrawals while the Customized 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 Customized Asset Rebalancing program at any time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates (MODEL(s)). Callan Associates is an independent research
and consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Models: Conservative, Moderately
Conservative, Moderate, Moderately Aggressive, or Aggressive. Your current
contribution allocations will be initially allocated among the Options
currently established for each Model. If we change the Model, your account
values will be automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
If you select this program, then unless you have terminated your participation,
your account values will be allocated and your variable portfolios will be
rebalanced automatically at least annually and more frequently if
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so determined by the Asset Allocation & Rebalancing Program. The program
automatically applies to all contributions made to your annuity contract while
you are still participating. You will receive a confirmation notice after each
rebalancing.
No transfer charge will apply to transfers under the 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 "Transfer Charges" in Part 4.
In each investor profile, a portion of all contributions is allocated to a
five-year Guaranteed Rate Option (GRO). The amount allocated to the GRO will
not be reallocated or rebalanced while participating in a specific investor
profile. You may cancel or change the investment profile you have selected at
any time. However, the GRO funds, if withdrawn or transferred, may be subject
to a market value adjustment (MVA) that may increase or decrease your account
value.
To enroll under the Asset Allocation and Rebalancing Program, complete the
Dollar Cost Averaging/Asset Allocation and Rebalancing form (Catalog 1815) found
in the back of this prospectus. 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 Customized Asset Rebalancing
program. If, after selecting one of the five models, you initiate a transaction
that results in a reallocation outside one of the Models, your participation in
the Model program is automatically terminated. You should, therefore, monitor
your use of such other programs, transfers, and withdrawals while the Customized
Asset Rebalancing program is in effect. This program is not available in
concert with the Customized 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.
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1998 GRAND MASTER CONSERVATIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation allocation
Class as a % of as a % of
Total the asset
Portfolio class
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 15 VIP Fidelity Equity-Income (Large Cap Value) 5 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 4 0
VIP II Fidelity Contrafund 4 0
VIP II Fidelity Index 500 2 0
Broad International 0 VIP Fidelity Overseas Portfolio 0
Equity:
Domestic Core Fixed 20 VIP II Fidelity Investment Grade Bond Portfolio 20 100
Income:
High Yield Fixed Income: 7 VIP High Income Portfolio 7 100
Cash Equivalents: 10 VIP Money Market Portfolio 10 100
Defensive Fixed: 48 3 Year GROs 0 100
5 Year GROs 48 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
30
<PAGE>
1998 GRAND MASTER MODERATELY CONSERVATIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation allocation
Class as a % of as a % of
Total the asset
Portfolio class
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 17 VIP Fidelity Equity-Income (Large Cap Value) 7 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 3 0
VIP II Fidelity Contrafund 5 0
VIP II Fidelity Index 500 2 0
Broad International 10 VIP Fidelity Overseas Portfolio 10
Equity:
Domestic Core Fixed 42 VIP II Fidelity Investment Grade Bond Portfolio 42 100
Income:
High Yield Fixed Income: 6 VIP High Income Portfolio 6 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 25 3 Year GROs 0
5 Year GROs 25 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
31
<PAGE>
1998 GRAND MASTER MODERATE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation allocation
Class as a % of as a % of
Total the asset
Portfolio class
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 28 VIP Fidelity Equity-Income (Large Cap Value) 10 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 6 0
VIP II Fidelity Contrafund 9 0
VIP II Fidelity Index 500 3 0
Broad International 17 VIP Fidelity Overseas Portfolio 17
Equity:
Domestic Core Fixed 40 VIP II Fidelity Investment Grade Bond Portfolio 40 100
Income:
High Yield Fixed Income: 5 VIP High Income Portfolio 5 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 10 3 Year GROs 0
5 Year GROs 10 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
32
<PAGE>
1998 GRAND MASTER MODERATELY AGGRESSIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation allocation
Class as a % of as a % of
Total the asset
Portfolio class
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 41 VIP Fidelity Equity-Income (Large Cap Value) 15 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 10 0
VIP II Fidelity Contrafund 13 0
VIP II Fidelity Index 500 3 0
Broad International 26 VIP Fidelity Overseas Portfolio 26
Equity:
Domestic Core Fixed 28 VIP II Fidelity Investment Grade Bond Portfolio 28 100
Income:
High Yield Fixed Income: 0 VIP High Income Portfolio 0 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 5 3 Year GROs 0
5 Year GROs 5 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
33
<PAGE>
1998 GRAND MASTER AGGRESSIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation allocation
Class as a % of as a % of
Total the asset
Portfolio class
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 51 VIP Fidelity Equity-Income (Large Cap Value) 18 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 10 0
VIP II Fidelity Contrafund 18 0
VIP II Fidelity Index 500 5 0
Broad International 33 VIP Fidelity Overseas Portfolio 33
Equity:
Domestic Core Fixed 11 VIP II Fidelity Investment Grade Bond Portfolio 11 100
Income:
High Yield Fixed Income: 0 VIP High Income Portfolio 0 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 5 3 Year GROs 0
5 Year GROs 5 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
34
<PAGE>
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 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.
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
35
<PAGE>
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:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 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
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:
36
<PAGE>
$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:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 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
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
37
<PAGE>
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.
38
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
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 . . . . . . . . . . . . . . . . . . . . . . .3
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, 1998. 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 1-800-433-1778.
<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) Integrity 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.
On April 22, 1998, ARM filed a registration statement with the SEC for a
secondary offering of 10 million shares of its Class A Common Stock (the
"Secondary Offering"). The Morgan Stanley Stockholders propose to sell all 10
million shares and, if the underwriters' over-allotment is exercised, up to an
additional 1.5 million shares. The Secondary Offering is expected to be made in
May 1998 through a syndicate of underwriters led by Morgan Stanley & Co.
Incorporated.
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 1996 and 1997, including services
applicable to the Registrant, were $6,007,766 and $5,855,216, 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.
2
<PAGE>
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.
We generally pay a maximum distribution allowance of 6.5% of initial
contributions. The amount of distribution allowances paid was $2,647,756,
$2,229,269, and $2,217,123 for the years ended December 31, 1997, 1996, and
1995, 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) to the power of n =
ERV, where P is a hypothetical initial payment of $1,000, T is the average
annual total return, n is the number of years, and ERV is the withdrawal
value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
3
<PAGE>
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as
a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
4
<PAGE>
For the period ending: 12/31/97
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
SEC STANDARDIZED
VARIABLE AVERAGE ANNUAL RETURN (1)
ACCOUNT ---------------------------------------------
INCEPTION Life of
VARIABLE OPTIONS DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset Manager 9/3/91 11.95% 10.96% n/a x.xx%
Asset Manager: Growth 2/8/95 16.31 n/a n/a x.xx
Balanced 2/19/97 13.46 n/a n/a x.xx
Contrafund 2/8/95 15.39 n/a n/a x.xx
Equity-Income 9/3/91 19.31 18.14 15.07 x.xx
Growth 9/3/91 14.74 16.01 15.53 x.xx
Growth & Income 2/14/97 n/a n/a n/a x.xx
Growth Opportunities 2/19/97 21.12 n/a n/a x.xx
High Income 2/19/93 9.00 11.92 7.29 x.xx
Index 500 3/4/93 23.83 17.91 n/a x.xx
Investment Grade Bond 9/3/91 .52 5.10 n/a x.xx
Overseas 9/3/91 2.98 12.10 8.06 x.xx
---------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that
would apply if an owner terminated the policy at the end of the period, but
exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through year-end.
(5) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
5
<PAGE>
For the period ending: 12/31/97
RETURNS WITHOUT SURRENDER CHARGES(3) All figures are unaudited.
<TABLE>
<CAPTION>
(5) CUMULATIVE TOTAL RETURN
FUND --------------------------------------------
INCEPTION LIFE OF
VARIABLE OPTIONS DATE (5) 3 YEAR 5 YEAR 10 YEAR FUND
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET MANAGER 9/6/89 55.24% 71.74% N/A 142.17%
ASSET MANAGER: GROWTH 1/3/95 N/A N/A N/A 77.33
BALANCED 1/3/95 N/A N/A N/A 46.97
CONTRAFUND 1/3/95 N/A N/A N/A 101.87
EQUITY-INCOME 10/9/86 89.87 133.85 309.77 299.22
GROWTH 10/9/86 84.05 113.77 326.25 335.86
GROWTH & INCOME 12/31/96 N/A N/A N/A 28.34
GROWTH OPPORTUNITIES 1/3/95 N/A N/A N/A 95.57
HIGH INCOME 9/19/85 55.34 79.20 103.44 93.51
INDEX 500 8/27/92 114.65 131.62 N/A 145.08
INVESTMENT GRADE BOND 12/5/88 26.74 31.72 N/A 53.76
OVERSEAS 1/28/87 N/A N/A 118.69 104.34
---------------------------------------------------------
<CAPTION> (5) AVERAGE ANNUAL RETURN
---------------------------------------------------------
LIFE OF
VARIABLE OPTIONS 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET MANAGER 19.02% 15.79% 11.42% N/A 11.22%
ASSET MANAGER: GROWTH 23.38 N/A N/A N/A 21.10
BALANCED 20.54 N/A N/A N/A 13.73
CONTRAFUND 22.47 N/A N/A N/A 26.46
EQUITY-INCOME 26.38 23.83 18.52 15.15 13.12
GROWTH 21.82 22.55 16.41 15.60 14.01
GROWTH & INCOME N/A N/A N/A N/A 28.36
GROWTH OPPORTUNITIES 28.20 N/A N/A N/A 25.12
HIGH INCOME 16.08 15.81 12.37 7.36 5.52
INDEX 500 30.91 29.00 18.29 N/A 18.26
INVESTMENT GRADE BOND 7.59 8.22 5.67 N/A 4.86
OVERSEAS 10.05 9.97 12.56 8.14 6.76
---------------------------------------------------------
<CAPTION>
CALENDAR YEAR RETURN(4)
---------------------------------------------------------
VARIABLE OPTIONS 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET MANAGER 19.50% -7.42% 15.38% 13.04% 19.02%
ASSET MANAGER: GROWTH N/A N/A 21.49 18.30 23.38
BALANCED N/A N/A 12.40 8.48 20.54
CONTRAFUND N/A N/A 37.76 19.66 22.47
EQUITY-INCOME 16.76 5.48 33.27 12.73 26.38
GROWTH 17.51 -1.16 33.54 13.14 21.82
GROWTH & INCOME N/A N/A N/A N/A 28.34
GROWTH OPPORTUNITIES N/A N/A 30.76 16.67 28.20
HIGH INCOME 18.68 -2.80 18.98 12.48 16.08
INDEX 500 8.77 -.79 35.34 21.15 30.91
INVESTMENT GRADE BOND 9.56 -5.14 15.74 1.78 7.59
OVERSEAS 35.21 .48 8.20 11.67 10.05
---------------------------------------------------------
</TABLE>
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
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
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.
9
<PAGE>
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 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, 1997, 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, 1997 and 1996 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, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . .1
Audited Financial Statements
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . . .2
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . .6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account I of National Integrity Life Insurance Company (comprising,
respectively, the Money Market, High Income, Equity-Income, Growth, Overseas,
Investment Grade Bond, Asset Manager, Index 500, Asset Manager: Growth,
Contrafund, Growth Opportunities, Balanced, and Growth & Income Divisions) as of
December 31, 1997, the related statement of operations for the year then ended
and statements of changes in net assets for the years ended December 31, 1997
and 1996. 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,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds") as of December 31, 1997, 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, 1997, and the results of their operations for the year
then ended, and changes in their net assets for the years ended December 31,
1997 and 1996, in conformity with generally accepted accounting principles.
Louisville, Kentucky
April 17, 1998
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(cost of $280,649,353
in the aggregate) $18,160,962 $35,694,592 $82,551,920 $45,270,816 $15,253,103 $7,146,341 $32,576,237
Receivable from (payable
to) the general account
of National Integrity (2,071) 3,126 3,054 3,265 2,862 1,942 727
-----------------------------------------------------------------------------------------------------
Net assets $18,158,891 $35,697,718 $82,554,974 $45,274,081 $15,255,965 $7,148,283 $32,576,964
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 12.90 $ 16.93 $ 36.77 $ 44.09 $ 21.69 $ 17.72 $ 25.50
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Units outstanding 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402 1,277,528
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
----------- ----------- ----------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(cost of $280,649,353
in the aggregate) $33,236,247 $7,850,886 $48,040,840 $3,847,508 $1,989,820 $3,924,602 $335,543,874
Receivable from
(payable to) the
general account of
National Integrity (2,046) 1,335 2,812 706 781 (458) 16,035
-----------------------------------------------------------------------------------------------------
Net assets $33,234,201 $7,852,221 $48,043,652 $3,848,214 $1,990,601 $3,924,144 $335,559,909
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 22.79 $ 17.55 $ 19.50 $ 11.99 $ 11.36 $ 12.19
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Units outstanding 1,458,280 447,420 2,463,777 320,952 175,229 321,915
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
Fidelity VIP Funds $ 985,156 $1,880,260 $ 5,754,472 $1,270,948 $1,059,390 $ 327,706 $3,540,050
EXPENSES
Mortality and expense
risk and administrative
charges 250,652 361,615 930,288 549,419 194,291 78,359 421,319
---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 734,504 1,518,645 4,824,184 721,529 865,099 249,347 3,118,731
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on sales
of investments - 760,264 1,220,503 2,802,454 603,432 34,624 929,804
Net unrealized appreciation
of investments
Beginning of period - 1,536,022 8,336,245 4,306,351 1,370,759 211,915 4,378,137
End of period - 3,206,551 17,861,921 8,568,899 1,076,735 349,438 5,692,094
---------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation during the
period - 1,670,529 9,525,676 4,262,548 (294,024) 137,523 1,313,957
---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 2,430,793 10,746,179 7,065,002 309,408 172,147 2,243,761
---------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 734,504 $3,949,438 $15,570,363 $7,786,531 $1,174,507 $421,494 $5,362,492
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP
Funds $ 485,571 $ 6,809 $ 936,877 $ - $ - $ 99,540 $16,346,779
EXPENSES
Mortality and expense risk and
administrative charges 303,413 87,509 526,524 19,432 10,036 17,962 3,750,819
------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 182,158 (80,700) 410,353 (19,432) (10,036) 81,578 12,595,960
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on sales of
investments 1,071,877 474,836 960,967 86,693 13,552 86,669 9,045,675
Net unrealized appreciation of
investments
Beginning of period 1,532,542 170,065 4,575,088 - - - 26,417,124
End of period 5,720,773 1,122,816 10,859,280 228,284 92,292 115,438 54,894,521
------------------------------------------------------------------------------------
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284 92,292 115,438 28,477,397
------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 5,260,108 1,427,587 7,245,159 314,977 105,844 202,107 37,523,072
------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $5,442,266 $1,346,887 $ 7,655,512 $295,545 $ 95,808 $283,685 $50,119,032
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</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, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 734,504 $ 1,518,645 $ 4,824,184 $ 721,529 $ 865,099 $ 249,347 $ 3,118,731
Net realized gain on sales of
investments - 760,264 1,220,503 2,802,454 603,432 34,624 929,804
Change in net unrealized appreciation
during the period - 1,670,529 9,525,676 4,262,548 (294,024) 137,523 1,313,957
------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 734,504 3,949,438 15,570,363 7,786,531 1,174,507 421,494 5,362,492
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 14,076,961 8,893,416 13,965,376 5,919,207 2,914,588 903,638 2,746,016
Contract terminations and benefits (2,421,910) (4,148,133) (3,205,355) (2,392,011) (1,275,749) (295,183) (3,098,725)
Net transfers among investment option (12,252,316) 3,601,295 1,081,673 (134,896) 680,539 514,038 (1,391,288)
------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (597,265) 8,346,578 11,841,694 3,392,300 2,319,378 1,122,493 (1,743,997)
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 137,239 12,296,016 27,412,057 11,178,831 3,493,885 1,543,987 3,618,495
Net assets, beginning of year 18,021,652 23,401,702 55,142,917 34,095,250 11,762,080 5,604,296 28,958,469
------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,158,891 $35,697,718 $82,554,974 $45,274,081 $15,255,965 $7,148,283 $32,576,964
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,114,197 558,880 422,804 144,679 132,358 53,477 116,674
Terminations and benefits (191,440) (271,245) (91,232) (58,086) (57,026) (17,510) (132,593)
Net transfers (968,450) 215,858 18,003 (1,855) 31,275 27,162 (58,489)
-----------------------------------------------------------------------------------------
Net increase (decrease) in units (45,693) 503,493 349,575 84,738 106,607 63,129 (74,408)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</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, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER:
INDEX 500 GROWTH CONTRAFUND GROWTH GROWTH &
DIVISION DIVISION DIVISION OPPORTUNITIES BALANCED INCOME TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 182,158 $ (80,700) $ 410,353 $ (19,432) $ (10,036) $ 81,578 $ 12,595,960
Net realized gain on sales of
investments 1,071,877 474,836 960,967 86,693 13,552 86,669 9,045,675
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284 92,292 115,438 28,477,397
----------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 5,442,266 1,346,887 7,655,512 295,545 95,808 283,685 50,119,032
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 9,004,723 2,970,634 10,325,955 2,953,975 1,711,873 2,726,972 79,113,334
Contract terminations and benefits (657,828) (406,304) (1,976,049) (36,079) (22,531) (40,093) (19,975,950)
Net transfers among investment options 6,587,964 (78,663) 2,335,510 634,773 205,451 953,580 2,737,660
----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 14,934,859 2,485,667 10,685,416 3,552,669 1,894,793 3,640,459 61,875,044
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 20,377,125 3,832,554 18,340,928 3,848,214 1,990,601 3,924,144 111,994,076
Net assets, beginning of year 12,857,076 4,019,667 29,702,724 - - - 223,565,833
----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $33,234,201 $7,852,221 $48,043,652 $3,848,214 $1,990,601 $3,924,144 $335,559,909
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 430,320 183,734 571,556 266,949 156,357 241,192
Terminations and benefits (30,797) (24,412) (101,248) (3,103) (2,031) (3,381)
Net transfers 320,269 5,421 127,720 57,106 20,903 84,104
--------------------------------------------------------------------------
Net increase (decrease) in units 719,792 164,743 598,028 320,952 175,229 321,915
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</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, 1996
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <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 $ 150,911
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853 66,281
Change in net unrealized appreciation
during the period - 338,992 3,582,485 888,211 873,498 (93,934)
----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 731,935 2,155,857 5,514,648 3,247,906 1,090,526 123,258
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 1,384,320
Contract terminations and benefits (2,565,173) (2,122,255) (2,744,148) (2,172,101) (543,454) (297,734)
Net transfers among investment options (13,359,842) 2,918,655 1,873,529 2,865,903 1,450,476 113,095
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,902,572) 6,565,011 15,658,102 9,811,168 3,151,860 1,199,681
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,170,637) 8,720,868 21,172,750 13,059,074 4,242,386 1,322,939
Net assets, beginning of year 20,192,289 14,680,834 33,970,167 21,036,176 7,519,694 4,281,357
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080 $5,604,296
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,070,667 420,641 613,841 264,112 120,141 86,373
Terminations and benefits (209,764) (152,014) (101,953) (62,070) (27,727) (17,903)
Net transfers (1,100,108) 204,521 67,546 82,490 78,298 7,195
----------------------------------------------------------------------------
Net increase (decrease) in units (239,205) 473,148 579,434 284,532 170,712 75,665
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</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, 1996
<TABLE>
<CAPTION>
ASSET
ASSET MANAGER:
MANAGER INDEX 500 GROWTH CONTRAFUND
DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,429,952 $ 92,181 $ 169,386 $ (163,258) $ 5,931,780
Net realized gain on sales of investments 130,034 511,372 29,931 370,212 3,912,908
Change in net unrealized appreciation
during the period 1,940,303 1,082,819 160,015 3,846,898 12,619,287
---------------------------------------------------------------
Net increase in net assets resulting from
operations 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 2,057,176 5,841,031 1,297,372 9,673,035 66,934,913
Contract terminations and benefits (2,120,090) (484,894) (89,733) (1,301,783) (14,441,365)
Net transfers among investment options (2,161,691) 1,597,892 1,429,241 4,579,388 1,306,646
---------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,224,605) 6,954,029 2,636,880 12,950,640 53,800,194
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,275,684 8,640,401 2,996,212 17,004,492 76,264,169
Net assets, beginning of year 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
---------------------------------------------------------------
NET ASSETS, END OF YEAR $28,958,469 $12,857,076 $4,019,667 $29,702,724 $223,565,833
---------------------------------------------------------------
---------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 104,501 371,841 99,473 677,612
Terminations and benefits (107,819) (30,376) (6,955) (89,447)
Net transfers (105,579) 103,587 105,013 323,547
-------------------------------------------------
Net increase (decrease) in units (108,897) 445,052 197,531 911,712
-------------------------------------------------
-------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity") established
Separate Account I (the "Separate Account") on May 19, 1986, under the insurance
laws of the State of New York, for the purpose of issuing flexible 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 growing asset accumulation business with particular emphasis
on retirement savings and investment products.
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 GPO.
The Separate Account investment divisions are invested in shares of
corresponding investment portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series"
type mutual funds managed by Fidelity Management and Research Company ("Fidelity
Management"). The contract holder's account value in a Separate Account division
will vary depending on the performance of the corresponding portfolio. The
Separate Account currently has thirteen 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, 1997 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 earn 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 earn 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 equity securities. The portfolio has the
flexibility, however, to invest the balance in all types of domestic and
foreign securities, including bonds.
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 at least 65% of its
assets in foreign securities.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital by investing in a broad
range of investment-grade fixed-income securities.
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 money
market 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
instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's 500 Composite Stock Price Index while
keeping transaction costs and other expenses low.
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks,
bonds, and short-term money market instruments. The portfolio has a
"neutral" mix of assets 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 not currently recognized by the public. This approach
focuses on companies that are currently out of public favor but show
potential for capital appreciation. The portfolio invests primarily in
common stocks and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks and securities convertible into common stock.
Although the portfolio invests in common stocks and securities convertible
into common stock, it has the ability to purchase other securities, such as
preferred stocks and bonds, that may produce capital growth.
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
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
GROWTH & INCOME PORTFOLIO seeks a high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. 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.
The assets of the Separate Account are owned by National Integrity. The portion
of the Separate Account's assets supporting the contracts may not be used to
satisfy liabilities arising out of any other business of National Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Fidelity VIP Funds are valued at the net asset
values of the respective portfolios, which approximates fair value. The
difference between cost and fair value is reflected as unrealized appreciation
and depreciation of investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends 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.
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
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.
14
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1997 and the cost of shares held
at December 31, 1997 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ---------------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Money Market $38,837,234 $38,696,859 $ 18,160,962
High Income 26,906,943 17,050,180 32,488,041
Equity-Income 20,821,044 4,164,977 64,689,999
Growth 11,346,814 7,237,543 36,701,917
Overseas 6,919,058 3,734,703 14,176,368
Investment Grade Bond 2,588,984 1,217,542 6,796,903
Asset Manager 8,167,251 6,798,251 26,884,143
Index 500 18,652,194 3,532,999 27,515,474
Asset Manager: Growth 4,339,551 1,936,249 6,728,070
Contrafund 13,824,141 2,733,795 37,181,560
Growth Opportunities 4,370,164 837,633 3,619,224
Balanced 1,999,529 115,553 1,897,528
Growth & Income 4,604,040 881,545 3,809,164
------------
$280,649,353
------------
------------
</TABLE>
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, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets (Statutory Basis) . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income (Statutory Basis) . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Capital and Surplus (Statutory Basis) . . . . . . 5
Statements of Cash Flows (Statutory Basis) . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8
<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, 1997 and 1996, and the
related statutory basis statements of income, 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, 1997 and 1996, or
the results of its operations or its cash flows for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National Integrity
Life Insurance Company at December 31, 1997 and 1996, 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.
Louisville, Kentucky
February 10, 1998
1
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 414,907 $ 451,439
Preferred stocks 21,792 50,715
Mortgage loans 3,242 3,929
Policy loans 26,396 24,981
Cash and short-term investments 12,078 14,570
Receivable for securities 1,941 4,522
Other invested assets 3,794 36
--------------------------------
Total cash and invested assets 484,150 550,192
Separate account assets 617,327 370,988
Accrued investment income 5,735 6,513
Federal income tax recoverable - 438
Other admitted assets 2,143 1,794
--------------------------------
Total admitted assets $ 1,109,355 $ 929,925
--------------------------------
--------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 446,610 $ 513,639
Unpaid claims 50 124
Deposits on policies to be issued 564 645
---------------------------------
Total policy and contract liabilities 447,224 514,408
Separate account liabilities 617,327 370,988
Accounts payable and accrued expenses 151 213
Transfers to separate accounts due or accrued, net (24,362) (21,247)
Reinsurance balances payable 511 589
Federal income taxes 5,645 -
Asset valuation reserve 1,570 1,773
Interest maintenance reserve 7,240 8,914
Other liabilities 32 6,016
---------------------------------
Total liabilities 1,055,338 881,654
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 (deficit) (7,977) (13,723)
---------------------------------
Total capital and surplus 54,017 48,271
---------------------------------
Total liabilities and capital and surplus $ 1,109,355 $ 929,925
---------------------------------
---------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
National Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 11,533 $ 8,640
Deposit-type funds 211,637 352,899
Net investment income 42,464 53,553
Amortization of the interest maintenance reserve 1,359 1,001
Other revenues 5,961 5,653
-------------------------------
Total premiums and other revenues 272,954 421,746
Benefits paid or provided:
Death benefits 1,268 921
Annuity benefits 12,687 19,445
Surrender benefits 123,520 101,241
Payments on supplementary contracts 1,648 1,879
Increase (decrease) in insurance and annuity reserves (66,954) 192,985
Other benefits 119 7,818
-------------------------------
Total benefits paid or provided 72,288 324,289
Insurance and other expenses:
Commissions 10,088 5,817
General expenses 11,146 8,051
Taxes, licenses and fees 794 349
Net transfers to separate accounts 163,896 69,158
Other expenses 3,542 3,110
-------------------------------
Total insurance and other expenses 189,466 86,485
-------------------------------
Gain from operations before federal income taxes
and net realized capital losses 11,200 10,972
Federal income tax expense (benefit) 3,621 (444)
-------------------------------
Gain from operations before net realized capital losses 7,579 11,416
Net realized capital losses, excluding realized
capital gains (losses) net of tax transferred to the
interest maintenance reserve (1997-($314); 1996-$2,923) (2,036) (2,500)
-------------------------------
Net income $ 5,543 $ 8,916
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
-------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 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
Net income 5,543 5,543
Decrease in asset valuation reserve 203 203
-------------------------------------------------------------------------
Balance, December 31, 1997 $ 2,000 $ 59,244 $ 750 $ (7,977) $ 54,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 223,170 $ 361,539
Net investment income received 42,944 53,492
Commission and expense allowances received on
reinsurance ceded 8 644
Benefits paid (139,316) (125,238)
Insurance expenses paid (22,090) (14,170)
Other income received net of other expenses paid 2,335 5,009
Net transfers to separate accounts (167,010) (74,076)
Federal income taxes (4,479) -
---------------------------------
Net cash provided by (used in) operations (64,438) 207,200
<CAPTION>
<S> <C> <C>
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments of investments:
Bonds 368,167 455,716
Preferred stocks 55,948 19,067
Mortgage loans 687 1,389
Other invested assets - 8,826
Miscellaneous proceeds 4,254 -
---------------------------------
Total investment proceeds 429,056 484,998
Benefits received (taxes paid) on capital gains 6,921 (1,212)
---------------------------------
Net proceeds from sales, maturities, or repayments
of investments 435,977 483,786
<CAPTION>
<S> <C> <C>
Cost of investments acquired:
Bonds 337,887 626,879
Preferred stocks 26,621 55,045
Other invested assets 3,794 -
Miscellaneous applications 405 36
---------------------------------
Total cost of investments acquired 368,707 681,960
Net increase in policy loans and premium notes 1,415 2,375
---------------------------------
Net cash provided by (used in) investment activities 65,855 (200,549)
</TABLE>
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Other sources 2,588 3,826
------------------------
Total other cash provided 2,588 3,826
------------------------
Other cash applied:
Other applications, net 6,497 16,175
------------------------
Total other cash applied 6,497 16,175
------------------------
Net cash used in financing and miscellaneous activities (3,909) (12,349)
------------------------
Net decrease in cash and short-term investments (2,492) (5,698)
Cash and short-term investments at beginning of year 14,570 20,268
------------------------
Cash and short-term investments at end of year $ 12,078 $ 14,570
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1997
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, specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products.
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
fair value based on the National Association of Insurance Commissioners
("NAIC") rating; for GAAP, such fixed maturity investments are designated
at purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity fixed investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized holding gains and losses reported in operations for those
designated as trading and as a separate component of shareholder's equity
for those designated as available-for-sale. In addition, fair values of
certain investments in bonds and stocks are based on values specified by
the NAIC, rather than on actual or estimated fair values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
formula and is reported as a liability rather than unassigned surplus.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the individual security sold using the seriatim method. The net
deferral is reported as the Interest Maintenance Reserve in the
accompanying balance sheets. Under GAAP, realized gains and losses are
reported in the income statement on a pretax basis in the period that the
asset giving rise to the gain or loss is sold and include provisions when
there has been a decline in asset values deemed other than temporary.
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 AND BENEFITS
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and
therefore not recognized as premium revenue; benefits paid equal to the
policy account value are accounted for as a return of deposit instead of
benefit expense.
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.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 5,543 $ 8,916
Deferred policy acquisition costs, net of amortization 10,157 5,187
Adjustments to customer deposits (5,781) (441)
Adjustments to invested asset carrying values
at acquisition date (38) (160)
Amortization of value of insurance in force (870) (1,470)
Amortization of interest maintenance reserve (1,359) (1,001)
Adjustments for realized investment gains 1,511 852
Adjustments for federal income tax expense (3,320) (2,185)
Other 166 (200)
------------------------
Net income, GAAP basis $ 6,009 $ 9,498
------------------------
------------------------
</TABLE>
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 54,017 $ 48,271
Adjustments to customer deposits (33,014) (27,233)
Adjustments to invested asset carrying values at
acquisition date (3,724) (5,197)
Asset valuation reserve and interest maintenance reserve 17,796 19,369
Value of insurance in force 13,043 13,913
Deferred policy acquisition costs 33,885 23,728
Net unrealized gains on available-for-sale securities 5,849 1,416
Other (5,793) (2,650)
------------------------
Shareholder's equity, GAAP basis $ 82,059 $ 71,617
------------------------
------------------------
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks and short-term investments are stated at values
prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost.
The discount or premium on bonds is amortized using the interest method.
For loan-backed bonds and structured securities, anticipated prepayments
are considered when determining the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities
are obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
11
<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 includes 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 reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
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.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 fair 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. Investments income and
interest credited on deposits held in guaranteed separate accounts are included
in the accompanying statements of income. The Company receives administrative
fees for managing the nonguaranteed separate accounts and other fees for
assuming mortality and certain expense risks. Such fees are included in other
revenues.
USE OF ESTIMATES
The preparation of financial statements 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 1997 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC is in the process of codifying statutory
accounting practices ("Codification"). Codification will likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Company uses to prepare its statutory basis financial statements. Codification
has been approved by the NAIC in March 1998, but it will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, New York must adopt Codification
as the prescribed basis of accounting on which domestic insurers must report
their statutory basis results to the Insurance Department. At this time it is
unclear whether New York will adopt Codification. The Company is monitoring
developments related to codification and assessing the potential effects any
changes would have on the Company's statutory basis financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1997:
Mortgage-backed securities $ 193,688 $ - $ - $ 193,688
Corporate securities 159,208 4,074 34 163,248
Asset-backed securities 27,370 - - 27,370
U.S. Treasury securities and
obligations of U.S. government
agencies 24,361 1,083 2 25,442
Foreign governments 10,280 - 437 9,843
-------------------------------------------------------
Total bonds $ 414,907 $ 5,157 $ 473 $ 419,591
-------------------------------------------------------
-------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
At December 31, 1996:
Mortgage-backed securities $ 244,376 $ - $ - $ 244,376
Corporate securities 168,146 775 7,178 161,743
Asset-backed securities 10,311 - - 10,311
U.S. Treasury securities and
obligations of U.S. government
agencies 16,243 415 110 16,548
Foreign governments 12,363 643 - 13,006
-------------------------------------------------------
Total bonds $ 451,439 $ 1,833 $ 7,288 $ 445,984
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
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, 1997 and 1996, the fair
value of investments in bonds includes $306.8 million and $312.7 million,
respectively, of bonds that were valued at amortized cost.
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1997, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED
COST FAIR VALUE
------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 1,304 $ 1,314
After one through five 13,493 13,513
After five through ten 39,042 39,192
After ten 140,010 144,514
Asset-backed securities 27,370 27,370
Mortgage-backed securities 193,688 193,688
------------------------------
Total $ 414,907 $ 419,591
------------------------------
------------------------------
</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 1997 and 1996 were $375.5
million and $755.7 million; gross gains of $8.6 million and $7.9 million, and
gross losses of $8.3 million and $4.5 million were realized on those sales,
respectively.
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
At December 31, 1997 and 1996, bonds with an admitted asset value of $1,235,000
and $1,234,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. 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 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
1997, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 34,854 $ 47,487
Preferred stocks 4,205 4,150
Mortgage loans 291 610
Policy loans 2,072 1,886
Cash and short-term investments 1,506 1,277
Other (3) 3
---------------------------
Total investment income 42,925 55,413
Investment expenses (461) (1,860)
---------------------------
Net investment income $ 42,464 $ 53,553
---------------------------
---------------------------
</TABLE>
16
<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 is not significant to the Company's premiums, benefits
or policy and contract liabilities.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed against
policyholders $ 210,910 $ 115,547
Reinsurance assumed 12,770 246,571
Reinsurance ceded (510) (580)
----------------------------
Net premiums, annuity considerations and
deposit-type funds $ 223,170 $ 361,538
----------------------------
----------------------------
</TABLE>
The Company sold guaranteed investment contract ("GIC") deposits totaling $358.3
million to Integrity as of June 30, 1996.
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.
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.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
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's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1997 and 1996, the adjusted capital
and surplus of the Company is substantially in excess of the minimum level of
RBC that would require regulatory response.
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1997 and 1996, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
---------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1997:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 219,464 22.9%
At book value less surrender charge of 5% or more 5,760 0.6
At market value 372,550 38.9
-------------------------
Total with adjustment or at market value 597,774 62.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 299,314 31.2
Not subject to discretionary withdrawal 61,448 6.4
-------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 958,536 100.0%
---------
---------
Less reinsurance ceded -
----------
Net annuity reserves and deposit fund liabilities $ 958,536
----------
----------
<CAPTION>
<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
----------
----------
</TABLE>
19
<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, 1997 is as follows:
<TABLE>
<CAPTION>
*NONINDEXED NONGUARANTEED
GUARANTEED SEPARATE
MORE THAN 4% ACCOUNTS TOTAL
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 122,664 $ 89,078 $ 211,742
--------------------------------------------------
--------------------------------------------------
Reserves for separate accounts with assets
at fair value $ 219,469 $ 372,669 $ 592,138
--------------------------------------------------
--------------------------------------------------
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 219,464 $ - $ 219,464
At book value without market value
adjustment and with current
surrender charge of 5% or more 5 - 5
At market value - 372,669 372,669
--------------------------------------------------
Total with adjustment or at market value 219,469 372,669 592,138
Not subject to discretionary withdrawal - - -
--------------------------------------------------
Total separate accounts reserves $ 219,469 $ 372,669 $ 592,138
--------------------------------------------------
--------------------------------------------------
</TABLE>
* Separate accounts with guarantees.
20
<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, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 211,743 $ 102,901
Transfers from separate accounts (52,365) (37,150)
-------------------------
Net transfers to separate accounts 159,378 65,751
Reconciling adjustments:
Mortality and expense charges reported as other revenues 4,417 3,194
Other revenues 101 213
-------------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 163,896 $ 69,158
-------------------------
-------------------------
</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.
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $ 414,907 $ 424,642 $ 451,439 $ 457,875
Preferred stocks 21,792 22,252 50,715 50,454
Mortgage loans 3,242 3,242 3,929 3,929
Liabilities:
Life and annuity reserves for
investment-type contracts $ 367,124 $ 367,374 $ 432,013 $ 426,516
Separate accounts annuity reserves 592,018 576,877 347,503 347,072
</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 estimate
or quoted market price of comparable investments.
MORTGAGE LOANS ON REAL ESTATE
The carrying amount of mortgage loans approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of deposit fund liabilities and the remaining
annuity reserves are based on the cash surrender value of the underlying
contracts.
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. RELATED PARTY TRANSACTIONS
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement and an Investment Advisory Agreement with ARM. Under these agreements,
ARM performs certain administrative investment advisory and special services for
the Company to assist with its business operations. The services include
policyholder services; accounting, tax and auditing; underwriting; marketing and
product development; functional support services; payroll functions; personnel
functions; administrative support services; and investment functions. During
1997 and 1996, the Company was charged $5.9 million and $6.1 million,
respectively, for these services in accordance with the requirements of
applicable insurance law and regulations.
11. YEAR 2000 (UNAUDITED)
The Company is currently evaluating on an ongoing basis, its computer systems
and the systems of other companies on which the Company's operations rely to
determine if they will function properly with respect to dates in the year 2000
and beyond. These activities are designed to ensure that there is no adverse
effect on the Company's core business operations. While the Company believes
its planning efforts are adequate to address its Year 2000 concerns, there can
be no guarantee that the systems of other companies on which the Company's
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Company's Year 2000 initiatives is not
expected to be material to the Company's results of operations or financial
condition.
23
<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
Form N-4 Item No. Location in Prospectus
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 Table of Contents
Statement of Additional
Information
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - IQ THE SMARTANNUITY
Form N-4 Item No. Location in Statement of Additional
Information
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 Part 2 - Distribution of the Contracts
Offered
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
<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-Registered Trademark- 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>
<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, 1998, 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.
<PAGE>
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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 . . . . . . . . . . . . . . . . . . . . . . . . . 2
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. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National Integrity Life Insurance Company. . . . . . . . . . . . . . . . . 7
The Separate Account and the Variable Account Options. . . . . . . . . . . 8
Assets of Our Separate Account . . . . . . . . . . . . . . . . . . . . . . 8
Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . 8
PART 3 - YOUR INVESTMENT OPTIONS
The Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Funds' Investment Adviser . . . . . . . . . . . . . . . . . . . . . 9
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . . 10
Guaranteed Rate Options . . . . . . . . . . . . . . . . . . . . . . . . 12
Renewals of GRO Accounts . . . . . . . . . . . . . . . . . . . . . . 13
Market Value Adjustments . . . . . . . . . . . . . . . . . . . . . . 13
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . . 14
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . 15
Reduction or Elimination of Separate Account or Administrative Charges . . 15
Fund Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . . 15
Reduction or Elimination of the Contingent Withdrawal Charge . . . . . . . 15
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . . 16
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Your Purchase of Units in Our Separate Account . . . . . . . . . . . . . . 17
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . . 17
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . . 19
<PAGE>
PAGE
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . . 21
PART 6 - VOTING RIGHTS
Fund Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . . 21
How Fund Shares Are Voted. . . . . . . . . . . . . . . . . . . . . . . . . 22
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . . 22
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . . 22
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . . 23
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . . 24
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . . 24
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . . 24
Traditional Individual Retirement Annuities . . . . . . . . . . . . . . 25
Roth Individual Retirement Annuities. . . . . . . . . . . . . . . . . . 25
SIMPLE Individual Retirement Annuities. . . . . . . . . . . . . . . . . 25
Simplified Employee Pensions . . . . . . . . . . . . . . . . . . . . . . . 25
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans. . . . . . . . . . . . . . . . . . . . . . . 25
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations. . . . . . . . . . . . . . . . . . . . . . . 26
Distributions Under Tax-Favored Retirement Programs. . . . . . . . . . . . 26
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . 27
Impact of Taxes to National Integrity. . . . . . . . . . . . . . . . . . . 27
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . . 27
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . . . . 28
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . . 28
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . 29
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Appendix A - Illustration of a Market Value Adjustment . . . . . . . . . 36
</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
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 (IQ)
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. If a Joint Owner is named, the
contract rights are shared with the Owner. Contract changes or any transactions
allowed under the contract require both signatures. The rules governing
distribution at death apply when the first Owner dies. See Section 7,
"DISTRIBUTION-AT-DEATH RULES."
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," "Customized Asset Rebalancing," and "Callan 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 1997 was .75% 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. Unless specifically
instructed otherwise, National Integrity will make withdrawals (including any
applicable charges) from the Investment Option in the same ratio the Annuitant's
Account Value in each Investment Option bares to the Annuitant's total Account
Value. 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.
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.
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses
- -----------------------------------
<S> <C>
Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . . . . $0
Exchange Fee (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge (2). . . . . . . . . . . . . . . . . . . . $30
Separate Account Annual Expenses (as a
percentage of average account value) (3)
- ----------------------------------------
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% .10% .31%
VIP High Income . . . . . . . . . . .59% .12% .71%(5)
VIP Equity-Income . . . . . . . . . .50% .08% .58%
VIP Growth. . . . . . . . . . . . . .60% .09% .69%
VIP Overseas. . . . . . . . . . . . .75% .17% .92%
VIP II Investment Grade Bond. . . . .44% .14% .58%
VIP II Asset Manager. . . . . . . . .55% .10% .65%(5)(6)
VIP II Index 500. . . . . . . . . . .24% . 4% .28%(6)
VIP II Contrafund . . . . . . . . . .60% .11% .71%(5)
VIP II Asset Manager: Growth. . . . .60% .17% .77%(5)(6)
VIP III Balanced. . . . . . . . . . .45% .16% .61%(5)
VIP III Growth Opportunities. . . . .60% .14% .74%(5)
VIP III Growth & Income . . . . . . .49% .21% .70%(5)(7)
</TABLE>
- -------------------------
(1) After the first twelve transfers during a contract year, 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, asset rebalancing, 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 whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would have
been .57% for VIP Equity-Income Portfolio, .67% for VIP Growth Portfolio, .90%
for VIP Overseas Portfolio, .64% for VIP II Asset Manager Portfolio, .68% for
VIP II Contrafund Portfolio, .76% for VIP II Asset Manager: Growth Portfolio,
and .73% for VIP III Growth Opportunities Portfolio, and .60% for VIP III
Balanced Portfolio.
3
<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 .27%, .13%,
and .40%, 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>
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 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.
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.
4
<PAGE>
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
December 31, 1997 $12.90 $16.93 $36.77 $44.09 $21.69 $17.72
Number of Units 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402
</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.
5
<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 - - -
December 31, 1997 $25.50 $22.79 $19.50 $17.55 $11.36 $12.19 $11.99
Number of Units 1,277,528 1,458,2803 2,463,777 447,420 175,229 321,915 320,952
</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.
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, 1997, ARM had $6.9
billion of assets under management.
6
<PAGE>
National Integrity is currently evaluating, on an ongoing basis, its computer
systems and the systems of other companies on which National Integrity's
operations rely to determine if they will function properly with respect to
dates in the year 2000 and beyond. These activities are designed to ensure that
there is no adverse effect on National Integrity's core business operations.
While National Integrity believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which National Integrity's operations rely will be converted on a
timely basis and will not have a material effect on National Integrity.
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;
- 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
7
<PAGE>
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-Registered Trademark-, one of the largest investment management
organizations in the United States. Fidelity Investments-Registered Trademark-
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-Registered Trademark- 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.
The VIP Money Market Portfolio's advisory fee is made up of three components: a
group fee rate, an individual fund fee rate (0.03%), and an income-based
component of 6% of the fund's gross income in excess of a 5% yield. The maximum
income-based component is 0.24% of the fund's average net assets.
8
<PAGE>
Pursuant to approval of shareholders of VIP II Index 500 at a shareholder
meeting held on November 19, 1997, effective December 1, 1997 Bankers Trust
Company ("BT") has been appointed as the fund's sub-adviser. BT chooses the
fund's investments and acts as the fund's custodian. BT, a New York banking
corporation with principal offices at 130 Liberty Street, New York, New York
10006, is a wholly owned subsidiary of Bankers Trust New York Corporation.
Index 500's management fees are paid out of the fund's assets to Fidelity
Management and BT. The fund also incurs other expenses for services such as
maintaining shareholder records and furnishing shareholder account statements
and financial reports. Management and sub-advisory fees are calculated and
paid every month to Fidelity Management and BT, respectively. The fund pays
the fees at the annual rate of 0.24% of its average net assets. These fees
include a management fee of 0.24% payable to Fidelity Management, and
estimated sub-advisory fees of less than 0.01% payable to BT (representing
40% of net income from securities lending). For investment management,
securities lending and custodial services to the fund, Fidelity Management
pays BT fees at an annual rate of 0.006% of the average net assets of the
fund. In addition, the fund pays BT fees equal to 40% of net income from the
fund's securities lending program. The remaining 60% of net income from the
fund's securities lending program goes to the fund. FMR has voluntarily
agreed, subject to revision or termination, to reimburse the fund if and to
the extent that its aggregate operating expenses, including management fees
(but excluding sub-advisory fees associated with securities lending, interest
taxes, brokerage commissions, and extraordinary expenses), are in excess of
an annual rate of 0.28% of the average net assets of the fund.
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 earn a high 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 a high 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 equity securities. The Portfolio has the flexibility, however,
to invest the balance in all types of domestic and foreign securities, including
bonds.
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 foreign securities.
9
<PAGE>
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.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments. 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 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 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. Although the Portfolio invests in common stock and securities
convertible into common stock, it has the ability to purchase other
securities, such as preferred stock and bonds, that may produce capital
growth.
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.
10
<PAGE>
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. 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 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.
11
<PAGE>
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. Withdrawal charges and the administrative
expense charge may invade principal.
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:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if 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.
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.
12
<PAGE>
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 Life Insurance
Company (INTEGRITY), the parent of National Integrity, who purchase contracts
under the salary allotment program of either company.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
The separate account or administrative charges may be reduced or eliminated when
contract sales are made to individuals or to a group of individuals in such a
manner that results in savings of expenses. The entitlement to such a reduction
will be based on: (1) the size and type of the group of individuals to whom the
contract is offered; and/or (2) the amount of expected contributions. Any
reduction or elimination of the separate account or administrative charges will
not unlawfully discriminate against any person.
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%.
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We may reduce or eliminate the contingent withdrawal charge when sales of the
contracts are made to individuals or a group of individuals in such a manner
that results in savings of expenses. The entitlement to such a reduction in the
contingent withdrawal charge will be based on the following: (1) the size and
type of the group of individuals to whom the contract is offered; (2) the amount
of expected contributions; and/or (3) whether there is a prior or existing
relationship with Integrity, such as being an employee of Integrity or an
affiliate, receiving distributions or making internal transfers from
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other contracts issued by Integrity, or making transfers of amounts held under
qualified plans sponsored by Integrity or an affiliate. Any reduction or
elimination of the contingent withdrawal charge will not unlawfully
discriminate against any person.
TRANSFER CHARGE
No charge is made for your first twelve transfers (excluding dollar cost
averaging and Customized 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)
Customized Asset Rebalancing, or (iii) the Callan 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 defined as any day that the New
York Stock Exchange is open.
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. We will accept changes by
telephone transfer. See "Transfers" in Part 5.
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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.
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).
- 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.
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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 Customized Asset Rebalancing programs, or the
Callan 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 9:00 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 ( or the close of the New York
Stock Exchange, if earlier) will be processed using unit values as of the close
of business on the next Business Day after the day you call. All transfers will
be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed not later than the next Business Day after
the requests are received by our Administrative Office.
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. Unless specifically
instructed otherwise, National Integrity will make withdrawals (including any
applicable charges) from the Investment Option in the same ratio the Annuitant's
Account Value in each Investment Option bares to the Annuitant's total Account
Value. 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.
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.
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DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We will pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day on which we receive due proof of
death. Similarly, if the Contract was issued on or after the youngest
Annuitant's 86th birthday, the death benefit is the contract account value at
the end of the business day on which we receive due proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the highest of:
a) the contract account value at the end of the business day on which we
receive due proof of death;
b) the total of all contributions; and
c) the highest contract account value on any contract anniversary which
occurred prior to the Annuitant's 81st birthday and prior to the
Annuitant's death, plus any subsequent contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). The amount of the
reduction will be determined by dividing the amount of the withdrawal by the
annuity account value on the transaction date and multiplying this percentage by
the then current guaranteed minimum death benefit.
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.
The death benefit described above becomes retroactive to all contracts issued on
or after January 1, 1997.
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.
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
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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 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.
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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 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 our understanding of the present federal income
tax laws as currently interpreted by the Internal Revenue Service (IRS) and
various courts. 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 tax 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:
Finally, the individual (or employer) may purchase the Annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules 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, 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.
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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) part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the taxpayer
or joint lives (or joint life expectancies) of the taxpayer and beneficiary; (4)
attributable to the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7); (5) from certain qualified plans (note, however, other
penalties may apply); (6) under a qualified funding asset (as defined in Section
130(d) of the Code); (7) purchased by an employer on termination of certain
types of qualified plans and held by the employer until the employee separates
from service; (8) under an immediate annuity as defined in Code Section
72(u)(4); or (9) purchase of a first home (distribution up to $10,000,
applicable to IRAs only).
However, the withdrawal provisions of your contract still apply. See
"Withdrawals" in Section 5.
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.
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.
21
<PAGE>
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.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may commence. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract which apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may commence. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose
of complying with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
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
22
<PAGE>
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
Traditional 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.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408 or a Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional
IRA; or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
23
<PAGE>
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
When required, 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 Integrity at or before the time of the distribution of an
election not to have any amounts withheld. In certain circumstances, 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%. The withholding rate applicable to eligible rollover
distributions is 20% unless such distribution is paid directly to an eligible
retirement plan.
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 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
24
<PAGE>
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."
INCOME PLUS WITHDRAWAL PROGRAM
We offer the Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals from your contract prior to your
reaching age 59-1/2. Income Plus Withdrawals are exempt from the 10% penalty
tax, normally applicable to early distributions made prior to age 59-1/2. See
"Taxation of Annuities Generally," in Section 7. Once distributions begin they
should not be changed or stopped until the later of age 59-1/2 or five years
from the date of the first distribution. If you change or stop the distribution
or take an additional withdrawal, you may be liable for the 10% penalty tax that
would have otherwise been due on all prior distributions made under the Income
Plus Program and for any interest thereon.
The Income Plus Withdrawal Program may be elected at any time if you are below
age 59-1/2. You can elect this option by submitting the proper election form to
our Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We will
calculate the amount of the distribution under a method selected by you. The
minimum Income Plus Withdrawal currently is $100. You must also specify an
account for direct deposit of your Income Plus Withdrawals.
To enroll under our Income Plus 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 seven Business Days prior
written notice, and we may terminate or amend the Income Plus 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. This program is not available in
concert with the Systematic Withdrawal Program, Dollar Cost Averaging or Asset
Allocation and Rebalancing Program.
Amounts withdrawn by you under the Income Plus 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 INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which 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.
CUSTOMIZED ASSET REBALANCING
We offer an Customized 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 Customized Asset Rebalancing program, and
26
<PAGE>
such transfers will not count towards the twelve transfers you may make in a
contract year before we may impose a transfer charge.
Fixed Accounts are not eligible for the Customized Asset Rebalancing program.
To enroll under our Customized 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
Customized Asset Rebalancing program. You should, therefore, monitor your use of
such other programs, transfers, and withdrawals while the Customized 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 Customized Asset Rebalancing program at any time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates (MODEL(s)). Callan Associates is an independent research
and consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Models: Conservative, Moderately
Conservative, Moderate, Moderately Aggressive, or Aggressive. Your current
contribution allocations will be initially allocated among the Options
currently established for each Model. If we change the Model, your account
values will be automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
If you select this program, then unless you have terminated your participation,
your account values will be allocated and your variable portfolios will be
rebalanced automatically at least annually and more frequently if so determined
by the Asset Allocation & Rebalancing Program. The program automatically
applies to all contributions made to your annuity contract while you are still
participating. You will receive a confirmation notice after each rebalancing.
No transfer charge will apply to transfers under the 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
"Transfer Charges" in Part 4.
In each investor profile, a portion of all contributions is allocated to a
five-year Guaranteed Rate Option (GRO). The amount allocated to the GRO will
not be reallocated or rebalanced while participating in a specific investor
profile. You may cancel or change the investment profile you have selected at
any time. However, the GRO funds, if withdrawn or transferred, may be subject
to a market value adjustment (MVA) that may increase or decrease your account
value.
To enroll under the Asset Allocation and Rebalancing Program, complete the
Dollar Cost Averaging/Asset Allocation and Rebalancing form (Catalog 1815) found
in the back of this prospectus. 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 Customized Asset Rebalancing
program. If, after selecting one of the five models, you initiate a transaction
that results in a reallocation outside one of the Models, your participation in
the Model program is automatically terminated. You should, therefore, monitor
your use of such other programs, transfers, and withdrawals while the Customized
Asset Rebalancing program is in effect. This program is not available in
concert with the Customized 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.
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<PAGE>
1998 GRAND MASTER CONSERVATIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation as allocation as
Class a % of Total a % of the
Portfolio asset class
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 15 VIP Fidelity Equity-Income (Large Cap Value) 5 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 4 0
VIP II Fidelity Contrafund 4 0
VIP II Fidelity Index 500 2 0
Broad International Equity: 0 VIP Fidelity Overseas Portfolio 0
Domestic Core Fixed Income: 20 VIP II Fidelity Investment Grade Bond Portfolio 20 100
High Yield Fixed Income: 7 VIP High Income Portfolio 7 100
Cash Equivalents: 10 VIP Money Market Portfolio 10 100
Defensive Fixed: 48 3 Year GROs 0 100
5 Year GROs 48 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
1998 GRAND MASTER MODERATELY CONSERVATIVE MODEL
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation allocation
Class as a % of as a % of
Total the asset
Portfolio class
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 17 VIP Fidelity Equity-Income (Large Cap Value) 7 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 3 0
VIP II Fidelity Contrafund 5 0
VIP II Fidelity Index 500 2 0
Broad International Equity: 10 VIP Fidelity Overseas Portfolio 10
Domestic Core Fixed Income: 42 VIP II Fidelity Investment Grade Bond Portfolio 42 100
High Yield Fixed Income: 6 VIP High Income Portfolio 6 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 25 3 Year GROs 0
5 Year GROs 25 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
28
<PAGE>
1998 GRAND MASTER MODERATE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation as allocation as
Class a % of Total a % of the
Portfolio asset class
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 28 VIP Fidelity Equity-Income (Large Cap Value) 10 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap 0 0
Blend)
VIP Fidelity Growth Portfolio 6 0
VIP II Fidelity Contrafund 9 0
VIP II Fidelity Index 500 3 0
Broad International Equity: 17 VIP Fidelity Overseas Portfolio 17
Domestic Core Fixed Income: 40 VIP II Fidelity Investment Grade Bond Portfolio 40 100
High Yield Fixed Income: 5 VIP High Income Portfolio 5 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 10 3 Year GROs 0
5 Year GROs 10 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
29
<PAGE>
1998 GRAND MASTER MODERATELY AGGRESSIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation as allocation as
Class a % of Total a % of the
Portfolio asset class
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 41 VIP Fidelity Equity-Income (Large Cap Value) 15 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 10 0
VIP II Fidelity Contrafund 13 0
VIP II Fidelity Index 500 3 0
Broad International Equity: 26 VIP Fidelity Overseas Portfolio 26
Domestic Core Fixed Income: 28 VIP II Fidelity Investment Grade Bond Portfolio 28 100
High Yield Fixed Income: 0 VIP High Income Portfolio 0 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 5 3 Year GROs 0
5 Year GROs 5 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
30
<PAGE>
1998 GRAND MASTER AGGRESSIVE MODEL
<TABLE>
<CAPTION>
Asset Class Allocation Mutual Fund Fund Fund
----------- to Asset ----------- allocation as allocation as
Class a % of Total a % of the
Portfolio asset class
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broad Domestic Equity: 51 VIP Fidelity Equity-Income (Large Cap Value) 18 0
VIP III Fidelity Growth and Income (Large Cap Value) 0 0
VIP III Fidelity Growth Opportunities (Large Cap Blend) 0 0
VIP Fidelity Growth Portfolio 10 0
VIP II Fidelity Contrafund 18 0
VIP II Fidelity Index 500 5 0
Broad International Equity: 33 VIP Fidelity Overseas Portfolio 33
Domestic Core Fixed Income: 11 VIP II Fidelity Investment Grade Bond Portfolio 11 100
High Yield Fixed Income: 0 VIP High Income Portfolio 0 100
Cash Equivalents: 0 VIP Money Market Portfolio 0 100
Defensive Fixed: 5 3 Year GROs 0
5 Year GROs 5 0
7 Year GROs 0
10 Year GROs 0
Balanced: VIP III Fidelity Balanced
Asset Allocation: VIP II Asset Manager
VIP II Asset Manager: Growth
TOTAL: 100 100
</TABLE>
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. 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.
Appendix A - Illustration of a Market Value Adjustment of the Prospectus is
replaced with the following:
<TABLE>
<CAPTION>
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<S> <C>
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
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
32
<PAGE>
described above. Three years after the initial contribution, there would have
been four years remaining in your GRO Account.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
Thus, the amount payable on a full withdrawal (the Market Adjusted Value) would
be:
$54,688.58 = $57,881.25 - $3,192.67
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:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
33
<PAGE>
Thus, the amount payable on a full withdrawal would be:
$59,564.96 = $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
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.
34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
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. . . . . . . . . . . . . . 11
Part 5 - 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, 1998.
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 1-800-433-1778.
<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) Integrity 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.
On April 22, 1998, ARM filed a registration statement with the SEC for a
secondary offering of 10 million shares of its Class A Common Stock (the
"Secondary Offering"). The Morgan Stanley Stockholders propose to sell all 10
million shares and, if the underwriters' over-allotment is exercised, up to an
additional 1.5 million shares. The Secondary Offering is expected to be made in
May 1998 through a syndicate of underwriters led by Morgan Stanley & Co.
Incorporated.
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 1996 and 1997, including services
applicable to the Registrant, were $6,007,766 and $5,855,216, 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.
We generally pay a maximum distribution allowance of 6.5% of initial
contributions. The amount of distribution allowances paid was $2,647,756,
$2,229,269, and $2,217,123 for the years ended December 31, 1997, 1996, and
1995, respectively.
<PAGE>
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-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
<PAGE>
For the period ending: 12/31/97
<TABLE>
<CAPTION>
VARIABLE SEC STANDARDIZED
RETURNS WITH CHARGES ACCOUNT AVERAGE ANNUAL RETURN (1)
----------------------------------------------------
VARIABLE OPTIONS INCEPTION DATE (2) 1 YEAR 5 YEAR 10 YEAR LIFE OF
ACCOUNT
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset Manager 9/3/91 x.xx% n/a n/a x.xx%
Asset Manager: Growth 9/3/91 x.xx n/a n/a x.xx
Balanced 3/12/97 n/a n/a n/a x.xx
Contrafund 2/16/95 x.xx n/a n/a x.xx
Equity-Income 9/3/91 x.xx x.xx n/a x.xx
Growth 9/3/91 x.xx x.xx n/a x.xx
Growth & Income 3/6/97 n/a n/a n/a x.xx
Growth Opportunities 3/12/97 n/a n/a n/a x.xx
High Income 3/12/93 x.xx n/a n/a x.xx
Index 500 4/6/93 x.xx n/a n/a x.xx
Investment Grade Bond 4/2/92 x.xx x.xx n/a x.xx
Overseas 9/3/91 x.xx x.xx n/a x.xx
------------------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that
would apply if an owner terminated the policy at the end of the period, but
exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through year-end.
(5) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
<PAGE>
<TABLE>
<CAPTION>
RETURNS
WITHOUT CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN CALENDAR YEAR RETURN(4)
CHARGES (3) FUND ---------------------------------------------------------------------------------------------------------
VARIABLE INCEPTION LIFE OF LIFE OF
OPTIONS DATE (5) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND 1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset
Manager 9/6/89 55.24% 71.74% n/a 142.17% 19.02% 15.79% 11.42% n/a 11.22% 19.50% -7.42% 15.38% 13.04% 19.02%
Asset
Manager:
Growth 1/3/95 n/a n/a n/a 77.33 23.38 n/a n/a n/a 21.10 n/a n/a 21.49 18.30 23.38
Balanced 1/3/95 n/a n/a n/a 46.97 20.54 n/a n/a n/a 13.73 n/a n/a 12.40 8.48 20.54
Contrafund 1/3/95 n/a n/a n/a 101.87 22.47 n/a n/a n/a 26.46 n/a n/a 37.76 19.66 22.47
Equity-
Income 10/9/86 89.87 133.85 309.77 299.22 26.38 23.83 18.52 15.15 13.12 16.76 5.48 33.27 12.73 26.38
Growth 10/9/86 84.05 113.77 326.25 335.86 21.82 22.55 16.41 15.60 14.01 17.51 -1.16 33.54 13.14 21.82
Growth &
Income 12/31/96 n/a n/a n/a 28.34 28.34 n/a n/a n/a 28.36 n/a n/a n/a n/a 21.88
Growth
Opportunities 1/3/95 n/a n/a n/a 95.57 28.20 n/a n/a n/a 25.12 n/a n/a 30.76 16.67 28.20
High
Income 9/19/85 55.34 79.20 103.44 93.51 16.08 15.81 12.37 7.36 5.52 18.68 -2.80 18.98 12.48 16.08
Index
500 8/27/92 114.65 131.62 n/a 145.08 30.91 29.00 18.29 n/a 18.26 8.77 -.79 35.34 21.15 30.91
Investment
Grade Bond 12/5/88 26.74 31.72 n/a 53.76 7.59 8.22 5.67 n/a 4.86 9.56 -5.14 15.74 1.78 7.59
Overseas 1/28/87 32.97 80.65 118.69 104.34 10.05 9.97 12.56 8.14 6.76 35.21 .48 8.20 11.67 10.05
</TABLE>
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
<PAGE>
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE)
by a nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT /CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government
/Corporate Bond Index with maturities between one and 9.99 years. Total return
comprises price appreciation/depreciation and income as a percentage of the
original investment. Indexes are rebalanced monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
<PAGE>
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by 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.
<PAGE>
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.
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.
<PAGE>
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, 1997, 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, 1997 and 1996 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.
<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . .1
Audited Financial Statements
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . . .2
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . .6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account I of National Integrity Life Insurance Company (comprising,
respectively, the Money Market, High Income, Equity-Income, Growth, Overseas,
Investment Grade Bond, Asset Manager, Index 500, Asset Manager: Growth,
Contrafund, Growth Opportunities, Balanced, and Growth & Income Divisions) as of
December 31, 1997, the related statement of operations for the year then ended
and statements of changes in net assets for the years ended December 31, 1997
and 1996. 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,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds") as of December 31, 1997, 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, 1997, and the results of their operations for the year
then ended, and changes in their net assets for the years ended December 31,
1997 and 1996, in conformity with generally accepted accounting principles.
Louisville, Kentucky
April 17, 1998
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(cost of $280,649,353
in the aggregate) $18,160,962 $35,694,592 $82,551,920 $45,270,816 $15,253,103 $7,146,341 $32,576,237
Receivable from (payable
to) the general account
of National Integrity (2,071) 3,126 3,054 3,265 2,862 1,942 727
-----------------------------------------------------------------------------------------------------
Net assets $18,158,891 $35,697,718 $82,554,974 $45,274,081 $15,255,965 $7,148,283 $32,576,964
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 12.90 $ 16.93 $ 36.77 $ 44.09 $ 21.69 $ 17.72 $ 25.50
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Units outstanding 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402 1,277,528
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
----------- ----------- ----------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(cost of $280,649,353
in the aggregate) $33,236,247 $7,850,886 $48,040,840 $3,847,508 $1,989,820 $3,924,602 $335,543,874
Receivable from
(payable to) the
general account of
National Integrity (2,046) 1,335 2,812 706 781 (458) 16,035
-----------------------------------------------------------------------------------------------------
Net assets $33,234,201 $7,852,221 $48,043,652 $3,848,214 $1,990,601 $3,924,144 $335,559,909
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 22.79 $ 17.55 $ 19.50 $ 11.99 $ 11.36 $ 12.19
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Units outstanding 1,458,280 447,420 2,463,777 320,952 175,229 321,915
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
Fidelity VIP Funds $ 985,156 $1,880,260 $ 5,754,472 $1,270,948 $1,059,390 $ 327,706 $3,540,050
EXPENSES
Mortality and expense
risk and administrative
charges 250,652 361,615 930,288 549,419 194,291 78,359 421,319
---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 734,504 1,518,645 4,824,184 721,529 865,099 249,347 3,118,731
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on sales
of investments - 760,264 1,220,503 2,802,454 603,432 34,624 929,804
Net unrealized appreciation
of investments
Beginning of period - 1,536,022 8,336,245 4,306,351 1,370,759 211,915 4,378,137
End of period - 3,206,551 17,861,921 8,568,899 1,076,735 349,438 5,692,094
---------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation during the
period - 1,670,529 9,525,676 4,262,548 (294,024) 137,523 1,313,957
---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments - 2,430,793 10,746,179 7,065,002 309,408 172,147 2,243,761
---------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 734,504 $3,949,438 $15,570,363 $7,786,531 $1,174,507 $421,494 $5,362,492
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP
Funds $ 485,571 $ 6,809 $ 936,877 $ - $ - $ 99,540 $16,346,779
EXPENSES
Mortality and expense risk and
administrative charges 303,413 87,509 526,524 19,432 10,036 17,962 3,750,819
------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 182,158 (80,700) 410,353 (19,432) (10,036) 81,578 12,595,960
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on sales of
investments 1,071,877 474,836 960,967 86,693 13,552 86,669 9,045,675
Net unrealized appreciation of
investments
Beginning of period 1,532,542 170,065 4,575,088 - - - 26,417,124
End of period 5,720,773 1,122,816 10,859,280 228,284 92,292 115,438 54,894,521
------------------------------------------------------------------------------------
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284 92,292 115,438 28,477,397
------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 5,260,108 1,427,587 7,245,159 314,977 105,844 202,107 37,523,072
------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $5,442,266 $1,346,887 $ 7,655,512 $295,545 $ 95,808 $283,685 $50,119,032
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</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, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 734,504 $ 1,518,645 $ 4,824,184 $ 721,529 $ 865,099 $ 249,347 $ 3,118,731
Net realized gain on sales of
investments - 760,264 1,220,503 2,802,454 603,432 34,624 929,804
Change in net unrealized appreciation
during the period - 1,670,529 9,525,676 4,262,548 (294,024) 137,523 1,313,957
------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 734,504 3,949,438 15,570,363 7,786,531 1,174,507 421,494 5,362,492
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 14,076,961 8,893,416 13,965,376 5,919,207 2,914,588 903,638 2,746,016
Contract terminations and benefits (2,421,910) (4,148,133) (3,205,355) (2,392,011) (1,275,749) (295,183) (3,098,725)
Net transfers among investment option (12,252,316) 3,601,295 1,081,673 (134,896) 680,539 514,038 (1,391,288)
------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (597,265) 8,346,578 11,841,694 3,392,300 2,319,378 1,122,493 (1,743,997)
------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 137,239 12,296,016 27,412,057 11,178,831 3,493,885 1,543,987 3,618,495
Net assets, beginning of year 18,021,652 23,401,702 55,142,917 34,095,250 11,762,080 5,604,296 28,958,469
------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,158,891 $35,697,718 $82,554,974 $45,274,081 $15,255,965 $7,148,283 $32,576,964
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,114,197 558,880 422,804 144,679 132,358 53,477 116,674
Terminations and benefits (191,440) (271,245) (91,232) (58,086) (57,026) (17,510) (132,593)
Net transfers (968,450) 215,858 18,003 (1,855) 31,275 27,162 (58,489)
-----------------------------------------------------------------------------------------
Net increase (decrease) in units (45,693) 503,493 349,575 84,738 106,607 63,129 (74,408)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</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, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER:
INDEX 500 GROWTH CONTRAFUND GROWTH GROWTH &
DIVISION DIVISION DIVISION OPPORTUNITIES BALANCED INCOME TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 182,158 $ (80,700) $ 410,353 $ (19,432) $ (10,036) $ 81,578 $ 12,595,960
Net realized gain on sales of
investments 1,071,877 474,836 960,967 86,693 13,552 86,669 9,045,675
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284 92,292 115,438 28,477,397
----------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 5,442,266 1,346,887 7,655,512 295,545 95,808 283,685 50,119,032
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 9,004,723 2,970,634 10,325,955 2,953,975 1,711,873 2,726,972 79,113,334
Contract terminations and benefits (657,828) (406,304) (1,976,049) (36,079) (22,531) (40,093) (19,975,950)
Net transfers among investment options 6,587,964 (78,663) 2,335,510 634,773 205,451 953,580 2,737,660
----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 14,934,859 2,485,667 10,685,416 3,552,669 1,894,793 3,640,459 61,875,044
----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 20,377,125 3,832,554 18,340,928 3,848,214 1,990,601 3,924,144 111,994,076
Net assets, beginning of year 12,857,076 4,019,667 29,702,724 - - - 223,565,833
----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $33,234,201 $7,852,221 $48,043,652 $3,848,214 $1,990,601 $3,924,144 $335,559,909
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 430,320 183,734 571,556 266,949 156,357 241,192
Terminations and benefits (30,797) (24,412) (101,248) (3,103) (2,031) (3,381)
Net transfers 320,269 5,421 127,720 57,106 20,903 84,104
--------------------------------------------------------------------------
Net increase (decrease) in units 719,792 164,743 598,028 320,952 175,229 321,915
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</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, 1996
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <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 $ 150,911
Net realized gain on sales of investments - 572,065 893,819 1,185,341 153,853 66,281
Change in net unrealized appreciation
during the period - 338,992 3,582,485 888,211 873,498 (93,934)
----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 731,935 2,155,857 5,514,648 3,247,906 1,090,526 123,258
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 1,384,320
Contract terminations and benefits (2,565,173) (2,122,255) (2,744,148) (2,172,101) (543,454) (297,734)
Net transfers among investment options (13,359,842) 2,918,655 1,873,529 2,865,903 1,450,476 113,095
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,902,572) 6,565,011 15,658,102 9,811,168 3,151,860 1,199,681
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,170,637) 8,720,868 21,172,750 13,059,074 4,242,386 1,322,939
Net assets, beginning of year 20,192,289 14,680,834 33,970,167 21,036,176 7,519,694 4,281,357
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,021,652 $23,401,702 $55,142,917 $34,095,250 $11,762,080 $5,604,296
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,070,667 420,641 613,841 264,112 120,141 86,373
Terminations and benefits (209,764) (152,014) (101,953) (62,070) (27,727) (17,903)
Net transfers (1,100,108) 204,521 67,546 82,490 78,298 7,195
----------------------------------------------------------------------------
Net increase (decrease) in units (239,205) 473,148 579,434 284,532 170,712 75,665
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</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, 1996
<TABLE>
<CAPTION>
ASSET
ASSET MANAGER:
MANAGER INDEX 500 GROWTH CONTRAFUND
DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,429,952 $ 92,181 $ 169,386 $ (163,258) $ 5,931,780
Net realized gain on sales of investments 130,034 511,372 29,931 370,212 3,912,908
Change in net unrealized appreciation
during the period 1,940,303 1,082,819 160,015 3,846,898 12,619,287
---------------------------------------------------------------
Net increase in net assets resulting from
operations 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 2,057,176 5,841,031 1,297,372 9,673,035 66,934,913
Contract terminations and benefits (2,120,090) (484,894) (89,733) (1,301,783) (14,441,365)
Net transfers among investment options (2,161,691) 1,597,892 1,429,241 4,579,388 1,306,646
---------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,224,605) 6,954,029 2,636,880 12,950,640 53,800,194
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,275,684 8,640,401 2,996,212 17,004,492 76,264,169
Net assets, beginning of year 27,682,785 4,216,675 1,023,455 12,698,232 147,301,664
---------------------------------------------------------------
NET ASSETS, END OF YEAR $28,958,469 $12,857,076 $4,019,667 $29,702,724 $223,565,833
---------------------------------------------------------------
---------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 104,501 371,841 99,473 677,612
Terminations and benefits (107,819) (30,376) (6,955) (89,447)
Net transfers (105,579) 103,587 105,013 323,547
-------------------------------------------------
Net increase (decrease) in units (108,897) 445,052 197,531 911,712
-------------------------------------------------
-------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity") established
Separate Account I (the "Separate Account") on May 19, 1986, under the insurance
laws of the State of New York, for the purpose of issuing flexible 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 growing asset accumulation business with particular emphasis
on retirement savings and investment products.
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 GPO.
The Separate Account investment divisions are invested in shares of
corresponding investment portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series"
type mutual funds managed by Fidelity Management and Research Company ("Fidelity
Management"). The contract holder's account value in a Separate Account division
will vary depending on the performance of the corresponding portfolio. The
Separate Account currently has thirteen 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, 1997 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 earn 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 earn 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 equity securities. The portfolio has the
flexibility, however, to invest the balance in all types of domestic and
foreign securities, including bonds.
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 at least 65% of its
assets in foreign securities.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital by investing in a broad
range of investment-grade fixed-income securities.
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 money
market 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
instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's 500 Composite Stock Price Index while
keeping transaction costs and other expenses low.
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks,
bonds, and short-term money market instruments. The portfolio has a
"neutral" mix of assets 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 not currently recognized by the public. This approach
focuses on companies that are currently out of public favor but show
potential for capital appreciation. The portfolio invests primarily in
common stocks and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks and securities convertible into common stock.
Although the portfolio invests in common stocks and securities convertible
into common stock, it has the ability to purchase other securities, such as
preferred stocks and bonds, that may produce capital growth.
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
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
GROWTH & INCOME PORTFOLIO seeks a high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. 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.
The assets of the Separate Account are owned by National Integrity. The portion
of the Separate Account's assets supporting the contracts may not be used to
satisfy liabilities arising out of any other business of National Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Fidelity VIP Funds are valued at the net asset
values of the respective portfolios, which approximates fair value. The
difference between cost and fair value is reflected as unrealized appreciation
and depreciation of investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends 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.
13
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
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.
14
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1997 and the cost of shares held
at December 31, 1997 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ---------------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Money Market $38,837,234 $38,696,859 $ 18,160,962
High Income 26,906,943 17,050,180 32,488,041
Equity-Income 20,821,044 4,164,977 64,689,999
Growth 11,346,814 7,237,543 36,701,917
Overseas 6,919,058 3,734,703 14,176,368
Investment Grade Bond 2,588,984 1,217,542 6,796,903
Asset Manager 8,167,251 6,798,251 26,884,143
Index 500 18,652,194 3,532,999 27,515,474
Asset Manager: Growth 4,339,551 1,936,249 6,728,070
Contrafund 13,824,141 2,733,795 37,181,560
Growth Opportunities 4,370,164 837,633 3,619,224
Balanced 1,999,529 115,553 1,897,528
Growth & Income 4,604,040 881,545 3,809,164
------------
$280,649,353
------------
------------
</TABLE>
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, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets (Statutory Basis) . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income (Statutory Basis) . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Capital and Surplus (Statutory Basis) . . . . . . 5
Statements of Cash Flows (Statutory Basis) . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8
<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, 1997 and 1996, and the
related statutory basis statements of income, 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, 1997 and 1996, or
the results of its operations or its cash flows for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National Integrity
Life Insurance Company at December 31, 1997 and 1996, 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.
Louisville, Kentucky
February 10, 1998
1
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 414,907 $ 451,439
Preferred stocks 21,792 50,715
Mortgage loans 3,242 3,929
Policy loans 26,396 24,981
Cash and short-term investments 12,078 14,570
Receivable for securities 1,941 4,522
Other invested assets 3,794 36
--------------------------------
Total cash and invested assets 484,150 550,192
Separate account assets 617,327 370,988
Accrued investment income 5,735 6,513
Federal income tax recoverable - 438
Other admitted assets 2,143 1,794
--------------------------------
Total admitted assets $ 1,109,355 $ 929,925
--------------------------------
--------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 446,610 $ 513,639
Unpaid claims 50 124
Deposits on policies to be issued 564 645
---------------------------------
Total policy and contract liabilities 447,224 514,408
Separate account liabilities 617,327 370,988
Accounts payable and accrued expenses 151 213
Transfers to separate accounts due or accrued, net (24,362) (21,247)
Reinsurance balances payable 511 589
Federal income taxes 5,645 -
Asset valuation reserve 1,570 1,773
Interest maintenance reserve 7,240 8,914
Other liabilities 32 6,016
---------------------------------
Total liabilities 1,055,338 881,654
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 (deficit) (7,977) (13,723)
---------------------------------
Total capital and surplus 54,017 48,271
---------------------------------
Total liabilities and capital and surplus $ 1,109,355 $ 929,925
---------------------------------
---------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
National Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 11,533 $ 8,640
Deposit-type funds 211,637 352,899
Net investment income 42,464 53,553
Amortization of the interest maintenance reserve 1,359 1,001
Other revenues 5,961 5,653
-------------------------------
Total premiums and other revenues 272,954 421,746
Benefits paid or provided:
Death benefits 1,268 921
Annuity benefits 12,687 19,445
Surrender benefits 123,520 101,241
Payments on supplementary contracts 1,648 1,879
Increase (decrease) in insurance and annuity reserves (66,954) 192,985
Other benefits 119 7,818
-------------------------------
Total benefits paid or provided 72,288 324,289
Insurance and other expenses:
Commissions 10,088 5,817
General expenses 11,146 8,051
Taxes, licenses and fees 794 349
Net transfers to separate accounts 163,896 69,158
Other expenses 3,542 3,110
-------------------------------
Total insurance and other expenses 189,466 86,485
-------------------------------
Gain from operations before federal income taxes
and net realized capital losses 11,200 10,972
Federal income tax expense (benefit) 3,621 (444)
-------------------------------
Gain from operations before net realized capital losses 7,579 11,416
Net realized capital losses, excluding realized
capital gains (losses) net of tax transferred to the
interest maintenance reserve (1997-($314); 1996-$2,923) (2,036) (2,500)
-------------------------------
Net income $ 5,543 $ 8,916
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
-------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 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
Net income 5,543 5,543
Decrease in asset valuation reserve 203 203
-------------------------------------------------------------------------
Balance, December 31, 1997 $ 2,000 $ 59,244 $ 750 $ (7,977) $ 54,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 223,170 $ 361,539
Net investment income received 42,944 53,492
Commission and expense allowances received on
reinsurance ceded 8 644
Benefits paid (139,316) (125,238)
Insurance expenses paid (22,090) (14,170)
Other income received net of other expenses paid 2,335 5,009
Net transfers to separate accounts (167,010) (74,076)
Federal income taxes (4,479) -
---------------------------------
Net cash provided by (used in) operations (64,438) 207,200
<CAPTION>
<S> <C> <C>
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments of investments:
Bonds 368,167 455,716
Preferred stocks 55,948 19,067
Mortgage loans 687 1,389
Other invested assets - 8,826
Miscellaneous proceeds 4,254 -
---------------------------------
Total investment proceeds 429,056 484,998
Benefits received (taxes paid) on capital gains 6,921 (1,212)
---------------------------------
Net proceeds from sales, maturities, or repayments
of investments 435,977 483,786
<CAPTION>
<S> <C> <C>
Cost of investments acquired:
Bonds 337,887 626,879
Preferred stocks 26,621 55,045
Other invested assets 3,794 -
Miscellaneous applications 405 36
---------------------------------
Total cost of investments acquired 368,707 681,960
Net increase in policy loans and premium notes 1,415 2,375
---------------------------------
Net cash provided by (used in) investment activities 65,855 (200,549)
</TABLE>
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Other sources 2,588 3,826
------------------------
Total other cash provided 2,588 3,826
------------------------
Other cash applied:
Other applications, net 6,497 16,175
------------------------
Total other cash applied 6,497 16,175
------------------------
Net cash used in financing and miscellaneous activities (3,909) (12,349)
------------------------
Net decrease in cash and short-term investments (2,492) (5,698)
Cash and short-term investments at beginning of year 14,570 20,268
------------------------
Cash and short-term investments at end of year $ 12,078 $ 14,570
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1997
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, specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products.
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
fair value based on the National Association of Insurance Commissioners
("NAIC") rating; for GAAP, such fixed maturity investments are designated
at purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity fixed investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized holding gains and losses reported in operations for those
designated as trading and as a separate component of shareholder's equity
for those designated as available-for-sale. In addition, fair values of
certain investments in bonds and stocks are based on values specified by
the NAIC, rather than on actual or estimated fair values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
formula and is reported as a liability rather than unassigned surplus.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the individual security sold using the seriatim method. The net
deferral is reported as the Interest Maintenance Reserve in the
accompanying balance sheets. Under GAAP, realized gains and losses are
reported in the income statement on a pretax basis in the period that the
asset giving rise to the gain or loss is sold and include provisions when
there has been a decline in asset values deemed other than temporary.
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 AND BENEFITS
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and
therefore not recognized as premium revenue; benefits paid equal to the
policy account value are accounted for as a return of deposit instead of
benefit expense.
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.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 5,543 $ 8,916
Deferred policy acquisition costs, net of amortization 10,157 5,187
Adjustments to customer deposits (5,781) (441)
Adjustments to invested asset carrying values
at acquisition date (38) (160)
Amortization of value of insurance in force (870) (1,470)
Amortization of interest maintenance reserve (1,359) (1,001)
Adjustments for realized investment gains 1,511 852
Adjustments for federal income tax expense (3,320) (2,185)
Other 166 (200)
------------------------
Net income, GAAP basis $ 6,009 $ 9,498
------------------------
------------------------
</TABLE>
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 54,017 $ 48,271
Adjustments to customer deposits (33,014) (27,233)
Adjustments to invested asset carrying values at
acquisition date (3,724) (5,197)
Asset valuation reserve and interest maintenance reserve 17,796 19,369
Value of insurance in force 13,043 13,913
Deferred policy acquisition costs 33,885 23,728
Net unrealized gains on available-for-sale securities 5,849 1,416
Other (5,793) (2,650)
------------------------
Shareholder's equity, GAAP basis $ 82,059 $ 71,617
------------------------
------------------------
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks and short-term investments are stated at values
prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost.
The discount or premium on bonds is amortized using the interest method.
For loan-backed bonds and structured securities, anticipated prepayments
are considered when determining the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities
are obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
11
<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 includes 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 reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
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.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 fair 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. Investments income and
interest credited on deposits held in guaranteed separate accounts are included
in the accompanying statements of income. The Company receives administrative
fees for managing the nonguaranteed separate accounts and other fees for
assuming mortality and certain expense risks. Such fees are included in other
revenues.
USE OF ESTIMATES
The preparation of financial statements 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 1997 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC is in the process of codifying statutory
accounting practices ("Codification"). Codification will likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Company uses to prepare its statutory basis financial statements. Codification
has been approved by the NAIC in March 1998, but it will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, New York must adopt Codification
as the prescribed basis of accounting on which domestic insurers must report
their statutory basis results to the Insurance Department. At this time it is
unclear whether New York will adopt Codification. The Company is monitoring
developments related to codification and assessing the potential effects any
changes would have on the Company's statutory basis financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1997:
Mortgage-backed securities $ 193,688 $ - $ - $ 193,688
Corporate securities 159,208 4,074 34 163,248
Asset-backed securities 27,370 - - 27,370
U.S. Treasury securities and
obligations of U.S. government
agencies 24,361 1,083 2 25,442
Foreign governments 10,280 - 437 9,843
-------------------------------------------------------
Total bonds $ 414,907 $ 5,157 $ 473 $ 419,591
-------------------------------------------------------
-------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
At December 31, 1996:
Mortgage-backed securities $ 244,376 $ - $ - $ 244,376
Corporate securities 168,146 775 7,178 161,743
Asset-backed securities 10,311 - - 10,311
U.S. Treasury securities and
obligations of U.S. government
agencies 16,243 415 110 16,548
Foreign governments 12,363 643 - 13,006
-------------------------------------------------------
Total bonds $ 451,439 $ 1,833 $ 7,288 $ 445,984
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
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, 1997 and 1996, the fair
value of investments in bonds includes $306.8 million and $312.7 million,
respectively, of bonds that were valued at amortized cost.
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1997, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED
COST FAIR VALUE
------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 1,304 $ 1,314
After one through five 13,493 13,513
After five through ten 39,042 39,192
After ten 140,010 144,514
Asset-backed securities 27,370 27,370
Mortgage-backed securities 193,688 193,688
------------------------------
Total $ 414,907 $ 419,591
------------------------------
------------------------------
</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 1997 and 1996 were $375.5
million and $755.7 million; gross gains of $8.6 million and $7.9 million, and
gross losses of $8.3 million and $4.5 million were realized on those sales,
respectively.
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
At December 31, 1997 and 1996, bonds with an admitted asset value of $1,235,000
and $1,234,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. 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 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
1997, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 34,854 $ 47,487
Preferred stocks 4,205 4,150
Mortgage loans 291 610
Policy loans 2,072 1,886
Cash and short-term investments 1,506 1,277
Other (3) 3
---------------------------
Total investment income 42,925 55,413
Investment expenses (461) (1,860)
---------------------------
Net investment income $ 42,464 $ 53,553
---------------------------
---------------------------
</TABLE>
16
<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 is not significant to the Company's premiums, benefits
or policy and contract liabilities.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed against
policyholders $ 210,910 $ 115,547
Reinsurance assumed 12,770 246,571
Reinsurance ceded (510) (580)
----------------------------
Net premiums, annuity considerations and
deposit-type funds $ 223,170 $ 361,538
----------------------------
----------------------------
</TABLE>
The Company sold guaranteed investment contract ("GIC") deposits totaling $358.3
million to Integrity as of June 30, 1996.
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.
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.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
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's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1997 and 1996, the adjusted capital
and surplus of the Company is substantially in excess of the minimum level of
RBC that would require regulatory response.
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1997 and 1996, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
---------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1997:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 219,464 22.9%
At book value less surrender charge of 5% or more 5,760 0.6
At market value 372,550 38.9
-------------------------
Total with adjustment or at market value 597,774 62.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 299,314 31.2
Not subject to discretionary withdrawal 61,448 6.4
-------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 958,536 100.0%
---------
---------
Less reinsurance ceded -
----------
Net annuity reserves and deposit fund liabilities $ 958,536
----------
----------
<CAPTION>
<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
----------
----------
</TABLE>
19
<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, 1997 is as follows:
<TABLE>
<CAPTION>
*NONINDEXED NONGUARANTEED
GUARANTEED SEPARATE
MORE THAN 4% ACCOUNTS TOTAL
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 122,664 $ 89,078 $ 211,742
--------------------------------------------------
--------------------------------------------------
Reserves for separate accounts with assets
at fair value $ 219,469 $ 372,669 $ 592,138
--------------------------------------------------
--------------------------------------------------
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 219,464 $ - $ 219,464
At book value without market value
adjustment and with current
surrender charge of 5% or more 5 - 5
At market value - 372,669 372,669
--------------------------------------------------
Total with adjustment or at market value 219,469 372,669 592,138
Not subject to discretionary withdrawal - - -
--------------------------------------------------
Total separate accounts reserves $ 219,469 $ 372,669 $ 592,138
--------------------------------------------------
--------------------------------------------------
</TABLE>
* Separate accounts with guarantees.
20
<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, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 211,743 $ 102,901
Transfers from separate accounts (52,365) (37,150)
-------------------------
Net transfers to separate accounts 159,378 65,751
Reconciling adjustments:
Mortality and expense charges reported as other revenues 4,417 3,194
Other revenues 101 213
-------------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 163,896 $ 69,158
-------------------------
-------------------------
</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.
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $ 414,907 $ 424,642 $ 451,439 $ 457,875
Preferred stocks 21,792 22,252 50,715 50,454
Mortgage loans 3,242 3,242 3,929 3,929
Liabilities:
Life and annuity reserves for
investment-type contracts $ 367,124 $ 367,374 $ 432,013 $ 426,516
Separate accounts annuity reserves 592,018 576,877 347,503 347,072
</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 estimate
or quoted market price of comparable investments.
MORTGAGE LOANS ON REAL ESTATE
The carrying amount of mortgage loans approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of deposit fund liabilities and the remaining
annuity reserves are based on the cash surrender value of the underlying
contracts.
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. RELATED PARTY TRANSACTIONS
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement and an Investment Advisory Agreement with ARM. Under these agreements,
ARM performs certain administrative investment advisory and special services for
the Company to assist with its business operations. The services include
policyholder services; accounting, tax and auditing; underwriting; marketing and
product development; functional support services; payroll functions; personnel
functions; administrative support services; and investment functions. During
1997 and 1996, the Company was charged $5.9 million and $6.1 million,
respectively, for these services in accordance with the requirements of
applicable insurance law and regulations.
11. YEAR 2000 (UNAUDITED)
The Company is currently evaluating on an ongoing basis, its computer systems
and the systems of other companies on which the Company's operations rely to
determine if they will function properly with respect to dates in the year 2000
and beyond. These activities are designed to ensure that there is no adverse
effect on the Company's core business operations. While the Company believes
its planning efforts are adequate to address its Year 2000 concerns, there can
be no guarantee that the systems of other companies on which the Company's
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Company's Year 2000 initiatives is not
expected to be material to the Company's results of operations or financial
condition.
23
<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, 1997
Statement of Income for the Year Ended December 31, 1997
Statements of Changes in Net Assets for the Years Ended December 31,
1997 and 1996
Notes to Financial Statements
NATIONAL INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1997 and 1996
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1997 and 1996
Statements of Changes in Capital and Surplus (Statutory Basis) for
the Years Ended December 31, 1997 and 1996
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1997 and 1996
Notes to Financial Statements (Statutory Basis)
(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.
<PAGE>
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.
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. Incorporated by reference from Registrant's Form
N-4 registration statement (File No. 33-56658), filed on
May 1, 1997.
9. Opinion and Consent of Kevin L. Howard. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658), filed on May 1, 1997.
10. Consents of Ernst & Young LLP.
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.
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:
- ---------
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Kenneth F. Clifford Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
2
<PAGE>
New York, New York 10020
James S. Cole Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
New York, New York 10020
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
John R. Lindholm Director and President
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Robert S. Niehaus Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
New York, New York 10020
Edward D. Powers Director
6064 Shipyard Lane
Easton, Maryland 21601
Colin F. Raymond Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
New York, New York 10020
Martin H. Ruby Director, Chairman of the Board and Chief
ARM Financial Group Inc. Executive Officer
515 West Market Street
Louisville, Kentucky 40202
Irwin T. Vanderhoof Director
18 Two Bridges Road
Towaco, New Jersey
Peter R. Vogelsang Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
New York, New York 10020
Patricia L. Winter Director and Executive Vice President
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Edward L. Zeman Director, Executive Vice President and Chief
ARM Financial Group, Inc. Financial Officer
515 West Market Street
Louisville, Kentucky 40202
SELECTED OFFICERS: (The business address for each of the principal officers listed below is 515 West Market Street, Louisville,
Kentucky 40202.)
<CAPTION>
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. McGeeney Executive Vice President-Retail Business Division
3
<PAGE>
Patricia L. Winter Executive Vice President-Investment Assurance & Institutional
Products
Michael A. Cochran Tax Officer
Peter S. Resnik Treasurer
Barry G. Ward Controller
</TABLE>
4
<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 5th day
of May, 1998.
SEPARATE ACCOUNT I OF
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: National Integrity Life Insurance Company
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
President
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
President
<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 5th day of May, 1998.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
------------------------------------------
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
----------------------------------------
John R. Lindholm, President
Date: 5/5/98
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
----------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 5/5/98
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
----------------------------------------
Barry G. Ward, Controller
Date: 5/5/98
DIRECTORS:
/s/ John R. Lindholm /s/ Edward L. Zeman
- ----------------------------------- ----------------------------------------
John R. Lindholm Edward L. Zeman
Date: 5/5/98 Date: 5/5/98
/s/ Kenneth F. Clifford /s/ Colin F. Raymond
- ----------------------------------- ----------------------------------------
Kenneth F. Clifford Colin F. Raymond
Date: 5/5/98 Date: 5/5/98
/s/ Martin H. Ruby
- ----------------------------------- ----------------------------------------
Martin H. Ruby Donald B. Henderson, Jr.
Date: 5/5/98 Date: 5/5/98
- ----------------------------------- ----------------------------------------
Irwin T. Vanderhoof Edward D. Powers
Date: 5/5/98 Date: 5/5/98
/s/ Peter R. Vogelsang
- ----------------------------------- ----------------------------------------
Dudley J. Godfrey, Jr. Peter R. Vogelsang
Date: 5/5/98 Date: 5/5/98
- ----------------------------------- ----------------------------------------
Robert H.Niehaus James S. Cole
Date: 5/5/98 Date: 5/5/98
/s/ Patricia L. Winter
- -----------------------------------
Patricia L Winter
Date: 5/5/98
<PAGE>
EXHIBIT INDEX
Exhibit No.
10. Consents of Ernst & Young LLP.
6
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Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post-Effective Amendment No. 10 to the Registration Statement (Form N-4
No. 33-56658) and Amendment No. 19 to the Registration Statement (Form N-4
No. 811-4846) and related Prospectuses of National Integrity Life Insurance
Company's Separate Account I and to the use of our reports (a) dated February
10, 1998, with respect to the statutory basis financial statements of National
Integrity Life Insurance Company and (b) dated April 17, 1998, with respect to
the financial statements of Separate Account I of National Integrity Life
Insurance Company, both included in the Registration Statement (Form N-4) for
1997 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 30, 1998
