<PAGE>
As filed with the Securities and Exchange Commission
on April 28, 2000
Registration Nos. 33-56658 and 811-4846
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. 13 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 [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
Kevin L. Howard
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)
immediately upon filing pursuant to paragraph (b) of Rule 485
---
X on May 1, 1999 pursuant to paragraph (b) of Rule 485
---
60 days after filing pursuant to paragraph (a)(1) of Rule 485
---
on (date)pursuant to paragraph (a)(1) of Rule 485
---
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
---
previously filed post-effective amendment.
<PAGE>
PROSPECTUS
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by NATIONAL INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by National Integrity Life Insurance Company, a subsidiary of The Western and
Southern Life Insurance Company (W&S). The contract provides several types of
benefits, some of which have tax-favored status under the Internal Revenue Code
of 1986, as amended (THE CODE). You may allocate contributions to different
investment divisions of our Separate Account I, referred to as Variable Account
Options and Fixed Accounts. Together, the Variable Account Options and Fixed
Account Options are referred to as INVESTMENT OPTIONS.
Contributions you make to the Variable Account Options are invested in shares of
corresponding Portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III) (the PORTFOLIOS or PORTFOLIO). The Portfolios are managed by Fidelity
Management & Research Company. The values allocated to the Options reflect the
investment performance of the Portfolios. The prospectus for the Portfolios
describes each one's investment objectives, policies and risks. There are
fourteen Variable Account Options, which invest in the following Portfolios:
<TABLE>
<S> <C>
- - VIP Money Market Portfolio: Initial Class - VIP II Investment Grade Bond Portfolio: Initial Class
- - VIP High Income Portfolio: Initial Class - VIP II Asset Manager Portfolio: Initial Class
- - VIP Equity-Income Portfolio: Initial Class - VIP II Index 500 Portfolio: Initial Class
- - VIP Growth Portfolio: Initial Class - VIP II Contrafund Portfolio: Initial Class
- - VIP Overseas Portfolio: Initial Class - VIP II Asset Manager: Growth Portfolio: Initial Class
- - VIP III Balanced Portfolio: Initial Class - VIP III Growth Opportunities Portfolio: Initial Class
- - VIP III Growth & Income Portfolio: Initial Class - VIP III Mid Cap Portfolio: Service Class
</TABLE>
We also offer Guaranteed Rate Options (GROS) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you contribute to a GRO
grows at a fixed interest rate that we declare at the beginning of the duration
you select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your contribution less prior withdrawals, plus interest compounded at an
annual effective rate of 3% (MINIMUM VALUE). Withdrawal charges and an annual
administrative charge may apply, which may invade principal. The money you
contribute to the STO grows at a fixed interest rate that we declare each
calendar quarter, guaranteed never to be less than an effective annual yield of
3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER
INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY
BASIS.
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them for
future reference. This prospectus isn't valid unless provided with the current
prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
National Integrity Life Insurance Company, 15 Matthews Street, Suite 200,
Goshen, New York, 10924. You may also call us at 1-800-433-1778.
A registration statement relating to the contract, which includes a Statement of
Additional Information (SAI) dated May 1, 2000, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A free copy of the SAI is available by writing to or calling
our Administrative Office. The table of contents for the SAI is found in
Appendix C.
THESE SECURITIES HAVEN'T BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
You can review and copy information about GrandMaster III at the SEC's Public
Reference Room in Washington, D.C. For hours of operation of the Public
Reference Room, please call 1-800-SEC-0330. You may also obtain information
about GrandMaster III on the SEC's Internet site at http://www.sec.gov. Copies
of that information are also available, after paying a duplicating fee, by
electronic request to [email protected], or by writing the SEC's Public
Reference Section, Washington, D.C. 20459-0102.
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY, ANY BANK, NOR
IS IT INSURED BY THE FDIC. IT IS SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
The date of this Prospectus is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
GLOSSARY
PART 1 - SUMMARY
<S> <C>
Your Variable Annuity Contract..............................................1
Your Benefits...............................................................1
How Your Contract is Taxed..................................................1
Your Contributions..........................................................1
Your Investment Options.....................................................1
Account Value, Adjusted Account Value and Cash Value .......................2
Transfers...................................................................2
Charges and Fees............................................................2
Withdrawals.................................................................2
Your Initial Right to Revoke................................................2
Risk/Return Summary: Investments and Risks..................................2
Table of Annual Fees and Expenses...........................................3
Examples....................................................................5
<CAPTION>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
<S> <C>
National Integrity Life Insurance Company...................................6
The Separate Account and the Variable Account Options.......................6
Assets of Our Separate Account..............................................6
Changes In How We Operate...................................................6
<CAPTION>
PART 3 - YOUR INVESTMENT OPTIONS
<S> <C>
The Portfolios .............................................................7
The Portfolios' Investment Adviser....................................7
Investment Objectives of the Portfolios...............................7
Fixed Accounts..............................................................9
Guaranteed Rate Options..............................................9
Renewals of GRO Accounts..........................................10
Market Value Adjustments..........................................10
Systematic Transfer Option..........................................11
<CAPTION>
PART 4 - DEDUCTIONS AND CHARGES
<S> <C>
Separate Account Charges...................................................11
Annual Administrative Charge...............................................11
Reduction or Elimination of Separate Account or Administrative Charges.....11
Portfolio Charges..........................................................11
State Premium Tax Deduction................................................12
Contingent Withdrawal Charge...............................................12
Reduction or Elimination of the Contingent Withdrawal Charge...............12
Transfer Charge............................................................12
Disability Waiver..........................................................13
Tax Reserve................................................................13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
<S> <C>
Contributions Under Your Contract..........................................13
Your Account Value.........................................................14
Units in Our Separate Account..............................................14
How We Determine Unit Value................................................14
Transfers..................................................................15
Excessive Trading..........................................................15
Withdrawals................................................................15
Assignments................................................................16
Death Benefits and Similar Benefit Distributions...........................16
Annuity Benefits...........................................................17
Annuities..................................................................17
Annuity Payments...........................................................17
Timing of Payment..........................................................18
How You Make Requests and Give Instructions................................18
<CAPTION>
PART 6 - VOTING RIGHTS
<S> <C>
Voting Rights..............................................................18
How We Determine Your Voting Shares........................................18
How Portfolio Shares Are Voted.............................................19
Separate Account Voting Rights.............................................19
<CAPTION>
PART 7 - TAX ASPECTS OF THE CONTRACT
<S> <C>
Introduction...............................................................19
Your Contract is an Annuity................................................19
Taxation of Annuities Generally............................................20
Distribution-at-Death Rules................................................21
Diversification Standards..................................................21
Tax-Favored Retirement Programs............................................21
Federal and State Income Tax Withholding...................................21
Impact of Taxes on National Integrity......................................21
Transfers Among Investment Options.........................................21
<CAPTION>
PART 8 - ADDITIONAL INFORMATION
<S> <C>
Systematic Withdrawals.....................................................22
Income Plus Withdrawal Program.............................................22
Dollar Cost Averaging......................................................23
Systematic Transfer Program................................................23
Customized Asset Rebalancing...............................................23
Callan Asset Allocation and Rebalancing Program............................23
Systematic Contributions...................................................24
Performance Information....................................................24
<CAPTION>
PART 9 - PRIOR CONTRACTS
<S> <C>
Prior Contracts............................................................25
Appendix A - Financial Information.......................................30
Appendix B - Illustration of a Market Value Adjustment...................32
Appendix C - SAI Table of Contents.......................................35
</TABLE>
<PAGE>
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Investment Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT - the person upon whose life an annuity benefit and death benefit are
based.
BUSINESS DAY - any day that the New York Stock Exchange is open.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro-rata annual administrative charges that may apply.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Options, which offer durations of two, three, five, seven
and ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO
Account, assuming you haven't withdrawn or transferred any amounts, will be the
amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges), accumulated at 3% interest annually,
less any administrative charges.
PORTFOLIO - an investment portfolio of a mutual fund in which the Separate
Account invests its assets.
RETIREMENT DATE - All annuity benefits under your contract are calculated as of
your Retirement Date. The Retirement Date can't be later than your 90th
birthday, or earlier if required by law.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in a variable account option.
UNIT VALUE - the value of each Unit calculated on any Business Day.
<PAGE>
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, other than the GROs and STO. The value of your contract will
reflect the investment performance of the Variable Account Options you choose.
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "we," "our" and "us" mean National Integrity Life Insurance
Company (NATIONAL INTEGRITY). The terms "you" and "your" mean the Annuitant, the
person upon whose life the Annuity Benefit and the Death Benefit are based,
usually the owner of the contract. If the Annuitant doesn't own the contract,
the owner has all of the rights under the contract until annuity payments begin.
If there are joint owners, they share contract rights and they must both sign
for any changes or transactions. The death of the first joint owner will
determine the timing of distribution.
You can invest for retirement by buying a GrandMaster III if you properly
complete a Customer Profile form (an application or enrollment form may be
required in some states) and make a minimum initial contribution. Because the
premium is flexible, additional contributions can be any amount you choose, as
long as they are above the minimum required contribution discussed below.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit, and a death benefit.
These benefits are described in more detail below.
Your benefits under the contract may be controlled by the usual rules for
taxation of annuities, including the deferral of taxes on your investment growth
until you actually make a withdrawal. You should read Part 7, "Tax Aspects of
the Contract" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under certain tax-favored retirement
programs, which may be subject to special eligibility and contribution rules.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
However, most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The minimum initial contribution is $1,000. Additional contributions can be as
little as $100. Some tax-favored retirement plans allow smaller contributions.
See "Contributions Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and the Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine different Investment
Options at any one time. See "Contributions Under Your Contract" in Part 5. To
select Investment Options most suitable for you, see Part 3, "Your Investment
Options."
The Variable Account Options invest in shares of investment portfolios of mutual
funds. Each investment portfolio is referred to as a PORTFOLIO. The investment
goal of each Variable Account Option and its corresponding Portfolio is the
same. For example, if your investment goal is to save money for retirement, you
might choose a GROWTH oriented Variable Account Option, which invests in a
GROWTH Portfolio. Your value in a Variable Account Option will vary with the
performance of the corresponding Portfolio. For a full description of each
Portfolio, see that Portfolio's prospectus and Statement of Additional
Information.
1
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Accounts added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased by any Market Value Adjustments. Your
Account Value in the GROs can never be decreased below the Minimum Value. Your
CASH VALUE is equal to your Adjusted Account Value, minus any contingent
withdrawal charge and minus the pro-rata portion of the annual administrative
charge, if it applies. See "Charges and Fees" below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these in
Part 5, "Transfers." Any transfer must be at least $250 and may be arranged
through our telephone transfer service. Transfers may also be made among certain
Investment Options under the following special programs: (i) Dollar Cost
Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation and
Rebalancing Program, or (iv) to transfer your STO contributions. All of these
programs are discussed in Part 8. If you make more than twelve transfers between
your Investment Options in one contract year, your account can be charged up to
$20 for each transfer after the first twelve.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account.
A daily charge at an effective annual rate of 1.35% is deducted from the Account
Value of each of your Variable Account Options to cover mortality and expense
risks (1.20%) and certain administrative expenses (.15%). The charge will never
be greater than this. For more information, see Part 4, "Deductions and
Charges."
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company receives investment management fees from the Portfolios based on the
average net assets of each Portfolio. Advisory fees can't be increased without
the consent of shareholders. See "Table of Annual Fees and Expenses" below and
"The Portfolios' Investment Adviser" in Part 3.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be at least
$300. You may withdraw up to 10% of your Account Value each contract year
without paying withdrawal charges. After the first 10%, there may be a charge
for withdrawals you make, based upon the length of time your money has been in
your account. See "Contingent Withdrawal Charge" in Part 4.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in certain states. If you cancel your contract, we'll return your Account
Value, which may be more or less than your initial contribution. If your state
requires, we'll return all of your contributions without any adjustment. We'll
return the amount of any contribution to the Guaranteed Rate Options upon
cancellation.
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the GrandMaster III Variable Annuity are protecting your
investment, building for retirement and providing future income. We strive to
achieve these goals through extensive portfolio diversification and superior
portfolio management.
2
<PAGE>
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most of
the Variable Account Options are in common stocks, there's also the inherent
risk that holders of common stock generally are behind creditors and holders of
preferred stock for payments in the event of the bankruptcy of a stock issuer.
For a complete discussion of the risks associated with an investment in any
particular Variable Account Option, see the prospectus of the corresponding
Portfolio.
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<CAPTION>
OWNER TRANSACTION EXPENSES
- --------------------------
<S> <C>
Sales Load on Purchases........................................................................... $0
Deferred Sales Load (as a percentage of contributions) (1).................................7% Maximum
Exchange Fee (2).................................................................................. $0
ANNUAL ADMINISTRATIVE CHARGE
- ----------------------------
Annual Administrative Charge* .................................................................... $30
* This charge applies only if the Account Value is less than $50,000 at the end of any
contract year prior to your Retirement Date. See "Annual Administrative Charge" in Part 4.
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) (3)
- ----------------------------------------------
Mortality and Expense Risk Fees.............................................................. 1.20%
Administrative Expenses...................................................................... .15%
-----
Total Separate Account Annual Expenses....................................................... 1.35%
-----
-----
</TABLE>
3
<PAGE>
Portfolio Annual Expenses After Reimbursement
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO FEES EXPENSES EXPENSES
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market: Initial Class................. .18% .09% .27%
VIP High Income: Initial Class.................. .58% .11% .69%
VIP Equity-Income: Initial Class................ .48% .08% .56% (4)
VIP Growth: Initial Class....................... .58% .07% .65% (4)
VIP Overseas: Initial Class..................... .73% .14% .87% (4)
VIP II Investment Grade Bond: Initial Class..... .43% .11% .54%
VIP II Asset Manager: Initial Class............. .53% .09% .62% (4)
VIP II Index 500: Initial Class................. .24% .04% .28% (5)
VIP II Contrafund: Initial Class................ .58% .07% .65% (4)
VIP II Asset Manager: Growth: Initial Class..... .58% .12% .70% (4)
VIP III Balanced: Initial Class................. .43% .12% .55% (4)
VIP III Growth Opportunities: Initial Class..... .58% .10% .68% (4)
VIP III Growth & Income: Initial Class.......... .48% .11% .59% (4)
VIP III Mid Cap: Service Class.................. .57% .50% 1.07% (6)(7)
</TABLE>
- -------------------------
1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
have a free withdrawal of up to 10% of the Account Value in any contract
year.
2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
3) See "Deductions and Charges - Separate Account Charges" in Part 4.
4) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce Portfolio expenses. In addition, through arrangements with
certain Portfolios, or through Fidelity Research & Management (FMR) on
behalf of certain Portfolio's custodians, credits realized as a result of
uninvested cash balances were used to reduce a portion of each applicable
Portfolio's expenses. Without these reductions, the Total Annual Expenses
presented above would have been .57% for VIP Equity-Income Portfolio, .66%
for VIP Growth Portfolio, .91% for VIP Overseas Portfolio, .63% for VIP II
Asset Manager Portfolio, .67% for VIP II Contrafund Portfolio, .71% for VIP
II Asset Manager: Growth Portfolio, .57% for VIP III Balanced Portfolio,
.69% for VIP III Growth Opportunities Portfolio, .60% for VIP III Growth &
Income Portfolio.
5) FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been .10% and the Total Annual Expenses would have
been .34%.
6) The Other Expenses for the VIP III Mid Cap Portfolio reflect the payment of
.10% pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual Fund.
7) FMR agreed to reimburse a portion of VIP III Mid Cap Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been 2.84% (including the payment of .10% pursuant to
the Rule 12b-1 Plan), and the Total Annual Expenses would have been 3.41%.
4
<PAGE>
EXAMPLES
The examples below show the expenses that the Annuitant would be charged for
each $1,000 investment, assuming a $40,000 average contract value and a 5%
annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
PERIOD SHOWN:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $ 87.35 $103.67 $122.28 $199.81
VIP High Income: Initial Class.................. $ 91.65 $116.72 $144.25 $244.80
VIP Equity-Income: Initial Class................ $ 90.32 $112.70 $137.49 $231.08
VIP Growth: Initial Class....................... $ 91.24 $115.48 $142.18 $240.59
VIP Overseas: Initial Class..................... $ 93.50 $122.28 $153.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $ 90.12 $112.07 $136.45 $228.95
VIP II Asset Manager: Initial Class............. $ 90.94 $114.56 $140.62 $237.43
VIP II Index 500: Initial Class................. $ 87.45 $103.98 $122.81 $200.91
VIP II Contrafund: Initial Class................ $ 91.24 $115.48 $142.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $ 91.76 $117.03 $144.77 $245.84
VIP III Balanced: Initial Class................. $ 90.22 $112.39 $136.97 $230.01
VIP III Growth Opportunities: Initial Class..... $ 91.55 $116.41 $143.73 $243.75
VIP III Growth & Income: Initial Class.......... $ 90.63 $113.63 $139.06 $234.26
VIP III Mid Cap: Service Class.................. $ 95.55 $128.43 $163.79 $283.88
</TABLE>
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT TO ANNUITIZE OR DON'T SURRENDER YOUR
CONTRACT AT THE END OF THE PERIOD SHOWN:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class................. $ 17.35 $ 53.67 $ 92.28 $199.81
VIP High Income: Initial Class.................. $ 21.65 $ 66.72 $114.25 $244.80
VIP Equity-Income: Initial Class................ $ 20.32 $ 62.70 $107.49 $231.08
VIP Growth: Initial Class....................... $ 21.24 $ 65.48 $112.18 $240.59
VIP Overseas: Initial Class..................... $ 23.50 $ 72.28 $123.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $ 20.12 $ 62.07 $106.45 $228.95
VIP II Asset Manager: Initial Class............. $ 20.94 $ 64.56 $110.62 $237.43
VIP II Index 500: Initial Class................. $ 17.45 $ 53.98 $ 92.81 $200.91
VIP II Contrafund: Initial Class................ $ 21.24 $ 65.48 $112.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $ 21.76 $ 67.03 $114.77 $245.84
VIP III Balanced: Initial Class................. $ 20.22 $ 62.39 $106.97 $230.01
VIP III Growth Opportunities: Initial Class..... $ 21.55 $ 66.41 $113.73 $243.75
VIP III Growth & Income: Initial Class.......... $ 20.63 $ 63.63 $109.06 $234.26
VIP III Mid Cap: Service Class.................. $ 25.55 $ 78.43 $133.79 $283.88
</TABLE>
These examples assume that all of the fixed charges of the Separate Account and
of the investment advisory fees and other expenses of the Portfolios will
continue as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE MORE OR
LESS. The annual rate of return assumed in the examples isn't an estimate or
guarantee of future investment performance. The table assumes an estimated
$40,000 average contract value, so that the administrative charge per $1,000 of
net asset value in the Separate Account is $0.75. This per $1,000 charge would
be higher for smaller Account Values and lower for higher values.
The table and examples above are to help you understand the various costs and
expenses that apply to your contract. These tables show expenses of the Separate
Account as well as those of the Portfolios. Premium taxes may also apply when
you receive a payout of your contributions.
CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNT IS PROVIDED IN APPENDIX
A.
5
<PAGE>
PART 2 - 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 Goshen, New York. We are authorized to
sell life insurance and annuities in nine states and the District of Columbia.
We sell flexible premium annuities with underlying investment options other than
the Portfolios, and fixed single premium annuities. National Integrity is a
subsidiary of Integrity Life Insurance Company and an indirect subsidiary of
W&S, a mutual life insurance company originally organized under the laws of the
State of Ohio on February 23, 1888.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account was established in 1986, and is maintained under the
insurance laws of the State of New York. It is a unit investment trust, which is
a type of investment company, registered with the Securities and Exchange
Commission (the SEC). SEC registration doesn't mean that the SEC is involved in
any way in supervising the management or investment policies of the Separate
Account. Each Variable Account Option invests in shares of a corresponding
Portfolio. We may establish additional Options from time to time. The Variable
Account Options currently available to you are listed in Part 3, "Your
Investment Options." Prior to September 3, 1991, the Portfolios invested in
shares of corresponding portfolios of Prism Investment Trust.
ASSETS OF OUR SEPARATE ACCOUNT
Under 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 participate in the
Separate Account in proportion to the amounts in their contracts. We can't use
the Separate Account's assets supporting the variable portion of these variable
contracts to satisfy liabilities arising out of any of our other businesses.
Under certain unlikely circumstances, one Variable Account Option may be liable
for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may allow charges owed to us to
stay in the Separate Account, and in that way, we can participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer them
to our general account.
CHANGES IN HOW WE OPERATE
We can change how we or our Separate Account operate, subject to your approval
when required by the Investment Company Act of 1940 ("1940 ACT") or other
applicable law or regulation. We'll notify you if any changes result in a
material change in the underlying investments of a Variable Account Option. We
may:
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- - register or end the registration of the Separate Account under the 1940
Act;
- - operate our Separate Account under the direction of a committee or
discharge a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of 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 Option(s) to invest in a mutual fund other than or in
addition to the Portfolios;
- - operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we'll rely on our own or outside counsel for advice.
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PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. The Portfolios' investment advisor may compensate
us for providing administrative services in connection with the Portfolios. This
compensation is paid from the investment advisor's assets. FOR A PROSPECTUS
CONTAINING MORE COMPLETE INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE
OFFICE TOLL-FREE AT 1-800-433-1778.
Each of the Portfolios is an open-end diversified management investment company
registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and variable
life contracts of insurance companies. Shares of the Portfolios are currently
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with FMR or National Integrity. The Board of
Trustees of each of the Portfolios is responsible for monitoring the Fund for
any material irreconcilable conflict between the interests of the policyowners
of all separate accounts investing in the Portfolio and determining what action,
if any, should be taken in response. If we believe that a Portfolio's response
to any of those events doesn't adequately protect our contract owners, we'll see
to it that appropriate and available action is taken. See the Portfolios'
prospectus for a further discussion of the risks associated with the offering of
shares to our Separate Account and the separate accounts of other insurance
companies.
THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company (FMR)
is a registered investment adviser under the Investment Advisers Act of 1940. It
serves as the investment adviser to each Portfolio. Bankers Trust Company ("BT")
is the VIP II Index 500 Portfolio's sub-adviser. BT, a New York banking
corporation, is a wholly owned subsidiary of Bankers Trust New York Corporation.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP MONEY MARKET PORTFOLIO
VIP Money Market Portfolio seeks to earn a high level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
VIP HIGH INCOME PORTFOLIO
VIP High Income Portfolio seeks a high current income, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks, and convertible securities,
with an emphasis on lower-quality debt securities.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
that exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth may
be measured by factors such as earnings or revenue. Companies with high growth
potential tend to be companies with higher than average price/earnings (P/E)
ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities or have a strong
industry or market position. The stocks of these companies are often called
"growth" stocks.
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VIP OVERSEAS PORTFOLIO
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
VIP II INDEX 500 PORTFOLIO
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the Portfolio
may invest include companies experiencing positive fundamental change such as a
new management team or product launch, a significant cost-cutting initiative, a
merger or acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earning potential has increased or is expected
to increase more than generally perceived; companies that have enjoyed recent
market popularity but which appear to have temporarily fallen out of favor for
reasons that are considered non-recurring or short-term; and companies that are
undervalued in relation to securities of other companies in the same industry.
VIP II ASSET MANAGER: GROWTH PORTFOLIO
VIP II Asset Manager: Growth Portfolio is an asset allocation fund that seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
RANGE NEUTRAL MIX
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds,
which may be lower-quality debt securities.
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VIP III BALANCED PORTFOLIO
VIP III Balanced Portfolio seeks both income and growth of capital by investing
approximately 65% of assets in stocks and other equity securities, and the
remainder in bonds and other debt securities, including lower-quality debt
securities, when its outlook is neutral.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III MID CAP PORTFOLIO
FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common
stocks. FMR normally invests at least 65% of the Portfolio's total assets in
securities of companies with medium market capitalizations. Medium market
capitalization companies are those whose market capitalization is similar to the
capitalization of companies in the S&P Mid Cap 400 at the time of the
investment. Companies whose capitalization no longer meets this definition after
purchase continue to be considered to have a medium market capitalization for
purposes of the 65% policy.
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, INTERESTS IN CONTRACTS ATTRIBUTABLE TO FIXED ACCOUNTS
HAVEN'T BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), OR THE
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). THUS, NEITHER THESE CONTRACTS NOR
OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE
CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933
ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT. DISCLOSURES
REGARDING THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO
CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING
TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of two, three, five, seven and ten years. We can
change the durations available from time to time. When you put money in a GRO,
that locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select. The duration of your GRO Account is
the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new
GRO Account for the duration you choose at the then-current Guaranteed Interest
Rate we declare. We won't declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. All contributions you make to a GRO are placed in a
non-unitized separate account. Values and benefits under your contract
attributable to GROs are guaranteed by the reserves in our GRO separate account
as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be
guaranteed for the Guaranteed Period's first year and declared at the time of
purchase. We can declare and credit additional interest based on Contribution,
Account Value, withdrawal dates, economic conditions or on any other lawful,
nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional
Interest credited to
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your GRO Account will be separate from the Guaranteed Interest Rate and not used
in the Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST
MAY NOT BE AVAILABLE IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO, even though they may have different
maturity dates.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. You will receive the Guaranteed Interest Rate that is in
effect on that date. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10 years
and when it expires, we don't offer a 10-year GRO, but we do offer a seven-year
GRO, your new one will be for seven years. If you want something different, you
can tell us within 30 days before the GRO Account expires. You can't choose, and
we won't renew a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Guarantee Period. In addition, we won't make a Market
Value Adjustment for a death benefit. The market adjusted value may be higher or
lower than the GRO Value, but will never be less than the MINIMUM VALUE. Minimum
Value is an amount equal to your contribution to the GRO Account, less previous
withdrawals from the GRO Account and less any applicable contingent withdrawal
and administrative charges, plus 3% interest compounded annually. Withdrawal
charges and the administrative expense charge can invade the Minimum Value.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
(N/12) (N/12)
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if that
remaining period isn't equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by a formula that
finds a value between the Guaranteed Interest Rates for GRO Accounts of the
next highest and next lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account will be zero. If for any reason we are no longer
declaring current Guaranteed Interest Rates, then to
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determine B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, using a formula when
necessary, in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions made to the STO Account during the calendar quarter for which
the rate has been declared. You MUST transfer all STO contributions into other
Investment Options within one year of your most recent STO contribution.
Transfers will be made automatically in approximately equal quarterly or monthly
installments of not less than $1,000 each. You can't transfer from other
Investment Options into the STO. Normal contingent withdrawal charges apply to
withdrawals from the STO. We guarantee that the STO's effective annual yield
will never be less than 3%. See "Systematic Transfer Program" in Part 8 for
details on this program. This option may not be available in some states.
PART 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
National Integrity deducts a daily expense amount from the Unit Value equal to
an effective annual rate of 1.35% of your Account Value in the Variable Account
Options. We can't increase this daily expense rate without your consent. Of the
1.35% total charge, .15% is used to reimburse us for administrative expenses not
covered by the annual administrative charge described below. We deduct the
remaining 1.20% for assuming the expense risk (.85%) and the mortality risk
(.35%) under the contract. The expense risk is the risk that our actual expenses
of administering the contracts will exceed the annual administrative expense
charge. Mortality risk, as used here, refers to the risk National Integrity
takes that annuitants, as a class of persons, will live longer than estimated
and we will be required to pay out more annuity benefits than anticipated. The
relative proportion of the mortality and expense risk charge may be changed, but
the total 1.20% effective annual risk charge can't be increased.
National Integrity may realize a gain from these daily charges if they aren't
needed to meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, we charge an annual administrative charge of $30.
This charge is deducted pro-rata from your Account Value and reduces the number
of Units we credit to you. The part of the charge deducted from the Fixed
Accounts is withdrawn in dollars. The annual administrative charge is pro-rated
in the event of the Annuitant's retirement, death, annuitization, or contract
termination during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if we anticipate expense savings. We may do
this based on the size and type of the group and the amount of the
contributions. We won't unlawfully discriminate against any person or group if
we reduce or eliminate these charges.
PORTFOLIO CHARGES
The Separate Account buys shares of the Portfolios at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without the approval of the
shareholders.
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STATE PREMIUM TAX DEDUCTION
National Integrity won't deduct state premium taxes from your contributions
before investing them in the Investment Options, unless required by your state
law. If the Annuitant elects an annuity benefit, we'll deduct any applicable
state premium taxes from the amount available for an annuity benefit. State
premium taxes currently range up to 4%.
CONTINGENT WITHDRAWAL CHARGE
We don't deduct sales charges when you make a contribution to the contract.
However, contributions withdrawn may be subject to a withdrawal charge of up to
7%. As shown below, the charge varies, depending upon the "age" of the
contributions included in the withdrawal- that is, the number of years that have
passed since each contribution was made. The maximum of 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contribution year. We don't deduct withdrawal charges when you withdraw
contributions made more than six years prior to your withdrawal. To calculate
the withdrawal charge, (1) the oldest contributions will be treated as the first
withdrawn and more recent contributions next, and (2) partial withdrawals up to
the free withdrawal amount aren't considered in the withdrawal charge
calculation. For partial withdrawals, the total amount deducted from your
Account will include the withdrawal amount requested, any Market Value
Adjustment that applies, and any withdrawal charges that apply, so that the net
amount you receive will be the amount you requested.
You may take up to 10% of your account value each year without any contingent
withdrawal charge or Market Value Adjustment. This is referred to as your "free
withdrawal." If you don't take any free withdrawals in one year, you can't add
it to the next year's free withdrawal. If you aren't 59 1/2, federal tax
penalties may apply.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ---------------------
<S> <C>
Current....................................... 7%
First Prior................................... 6
Second Prior.................................. 5
Third Prior................................... 4
Fourth Prior.................................. 3
Fifth Prior................................... 2
Sixth Prior .................................. 1
Seventh Prior and earlier..................... 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from National Integrity either an immediate annuity benefit with life
contingencies or an immediate annuity without life contingencies with a
restricted prepayment option that provides for level payments over five or more
years. Similarly, we won't deduct a charge if the Annuitant dies. See "Death
Benefits and Similar Benefit Distributions" in Part 5.
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge for individuals or a
group of individuals if we anticipate expense savings. We may do this based on
the size and type of the group and the amount of the contribution or whether
there is some relationship with National Integrity. Examples of these
relationships would include being an employee of National Integrity or an
affiliate, receiving distributions or making internal transfers from other
contracts issued by National Integrity, or making transfers of amounts held
under qualified plans sponsored by National Integrity or an affiliate. We won't
unlawfully discriminate against any person or group if we reduce or eliminate
the contingent withdrawal charge.
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers
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under (i) Dollar Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Asset
Allocation and Rebalancing, or (iv) systematic transfers from the STO, nor do
these transfers count toward the twelve free transfers you may make in a
contract year.
DISABILITY WAIVER
We can waive withdrawal charges on full or partial withdrawal requests of $1,000
or more under a hardship circumstance. We can also waive the Market Value
Adjustment on any amounts withdrawn from the GRO Accounts. A hardship
circumstance includes the owner becoming disabled before attaining age 65. We
can require reasonable notice and documentation including, but not limited to, a
physician's certification and claim for Social Security benefits. Different
hardship circumstances may apply in some states, and, in other states, may not
be available at all.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment performance of the Variable Account
Options.
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000.
We'll accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Tax-Favored Retirement Programs" in the SAI.
We may limit the total contributions under a contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach nine years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by National
Integrity for all Annuitants under the contract. If your contributions are made
under a tax-favored retirement program, we won't measure them against the
maximum limits set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have RECEIVED (as defined below) both the contribution and instructions
for allocation among the Investment Options at our Administrative Office,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining the nine Investment Options, each of your GRO Accounts
counts as one Investment Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are deemed received on the next Business Day. Contributions
by check or mail are deemed received when they are delivered in good order to
our Administrative Office.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that accompanies it and for all future contributions. We can also
accept changes by telephone transfer. See "Transfers" in Part 5.
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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. The value
of contributions made to the Variable Account Options isn't guaranteed. The
value of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase Units. On any
given day, the value you have in a Variable Account Option is the Unit Value
multiplied by the number of Units credited to you in that Option. The Units of
each Variable Account Option have different Unit Values.
The number of Units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
Unit Value, calculated as of the close of business that day. The number of Units
for a Variable Account Option at any time is the number of Units purchased less
the number of Units redeemed. The value of Units fluctuates with the investment
performance of the corresponding Portfolios, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as their expenses. The Unit Values also change because of
deductions and charges we make to our Separate Account. The number of Units
credited to you, however, won't vary because of changes in Unit Values. Units of
a Variable Account Option are purchased when you make new contributions or
transfer contributions you made to a different Option into that Option. Units
are redeemed when you make withdrawals or transfer amounts out of a Variable
Account Option into a different Option. We also redeem Units to pay the death
benefit when the Annuitant dies and to pay the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine Unit Values for each Variable Account Option at 4 p.m. Eastern Time
on each Business Day. The Unit Value of each Variable Account Option for any
Business Day is equal to the Unit Value for the previous Business Day multiplied
by the net investment factor for that Option on the current day. We determine a
NET INVESTMENT FACTOR for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before
giving effect to any transactions for that day, such as contributions
or withdrawals). For this purpose, we use the share value reported to
us by the Portfolios.
- Next, we add any dividends or capital gains distributions by the
Portfolio on that day.
- Then we charge or credit for any taxes or amounts set aside as a
reserve for taxes.
- Then we divide this amount by the value of the amounts in the Option
at the close of business on the last day on which a Unit Value was
determined (after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since
the last day on which a Unit Value was determined (for example, a
Monday calculation will include charges for Saturday and Sunday). The
daily charge is equal to an effective annual rate of 1.35%. This
charge is for the mortality risk, administrative expenses and expense
risk we assume under the contract.
Generally, this means that we adjust Unit Values to reflect what happens to the
Portfolios and 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 transfer restrictions. You can't make a
transfer into the STO. Transfers to a GRO must be to a newly elected GRO (i.e.
to a GRO you haven't already purchased) at the then-current Guaranteed Interest
Rate, unless we agree otherwise. Transfers you make from a GRO Account, except
within 30 days before your GRO Account expires, are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. Transfers from GROs will be
made according to the order in which money was originally allocated to the GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing Program, or systematic transfer programs, described in Part 8.
You may request a transfer by writing to our Administrative Office. Each request
for a transfer must specify the contract number, the amounts to be transferred
and the Investment Options to and from which the amounts are to be transferred.
Transfers may also be arranged through our telephone transfer service if you
have established a Personal Identification Number (PIN CODE). We'll honor
telephone transfer instructions from any person who provides correct identifying
information. We aren't responsible for any fraudulent telephone transfers that
we believe to be genuine in accordance with these procedures. You bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it. A transfer request doesn't change the allocation of current or
future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' Unit Values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m. Eastern Time (or the close of the New York Stock Exchange, if earlier) will
be processed using Unit Values as of the close of business on the next Business
Day after the day you call. All transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed no later than the next Business Day after
our Administrative Office receives the requests.
EXCESSIVE TRADING
We reserve the right to limit the number of transfers in any contract year or to
refuse any transfer request for an owner or certain owners if we believe in our
sole discretion that (a) excessive trading by the owner or owners or a specific
transfer request or group of transfer requests may have a detrimental effect on
Unit Values or the share prices of the underlying mutual funds; or (b) we are
informed by one or more of the underlying mutual funds that the purchase or
redemption of shares is to be restricted because of excessive trading, or that a
specific transfer or group of transfers is expected to have a detrimental effect
on share prices of affected underlying mutual funds. We also have the right,
which may be exercised in our sole discretion, to prohibit transfers occurring
on consecutive Business Days.
We will notify you or your designated representative if your requested transfer
is not made. Current SEC rules preclude us from processing your request at a
later date if it is not made when initially requested. ACCORDINGLY, YOU WILL
NEED TO SUBMIT A NEW TRANSFER REQUEST IN ORDER TO MAKE A TRANSFER THAT WAS NOT
MADE BECAUSE OF THESE LIMITATIONS.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be for at
least $300. The money will be taken from your Investment Options, pro-rata, in
the same proportion that their value bears to your total Account Value. For
example, if your Account Value is divided in equal 25% shares among four
Investment Options, when you make a withdrawal, 25% of the money withdrawn will
come from each of your Investment Options. You can
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tell us if you want your withdrawal handled differently. During the first six
years of your contract, there is a contingent withdrawal charge for any
withdrawals other than your free withdrawals. The charge starts at 7% and
decreases depending on the age of your account. This charge is in addition to
any Market Value Adjustments made to early withdrawals from GRO Accounts. Under
some circumstances, the contingent withdrawal charge and Market Value Adjustment
may be waived.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any contingent
withdrawal charges and any Market Value Adjustments. The total amount that you
receive will be the total that you requested. Most of the withdrawals you make
before you are 59 1/2 years old are subject to a 10% federal tax penalty. If
your contract is part of a tax-favored plan, the plan may limit your
withdrawals. See "Tax Aspects of the Contract" in Part 7.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
consequences. See Part 7, "Tax Aspects of the Contract." We won't be bound by an
assignment unless it is in writing and our Administrative Office has received it
in a form acceptable to us.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the Account
Value at the end of the Business Day when we receive proof of death. Similarly,
if the Contract was issued on or after the youngest Annuitant's 86th birthday,
the death benefit is the Account Value at the end of the Business Day when we
receive proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the highest of:
(a) your highest Account Value on any contract anniversary before age 81,
plus subsequent contributions and minus subsequent withdrawals (after
being adjusted for associated charges and adjustments);
(b) total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); and
(c) your current Account Value.
The reductions in the death benefit described in (a) and (b) above for
subsequent withdrawals will be calculated on a pro-rata basis with respect to
Account Value at the time of withdrawal.
Death benefits and benefit distributions required because of a separate owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The owner selects the beneficiary of the death benefit. An owner may change
beneficiaries by sending the appropriate form to the Administrative Office. If
an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit
is generally paid to the Annuitant's estate. A death benefit won't be paid after
the Annuitant's death if there is a contingent Annuitant. In that case, the
contingent Annuitant becomes the new Annuitant under the contract.
The maximum issue age for the Annuitant is 85 years old.
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ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 90th birthday or earlier, if required by law. Contract
terms that apply to the various retirement programs, along with the federal tax
laws, establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time. A lump sum
payment will provide the Annuitant with the Cash Value under the contract
shortly after the Retirement Date. The amount applied toward the purchase of an
annuity benefit will be the Adjusted Account Value, less any pro-rata annual
administrative charge, except that the Cash Value will be the amount applied
instead if the annuity benefit doesn't have a life contingency and either the
term is less than five years or the annuity can be commuted to a lump sum
payment without a withdrawal charge applying.
ANNUITIES
Annuity benefits can provide for fixed payments, which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must be
at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually.
If you haven't already selected a form of annuity, within six months prior to
your Retirement Date we'll send you a notice form. You can tell us on the form
the type of annuity you want or confirm to us that we're to provide the normal
form of annuity, which is the LIFE AND TEN YEARS CERTAIN ANNUITY. However, if we
don't receive a completed form from you on or before your Retirement Date, we'll
extend the Retirement Date until we receive your written instructions at our
Administrative Office. During this extension, the values under your contract in
the various Investment Options will remain invested in those options and amounts
remaining in Variable Account Options will continue to be subject to the
associated investment risks. However, your Retirement Date can't be extended
beyond your 90th birthday or earlier, if required by law. You'll receive a lump
sum benefit if you don't make an election by then.
We currently offer the following types of annuities:
A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10
years of payments guaranteed, funded through our general account.
A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period you select when you select the type of annuity you want. If the Annuitant
dies before the end of the period selected, the Annuitant's beneficiary can
choose to receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant or the lives of the
Annuitant and another annuitant under a joint and survivor annuity. If the
Annuitant (or the Annuitant and the other annuitant under a joint and survivor
annuity) dies before the period selected ends, the remaining payments will go to
the Annuitant's beneficiary. The Annuitant's beneficiary can redeem the annuity
and receive the present value of future guaranteed payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the Annuitant's age (or
Annuitant and a joint annuitant in the case of a joint and survivor annuity) and
sex (except under most tax-favored retirement programs). If our annuity rates
then in effect would yield a larger payment, those rates will apply instead of
the contract rates.
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If the age or sex of an annuitant has been misstated, any benefits will be those
that would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally apply your Adjusted Account Value to the purchase of an annuity
within seven days after we receive the required form at our Administrative
Office. We can defer our action, however, for any period during which:
(1) the New York Stock Exchange has been closed or trading on it is restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
(3) the SEC, by order, permits us to defer action in order to protect persons
with interests in the Separate Account. We can defer payment of your Fixed
Accounts for up to six months, and interest will be paid on any such
payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the cover page
of this prospectus. We can't honor your requests unless they are in proper and
complete form. Whenever possible, use one of our printed forms, which you can
get from our Administrative Office.
PART 6 - VOTING RIGHTS
VOTING RIGHTS
National Integrity is the legal owner of the shares of the Portfolios held by
the Separate Account and, as such, has the right to vote on certain matters.
Among other things, we may vote to elect the Portfolios' Boards of Directors, to
ratify the selection of independent auditors for the Portfolios, and on any
other matters described in the Portfolios' current prospectus or requiring a
vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all owners, we'll vote shares in a
Portfolio for which we have not received instructions in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain Qualified Plans, your voting instructions must be
communicated to us indirectly, through your employer, but we aren't responsible
for any failure by your employer to ask for your instructions or to tell us what
your instructions are. We'll vote any Portfolio shares that we're entitled to
vote directly, because of amounts we have accumulated in our Separate Account,
in the same proportion that other owners vote. If the federal securities laws or
regulations or interpretations of them change so that we are permitted to vote
shares of the Portfolios in our own right or to restrict owner voting, we may do
so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
have been invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing the amount of your Account Value
allocated to that Option by the net asset value of one share of the
corresponding Portfolio as of the record date set by the Portfolios' Boards for
the shareholders' meeting. We count fractional shares. The record date for this
purpose can't be more than 60 days before the shareholders' meeting. After
annuity payments have
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begun, voting rights are calculated in a similar manner based on the actuarially
determined value of your interest in each Variable Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by those companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by 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'll be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by owners.
PART 7 - TAX ASPECTS OF THE CONTRACT
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
isn't designed to cover all situations and isn't intended to be tax advice. It
is based upon our understanding of the present federal income tax laws as
currently interpreted by the Internal Revenue Service (IRS) and various courts.
We cannot guarantee that the IRS or the courts will not change their views on
the treatment of these contracts. Future legislation may affect annuity
contracts adversely. Moreover, we have not attempted to consider any applicable
state or other tax laws. Because of the complexity of the tax laws and the fact
that tax results will vary according to the particular circumstances, any one
considering buying a contract, or selecting annuity payments under the contract,
or receiving annuity payments under a contract should consult a qualified tax
adviser. 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 federal tax law, anyone can purchase an annuity with after-tax dollars.
Earnings under the contract generally will not be taxed until you make a
withdrawal. An individual (or employer) may also purchase the annuity to fund a
tax-favored retirement program (contributions are with pre-tax dollars), such as
an IRA or qualified plan. Finally, an individual (or employer) may buy the
Annuity to fund a Roth IRA (contributions are with after-tax dollars and
earnings are excluded from taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules that apply to an annuity purchased to fund a tax-favored retirement
program (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits to qualify for its special treatment under the federal tax law.
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TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) will not be taxed when you receive those amounts back in a
distribution. Also, an owner is not generally taxed on the annuity's earnings
until some form of withdrawal or distribution is made under the contract.
However, under certain circumstances, the increase in value may be subject to
current federal income tax. For example, corporations, partnerships, and other
non-natural persons can't defer tax on the annuity's income unless an exception
applies. In addition, if an owner transfers an annuity as a gift to someone
other than a spouse (or former spouse), all increases in its value are taxed at
the time of transfer. The assignment or pledge of any portion of the value of a
contract will be treated as a distribution of that portion of the value of the
contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for each
type of distribution. Section 72 of the Code states that the proceeds of a full
or partial withdrawal from a contract before annuity payments begin are treated
first as taxable income, but only to the extent of the increase of the Account
Value. The rest of the withdrawal, representing your basis in the annuity, isn't
taxable. Generally, the investment or basis in the contract equals the
contributions made by you or on your behalf, minus any amounts previously
withdrawn that weren't treated as taxable income. Special rules may apply if the
contract includes contributions made prior to August 14, 1982 that were rolled
over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is determined using a ratio of the owner's investment to
his or her expected return under the contract (exclusion Ratio). The rest of
each payment will be ordinary income. That means that part of your payment is
tax-free and part of it is taxable. When all of these tax-free portions add up
to your investment in the annuity, future payments are entirely ordinary income.
If the Annuitant dies before recovering the total investment, a deduction for
the remaining basis will generally be allowed on the owner's final federal
income tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, you may be subject to a tax penalty
of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59 1/2;
(2) as a result of the owner's death;
(3) part of a series of substantially equal periodic payments (paid at least
annually) for the life (or life expectancy) of the taxpayer or joint lives
(or joint life expectancies) of the taxpayer and beneficiary;
(4) a result of the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the Code);
(7) purchased by an employer on termination of certain types of qualified plans
and held by the employer until the employee separates from service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) for the purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses; or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10), and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals" in
Part 5.
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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, to be treated as an annuity, a contract must
provide the following distribution rules: (a) if any owner dies on or after the
Retirement Date and before the entire interest in the contract has been
distributed, then the rest of that annuity must be distributed at least as
quickly as the method in effect when the owner died; and (b) if any owner dies
before the Retirement Date, the entire interest in the contract must be
distributed within five years. However, any interest that is payable to a
beneficiary may be annuitized over the life of that beneficiary or over a period
not extending beyond the life expectancy of that beneficiary, so long as
distributions begin within one year after the owner's death. If the beneficiary
is the owner's spouse, the contract (along with the deferred tax status) may be
continued in the spouse's name as the owner.
DIVERSIFICATION STANDARDS
National Integrity manages the investments in the annuities under Section 817(h)
of the Code to ensure that they will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An owner can use this annuity with certain types of retirement plans that
receive favorable tax treatment under the Code. Numerous tax rules apply to the
participants in qualified plans and to the contracts used in connection with
those qualified plans. These tax rules vary according to the type of plan and
the terms and conditions of the plan itself. owners, Annuitants, and
beneficiaries are cautioned that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the contract. In addition,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loans must be repaid. (owners
should always consult their tax advisors and retirement plan fiduciaries before
taking any loans from the plan.) Special rules also apply to the time at which
distributions must begin and the form in which the distributions must be paid.
THE SAI CONTAINS GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS
TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON NATIONAL INTEGRITY
The contracts allow National Integrity to charge the Separate Account for taxes.
National Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
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PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract prior to your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is to be
made. You may specify a dollar amount for each withdrawal or an annual
percentage to be withdrawn. The minimum systematic withdrawal currently is $100.
You may also specify an account for direct deposit of your systematic
withdrawals. To enroll in our systematic withdrawal program, send the
appropriate form to our Administrative Office. Withdrawals may begin as soon as
one Business Day after we receive the form. You may terminate your participation
in the program upon one day's prior written notice, and we may terminate or
change the systematic withdrawal program at any time. If on any withdrawal date
you don't have enough money in your Account to make all of the withdrawals you
have specified, no withdrawal will be made and your enrollment in the program
will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't deduct a contingent withdrawal charge
and no Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO
THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWAL AND TO INCOME TAXATION. See
Part 7, "Tax Aspects of the Contract."
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59 1/2. You won't have to pay any tax
penalty for these withdrawals, but they will be subject to ordinary income tax.
See "Taxation of Annuities Generally," in Part 7. Once you begin receiving
distributions, they shouldn't be changed or stopped until the later of:
- - the date you reach age 59 1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions before you reached age 59 1/2 made under the Income Plus
Withdrawal Program plus interest.
You can choose the Income Plus Withdrawal Program any time before you reach age
59 1/2. You can elect this option by sending the election form to our
Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We'll
calculate the amount of the distribution under a method you select, subject to a
minimum, which is currently $100. You must also specify an account for direct
deposit of your withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Withdrawals may begin as soon as one Business Day
after we receive your form. You may end your participation in the program upon
seven Business Day's prior written notice, and we may terminate or change the
Income Plus Withdrawal Program at any time. If on any withdrawal date you don't
have enough money in your Accounts to make all of the withdrawals you have
specified, no withdrawal will be made and your enrollment in the program will be
ended. This program isn't available in connection with the Systematic Withdrawal
Program, Dollar Cost Averaging, Systematic Transfer Option or Asset Allocation
and Rebalancing Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS
WITHDRAWN
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UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE WITHDRAWAL AMOUNT
WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET VALUE ADJUSTMENT
IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
that you have made to the VIP Money Market Option on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must tell us how much you want to be transferred into each Variable Account
Option. The current minimum transfer to each Option is $250. We won't charge a
transfer charge under our dollar cost averaging program, and these transfers
won't count towards your twelve free transfers.
To enroll in our dollar cost averaging program, send the appropriate form to our
Administrative Office. You may terminate your participation in the program upon
one day's prior written notice, and we may terminate or change the dollar cost
averaging program at any time. If you don't have enough money in the VIP Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis to one or more
other Investment Options that you select. We'll transfer your STO contributions
in equal installments of not less than $1,000 over a one-year period. If you
don't have enough money in the STO to transfer to each Option specified, a final
transfer will be made on a pro-rata basis and your enrollment in the program
will be ended. Any money remaining in the STO at the end of the year during
which transfers are required to be made will be transferred on a pro-rata basis
at the end of that year to the Options you have chosen for this program. We
won't charge a transfer charge for transfers under our systematic transfer
program, and these transfers won't count towards your twelve free transfers.
To enroll in our systematic transfer program, send the appropriate form to our
Administrative Office. We can terminate the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a Customized Asset Rebalancing program that allows you to determine how
often rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will
automatically be rebalanced by transfers among your Investment Options, and you
will receive a confirmation notice after each rebalancing. Transfers will occur
only to and from those Variable Account Options where you have current
contribution allocations. We won't charge a transfer charge for transfers under
our Customized Asset Rebalancing program, and they won't count towards your
twelve free transfers.
Fixed Accounts aren't eligible for the Customized Asset Rebalancing program.
To enroll in our Customized Asset Rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, as well as transfers and withdrawals
that you make, may not work with the Customized Asset Rebalancing program. You
should, therefore, monitor your use of other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. You may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or change the Customized Asset Rebalancing program at any
time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates. Callan Associates is an independent research and
consulting firm, specializing in the strategic asset allocation decision.
23
<PAGE>
You may select one of five proposed Asset Allocation Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contributions you are making will initially be allocated among
the Options established for each Model. If we change the Model, your account
values will be automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
When you select this program, your account values will be allocated and your
variable portfolios will automatically be rebalanced at least annually. The
program automatically applies to all contributions made to your annuity contract
while you are still participating. You will receive a confirmation notice after
each rebalancing. We won't charge a transfer charge for transfers made under the
Asset Allocation and Rebalancing Program. These transfers won't count toward
your twelve free transfers.
In each Asset Allocation Rebalancing Model, a part of each contribution is
allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to
the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. If you withdraw or transfer your GRO funds, they may be subject to a
Market Value Adjustment that may increase or decrease your account value.
To enroll in the Asset Allocation and Rebalancing Program, complete the
appropriate form and send it to our Administrative Office. You should be aware
that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work with the Customized Asset
Rebalancing program. If, after selecting one of the five models, you request a
transaction that results in a reallocation outside one of the Models, your
participation in the Model program automatically ends. You should, therefore,
monitor your use of other programs, transfers, and withdrawals while the
Customized Asset Rebalancing program is in effect. This program isn't available
with the Customized Asset Rebalancing program. We can terminate or change this
program in whole or in part, or restrict contributions to the program. This
program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account to
make your contributions. To enroll in this program, send the appropriate form to
our Administrative Office. You may terminate your participation in the program
upon 30 days' prior written notice. We may terminate your participation if your
bank declines to make any payment. The minimum amount for systematic
contributions is $100 per month.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. This performance data is based only the performance of a
hypothetical investment in that Option during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame. It
shouldn't be considered as a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply, including any
contingent withdrawal charge that would apply if an owner surrendered the
contract at the end of the period shown. Total returns also may be shown that
don't take into account the contingent withdrawal charge or the annual
administrative charge that is applied when the Account Value is less than
$50,000 at the end of the contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually several years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would produce the same
24
<PAGE>
cumulative total return if the Investment Option experienced exactly the same
return each year for the entire period shown. Because performance will fluctuate
on a year-by-year basis, the average annual total returns tend to show a smooth
result that won't mirror actual performance, even though the end result will be
the same.
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses or the contingent withdrawal charge that
may apply if you withdraw your money at the end of the hypothetical period.
The VIP Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in that Option over
a specified seven-day period. Effective yield is calculated in a similar manner
except that it assumes that the income earned is reinvested, and the income on
the reinvested amount is included. The VIP II Investment Grade Bond and VIP High
Income Option may advertise a 30-day yield which reflects the income generated
by an investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
PART 9 - PRIOR CONTRACTS
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
(IDENTIFIED UNDER GRANDMASTER II MARKETING NAME)
This section shows the Death Benefit information for contracts issued before
January 1, 1997. It may be different from other provisions in this prospectus.
For contracts issued before January 1, 1995, the amount of the death benefit is
the greatest of:
- - your Account Value
- - the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
- - your total contributions less the sum of withdrawals.
For contracts issued on or after January 1, 1995, the amount of the death
benefit is the greatest of:
- - your Account Value
- - the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- - your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments that apply to those withdrawals and reduce the
death benefit on a pro rata basis.
FOR CONTRACTS ISSUED BEFORE FEBRUARY 15, 1997 (IDENTIFIED UNDER GRANDMASTER II
MARKETING NAME) the following rules apply even if they are different from other
provisions in this prospectus:
CONTINGENT WITHDRAWAL CHARGE
There is a withdrawal charge of up to 7% on all contributions withdrawn. As
shown below, this charge varies, depending upon the "age" of the contributions
included in the withdrawal, that is, how long ago you made your contributions.
The maximum of 7% would apply if the entire amount of the withdrawal consisted
of contributions made during your current contract year. No withdrawal charge
applies when you withdraw contributions made earlier than your fifth prior
contribution year. For purposes of calculating the withdrawal charge, (1) the
oldest contributions will be treated as the first withdrawn and more recent
contributions next, and (2) partial withdrawals up to the free withdrawal amount
won't be considered a withdrawal of any contributions. For partial withdrawals,
the total amount
25
<PAGE>
deducted from your Account Value will include the withdrawal amount requested,
any applicable Market Value Adjustment and any applicable withdrawal charge, so
that the net amount you receive will be the amount requested.
No charge will be applied to your partial withdrawals that don't exceed the free
withdrawal amount in any contract year. On any Business Day, the free withdrawal
amount is the greater of (i) 10% of your Account Value and (ii) any investment
gain during the prior contract year, less withdrawals during the current
contract year. Investment gain is calculated as the increase in the Account
Value during the prior contract year, minus contributions during that year, plus
withdrawals made during that year. We'll deduct contingent withdrawal charges
for any partial withdrawal amount that is over the free withdrawal amount. The
contingent withdrawal charge is a sales charge to help pay our costs of selling
and promoting the contracts. We don't expect revenues from contingent withdrawal
charges to cover all of those costs. Any shortfall will be made up from our
General Account assets, which may include profits from other charges under the
contracts.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current.................................... 7%
First Prior................................ 6
Second Prior............................... 5
Third Prior................................ 4
Fourth Prior............................... 3
Fifth Prior................................ 2
Sixth Prior and Earlier.................... 0
</TABLE>
We won't deduct a contingent withdrawal charge if the Annuitant uses the
withdrawal to buy from us either an immediate annuity benefit with life
contingencies or an immediate annuity without life contingencies with a
restricted prepayment option that provides for level payments over five or
more years. Similarly, we won't deduct a charge if the Annuitant dies and the
withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and
Similar Benefit Distributions" in Part 5.
TABLE OF ANNUAL FEES AND EXPENSES FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
<TABLE>
<CAPTION>
Owner Transaction Expenses
- --------------------------
<S> <C>
Sales Load on Purchases........................................................................... $0
Deferred Sales Load (1)....................................................................7% Maximum
Exchange Fee (2).................................................................................. $0
Annual Administrative Charge
- ----------------------------
Annual Administrative Charge* .................................................................... $30
* This charge applies only if the Account Value is less than $50,000 at the end of any
contract year prior to your Retirement Date. See "Annual Administrative Charge" in Part 4.
Separate Account Annual Expenses (as a
Percentage of Average Account Value) (3)
- ----------------------------------------
Mortality and Expense Risk Fees.............................................................. 1.20%
Administrative Expenses...................................................................... .15%
----
Total Separate Account Annual Expenses....................................................... 1.35%
----
----
</TABLE>
26
<PAGE>
Fund Annual Expenses After Reimbursement
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market: Initial Class................. .18% .09% .27%
VIP High Income: Initial Class.................. .58% .11% .69%
VIP Equity-Income: Initial Class................ .48% .08% .56% (4)
VIP Growth: Initial Class....................... .58% .07% .65% (4)
VIP Overseas: Initial Class..................... .73% .14% .87% (4)
VIP II Investment Grade Bond: Initial Class..... .43% .11% .54%
VIP II Asset Manager: Initial Class............. .53% .09% .62% (4)
VIP II Index 500: Initial Class................. .24% .04% .28% (5)
VIP II Contrafund: Initial Class................ .58% .07% .65% (4)
VIP II Asset Manager: Growth: Initial Class..... .58% .12% .70% (4)
VIP III Balanced: Initial Class................. .43% .12% .55% (4)
VIP III Growth Opportunities: Initial Class..... .58% .10% .68% (4)
VIP III Growth & Income: Initial Class.......... .48% .11% .59% (4)
VIP III Mid Cap Portfolio: Service Class........ .57% .50% 1.07% (6)(7)
</TABLE>
- -------------------------
1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
have a free withdrawal of up to 10% of the Account Value in any contract
year.
2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
3) See "Deductions and Charges - Separate Account Charges" in Part 4.
4) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce Portfolio expenses. In addition, through arrangements with
certain Portfolios, or through Fidelity Research & Management (FMR) on
behalf of certain Portfolio's custodians, credits realized as a result of
uninvested cash balances were used to reduce a portion of each applicable
Portfolio's expenses. Without these reductions, the Total Annual Expenses
presented above would have been .57% for VIP Equity-Income Portfolio, .66%
for VIP Growth Portfolio, .91% for VIP Overseas Portfolio, .63% for VIP II
Asset Manager Portfolio, .67% for VIP II Contrafund Portfolio, .71% for VIP
II Asset Manager: Growth Portfolio, .57% for VIP III Balanced Portfolio,
.69% for VIP III Growth Opportunities Portfolio, .60% for VIP III Growth &
Income Portfolio.
5) FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been .10% and the Total Annual Expenses would have
been .34%.
6) The Other Expenses for the VIP III Mid Cap Portfolio reflect the payment of
.10% pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual Fund.
7) FMR agreed to reimburse a portion of VIP III Mid Cap Portfolio's expenses
during the period. Without this reimbursement, the Other Expenses for the
Portfolio would have been 2.84% (including the payment of .10% pursuant to
the Rule 12b-1 Plan), and the Total Annual Expenses would have been 3.41%.
27
<PAGE>
EXAMPLES
The examples below show the expenses 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: Initial Class................. $ 87.35 $103.67 $122.28 $199.81
VIP High Income: Initial Class.................. $ 91.65 $116.72 $144.25 $244.80
VIP Equity-Income: Initial Class................ $ 90.32 $112.70 $137.49 $231.08
VIP Growth: Initial Class....................... $ 91.24 $115.48 $142.18 $240.59
VIP Overseas: Initial Class..................... $ 93.50 $122.28 $153.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $ 90.12 $112.07 $136.45 $228.95
VIP II Asset Manager: Initial Class............. $ 90.94 $114.56 $140.62 $237.43
VIP II Index 500: Initial Class................. $ 87.45 $103.98 $122.81 $200.91
VIP II Contrafund: Initial Class................ $ 91.24 $115.48 $142.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $ 91.76 $117.03 $144.77 $245.84
VIP III Balanced: Initial Class................. $ 90.22 $112.39 $136.97 $230.01
VIP III Growth Opportunities: Initial Class..... $ 91.55 $116.41 $143.73 $243.75
VIP III Growth & Income: Initial Class.......... $ 90.63 $113.63 $139.06 $234.26
VIP III Mid Cap: Service Class.................. $ 95.55 $128.43 $163.79 $283.88
</TABLE>
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: Initial Class................. $ 17.35 $ 53.67 $ 92.28 $199.81
VIP High Income: Initial Class.................. $ 21.65 $ 66.72 $114.25 $244.80
VIP Equity-Income: Initial Class................ $ 20.32 $ 62.70 $107.49 $231.08
VIP Growth: Initial Class....................... $ 21.24 $ 65.48 $112.18 $240.59
VIP Overseas: Initial Class..................... $ 23.50 $ 72.28 $123.55 $263.50
VIP II Investment Grade Bond: Initial Class..... $ 20.12 $ 62.07 $106.45 $228.95
VIP II Asset Manager: Initial Class............. $ 20.94 $ 64.56 $110.62 $237.43
VIP II Index 500: Initial Class................. $ 17.45 $ 53.98 $ 92.81 $200.91
VIP II Contrafund: Initial Class................ $ 21.24 $ 65.48 $112.18 $240.59
VIP II Asset Manager: Growth: Initial Class..... $ 21.76 $ 67.03 $114.77 $245.84
VIP III Balanced: Initial Class................. $ 20.22 $ 62.39 $106.97 $230.01
VIP III Growth Opportunities: Initial Class..... $ 21.55 $ 66.41 $113.73 $243.75
VIP III Growth & Income: Initial Class.......... $ 20.63 $ 63.63 $109.06 $234.26
VIP III Mid Cap: Service Class.................. $ 25.55 $ 78.43 $133.79 $283.88
</TABLE>
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT TO ANNUITIZE 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.
28
<PAGE>
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.
RETIREMENT DATE
The Retirement Date will be the date you specify, but no later than your 85th
birthday or the 10th Contract Anniversary, whichever is later.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
For contracts issued before February 15, 1997, the Callan Asset Allocation and
Rebalancing Program uses the 4-year Guaranteed Rate Option for the Fixed Income
Investment Sector of the Model.
HARDSHIP WAIVERS
For contracts issued before February 15, 1997, Hardship Waivers aren't
available.
FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
HARDSHIP WAIVER
We can waive withdrawal charges on full or partial withdrawal requests of $1,000
or more under a hardship circumstance. We can also waive the Market Value
Adjustment on any amounts withdrawn from the GRO Accounts. Hardship
circumstances include the owner's (1) confinement to a nursing home, hospital or
long term care facility, (2) diagnosis of terminal illness with any medical
condition which would result in death or total disability, and (3) unemployment.
We can require reasonable notice and documentation including, but not limited
to, a physician's certification and Determination Letter from a State Department
of Labor. Some of the hardship circumstances listed above may not apply in some
states, and, in other states, may not be available at all.
FIXED ACCOUNTS
SYSTEMATIC TRANSFER OPTION
STO is not available for contracts issued before July 7, 1998.
ANNUITY PAYMENTS
For contracts issued before May 1, 1999, additional annuitization options may
have been available.
29
<PAGE>
APPENDIX A
FINANCIAL INFORMATION
The table below shows the Unit Value for each Variable Account Option at
inception, the number of Units outstanding at December 31 of each year since
inception, and the Unit Value at the end of each period. The Unit Value at the
beginning of each period is the Unit Value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
MONEY HIGH EQUITY- INVESTMENT
MARKET INCOME INCOME GROWTH OVERSEAS MID CAP GRADE BOND
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 - - - - - - -
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
December 31, 1998 $13.42 $15.98 $40.49 $60.67 $24.12 - $19.02
Number of Units 2,302,396 2,101,650 2,160,698 1,016,514 682,756 - 487,242
December 31, 1999 $13.93 $17.05 $42.47 $82.26 $33.94 $12.94 $18.57
Number of Units 1,548,339 1,828,869 1,770,880 988,503 620,170 67,562 556,717
</TABLE>
*The Inception date for each Option is shown below:
February 19, 1993 for the VIP High Income Option; March 4, 1993 for the VIP II
Index 500 Option; December 31, 1996 for the VIP III Balanced Option, VIP III
Growth Opportunities Option, and VIP III Growth & Income Option; February 6,
1995 for the VIP II Contrafund Option and the Asset Manager: Growth Option;
August 13, 1999 for the VIP III Mid Cap Option. Inception dates for the
remaining Options all were in the third quarter of 1987. Prior to September 3,
1991, the Variable Account Options invested in shares of corresponding
portfolios of Prism Investment Trust, and the VIP Money Market, VIP
Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and VIP II
Asset
30
<PAGE>
Manager Options were known as the Money Market, Common Stock, Aggressive
Stock, Global, Bond and Balanced Options, respectively.
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 1,458,280 2,463,777 447,420 175,229 321,915 320,952
December 31, 1998 $28.94 $28.85 $25.00 $20.35 $13.18 $15.58 $14.74
Number of Units 1,201,119 1,609,895 2,547,399 625,642 407,009 812,252 739,632
December 31, 1999 $31.72 $34.30 $30.65 $23.14 $13.59 $16.78 $15.16
Number of Units 956,725 1,510,242 2,315,960 472,471 541,589 938,522 770,889
</TABLE>
*The Inception date for each Option is shown below:
February 19, 1993 for the VIP High Income Option; March 4, 1993 for the VIP II
Index 500 Option; December 31, 1996 for the VIP III Balanced Option, VIP III
Growth Opportunities Option, and VIP III Growth & Income Option; February 6,
1995 for the VIP II Contrafund Option and the Asset Manager: Growth Option;
August 13, 1999 for the VIP III Mid Cap Option. Inception dates for the
remaining Options all were in the third quarter of 1987. Prior to September 3,
1991, the Variable Account Options invested in shares of corresponding
portfolios of Prism Investment Trust, and the VIP Money Market, VIP
Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and VIP II
Asset Manager Options were known as the Money Market, Common Stock, Aggressive
Stock, Global, Bond and Balanced Options, respectively.
31
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs at the end of the three year period after the
initial contribution. The Market Value Adjustment operates in a similar manner
for transfers. No contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next lower
number of complete months. If we don't declare a rate for the exact time
remaining, we will use a formula to find a rate using GRO Accounts of durations
closest to (next higher and next lower) the remaining period described above.
Three years after the initial contribution, there would have been four years
remaining in your GRO Account. These examples also show the withdrawal charge
that 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
32
<PAGE>
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
(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
33
<PAGE>
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have more or less impact than shown in the
examples, depending on the actual change in interest crediting rate and the
timing of the withdrawal or transfer in relation to the time remaining in the
GRO Account. Also, the Market Value Adjustment can never decrease the Account
Value below premium plus 3% interest, before any applicable charges. Account
values less than $50,000 will be subject to a $30 annual charge.
34
<PAGE>
APPENDIX C
<TABLE>
<CAPTION>
SAI TABLE OF CONTENTS
<S> <C>
Part 1 - National Integrity and Custodian..................................1
Part 2 - Distribution of the Contracts.....................................1
Part 3 - Performance Information...........................................3
Part 4 - Determination of Accumulation Values..............................8
Part 5 - Tax-Favored Retirement Programs...................................8
Traditional Individual Retirement Annuities..........................8
Roth Individual Retirement Annuities.................................8
SIMPLE Individual Retirement Annuities...............................8
Tax Sheltered Annuities..............................................9
Simplified Employee Pensions.........................................9
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans...........................................9
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations..........................................9
Distributions Under Tax Favored Retirement Programs..................9
Part 6 - Financial Statements.............................................10
</TABLE>
- -------------------------------------------------------------------------------
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
National Integrity Life Insurance Company
15 Matthews Street, Suite 200
Goshen, NY 10924
ATTN: Request for SAI of Separate Account I (Grandmaster III)
Name:
----------------------------------------------------------------------
Address:
-------------------------------------------------------------------
City: State: Zip:
--------------------------------- ---------- -----------------
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
FOR
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Part 1 - National Integrity and Custodian............................................................1
Part 2 - Distribution of the Contracts...............................................................1
Part 3 - Performance Information.....................................................................3
Part 4 - Determination of Accumulation Values........................................................8
Part 5 - Tax Favored Retirement Programs.............................................................8
Traditional Individual Retirement Annuities.....................................................8
Roth Individual Retirement Annuities............................................................8
SIMPLE Individual Retirement Annuities..........................................................8
Tax Sheltered Annuities.........................................................................9
Simplified Employee Pensions....................................................................9
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit Sharing Plans.................9
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations.........9
Distributions Under Tax Favored Retirement Programs.............................................9
Part 6 - Financial Statements.......................................................................10
</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, 2000.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at National Integrity Life Insurance Company
("National Integrity"), 15 Matthews Street, Suite 200, Goshen, NY 10924, or by
calling 1-800-433-1778.
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity, the depositor of Separate Account I, is a wholly owned
subsidiary of Integrity Life Insurance Company and an indirect subsidiary of The
Western and Southern Life Insurance Company ("W&S"), a mutual life insurance
company originally organized under the laws of the State of Ohio on February 23,
1888.
Until March 3, 2000, National Integrity was an indirect wholly owned subsidiary
of ARM Financial Group, Inc. ("ARM"). ARM provided substantially all of the
services required to be performed on behalf of the Separate Account. Total fees
paid to ARM by National Integrity for management services in 1997 were
$5,855,216, in 1998 were $8,766,003, and in 1999 were $7,558,793.
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. Integrity is currently rated
"A" (Excellent) by A.M. Best Company, "AAA" (Extremely Strong) by Standard &
Poor's Corporation, "Aa2" (Excellent) by Moody's Investors Service, Inc., and
"AAA" (Highest) by Duff and Phelps Credit Rating Company. However, National
Integrity doesn't guarantee the investment performance of the portfolios, and
these ratings don't reflect protection against investment risk.
TAX STATUS OF NATIONAL INTEGRITY
National Integrity is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code of 1986, as amended (the CODE). Since
the Separate Accounts aren't separate entities from National Integrity and their
operations form a part of National Integrity, they aren't taxed separately as
"regulated investment companies" under Subchapter M of the Code. Investment
income and realized capital gains on the assets of the Separate Accounts are
reinvested and taken into account in determining the accumulation value. Under
existing federal income tax law, the Separate Accounts' investment income,
including realized net capital gains, isn't taxed to National Integrity.
National Integrity can make a tax deduction if federal tax laws change to
include these items in our taxable income.
PART 2 - DISTRIBUTION OF THE CONTRACTS
Touchstone Securities, Inc. ("Touchstone Securities"), 311 Pike Street,
Cincinnati, Ohio 45202, and indirect subsidiary of W&S and an affiliate of
National Integrity, is the principal underwriter of the contracts. Touchstone
Securities is registered with the SEC as a broker-dealer and is a member in good
standing of the National Association of Securities Dealers, Inc. The contracts
are offered through Touchstone Securities on a continuous basis.
We generally pay a maximum distribution allowance of 7.5% of initial
contribution and 7% of additional contributions, plus .50% trail commission paid
on Account Value after the 8th Contract Year. The amount of distribution
allowances paid was $1,040,858 for the year ended December 31, 1999, $1,753,582
for the year ended December 31, 1998, and $2,647,756 for the year ended December
31, 1997. Distribution allowances weren't retained by ARM Securities
Corporation, the principal underwriter for the contracts prior to March 3, 2000,
during these years. 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, those types of incentives
may be offered only to certain broker-dealers that sell or are expected to sell
certain minimum amounts of the contracts during specified time periods.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the
1
<PAGE>
formulas described below. At any time in the future, total return and yields may
be higher or lower than in the past and we can't guarantee that any historical
results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all charges
that apply to the Option on an annual basis, including mortality risk and
expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of contract
values, an average account value of $40,000 has been used. Quotations also will
assume a termination (surrender) at the end of the particular period and reflect
the deductions of the contingent withdrawal charge, if they would apply. Any
total return calculation will be based upon the assumption that the Option
corresponding to the investment portfolio was in existence throughout the stated
period and that the applicable contractual charges and expenses of the Option
during the stated period were equal to those that currently apply under the
contract. Total returns may be shown at the same time that do not take into
account deduction of the contingent withdrawal charge, and/or the annual
administrative charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Option over
certain periods, including 1, 3, 5, and 10 years (up to the life of the
Option), and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period. Investors should realize that the Option's
performance is not constant over time, but changes from year to year, and
that the average annual returns represent the averages of historical figures
as opposed to the actual historical performance of an Option during any
portion of the period shown. Average annual returns are calculated pursuant
to the following formula: P(1+T)TO THE POWER OF N = ERV, where P is a
hypothetical initial payment of $1,000, T is the average annual total return,
n is the number of years, and ERV is the withdrawal value at the end of the
period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or any contingent
withdrawal charge. Yields are annualized and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula: Effective Yield = {(Base Period
Return) + 1)TO THE POWER OF 365/7} - 1
2
<PAGE>
For the period ending: 12/31/99
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
SEC STANDARDIZED
VARIABLE AVERAGE ANNUAL RETURN (1)
ACCOUNT -----------------------------------------------
INCEPTION
VARIABLE OPTIONS DATE (2) 1 YEAR 5 YEAR 10 YEAR LIFE OF ACCOUNT
- ---------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VIP II Asset Manager: Initial 9/3/91 3.52 7.59 n/a 11.24
Class
VIP II Asset Manager: Growth: 2/10/95 7.63 n/a n/a 18.34
Initial Class
VIP III Balanced: Initial Class 3/12/97 -2.94 n/a n/a 10.61
VIP II Contrafund: Initial 2/16/95 16.50 n/a n/a 25.52
Class
VIP Equity-Income: Initial 9/3/91 -1.18 16.72 n/a 15.13
Class
VIP Growth: Initial Class 9/3/91 29.51 27.76 n/a 20.67
VIP III Growth & Income: 3/6/97 1.62 n/a n/a 19.05
Initial Class
VIP III Growth Opportunities: 3/12/97 -3.21 n/a n/a 15.10
Initial Class
VIP High Income: Initial Class 3/12/93 .62 9.01 n/a 8.08
VIP II Index 500: Initial Class 4/6/93 12.81 26.20 n/a 20.01
VIP II Investment Grade Bond: 4/2/92 -8.46 5.45 n/a 4.97
Initial Class
VIP III Mid Cap: Service Class 12/28/98 34.63 n/a n/a 11.94
--------------------------------------------------------------------------------------
VIP Overseas: Initial Class 9/3/91 n/a 15.49 n/a 11.94
--------------------------------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.45%. They also reflect any withdrawal charges that would
apply if an owner terminated the policy at the end of the period, but
exclude deductions for the applicable premium tax charges. Surrender
charges are 7% in year one, declining 1% annually in years one through six,
0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
3
<PAGE>
For the period ending: 12/31/99
NON-STANDARDIZED RETURNS
RETURNS WITHOUT SURRENDER CHARGES (1)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
FUND ---------------------------------------------------------
INCEPTION LIFE
OF
VARIABLE OPTIONS DATE 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR
(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VIP II Asset Manager: 9/6/89 48.05 93.10 200.08 201.23 9.59 13.97 14.07 11.62
Initial Class
VIP II Asset Manager: 1/3/95 62.72 n/a n/a 133.85 13.70 17.62 n/a n/a
Growth: Initial Class
VIP III Balanced: 1/3/95 44.28 n/a n/a 75.92 3.14 13.00 n/a n/a
Initial Class
VIP II Contrafund: 1/3/95 92.49 n/a n/a 217.30 22.58 24.40 n/a n/a
Initial Class
VIP Equity-Income: 10/9/86 45.99 119.32 237.76 361.15 4.90 13.44 17.01 12.94
Initial Class
VIP Growth: Initial 10/9/86 127.28 243.40 437.58 713.22 35.58 31.48 27.99 18.32
Class
VIP III Growth & 12/31/96 n/a n/a n/a 76.70 7.70 n/a n/a n/a
Income: Initial Class
VIP III Growth 1/3/95 62.12 n/a n/a 147.31 2.87 17.47 n/a n/a
Opportunities:
Initial Class
VIP High Income: 9/19/85 16.89 56.43 151.26 94.86 6.70 5.34 9.36 9.65
Initial Class
VIP II Index 500: 8/27/92 97.02 223.05 n/a 268.86 18.89 25.36 26.43 n/a
Initial Class
VIP II Investment 12/5/88 12.77 32.85 60.94 61.16 -2.38 4.09 5.85 4.87
Grade Bond: Initial
Class
VIP III Mid Cap: 12/28/98 n/a n/a n/a 51.48 46.94 n/a n/a n/a
Service Class
- ---------------------------------------------------------------------------------------------------------
VIP Overseas: Initial 1/28/87 72.24 108.11 157.54 219.81 40.71 19.87 15.79 9.92
Class
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
All figures are unaudited.
CALENDAR YEAR RETURN(2)
-----------------------------------------------
LIFE OF
VARIABLE OPTIONS FUND 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VIP II Asset Manager: 11.28 -7.42 15.38 13.04 19.02 13.50 9.59
Initial Class
VIP II Asset Manager: 18.56 n/a 21.49 18.30 23.38 15.98 13.70
Growth: Initial Class
VIP III Balanced: 11.98 n/a 12.40 8.48 20.54 16.05 3.14
Initial Class
VIP II Contrafund: 26.03 n/a 37.76 19.66 22.47 28.23 22.58
Initial Class
VIP Equity-Income: 12.25 5.48 33.27 12.73 26.38 10.12 4.90
Initial Class
VIP Growth: Initial 17.17 -1.16 33.54 13.14 21.82 37.61 35.58
Class
VIP III Growth & 20.91 n/a n/a n/a 28.34 27.84 7.70
Income: Initial Class
VIP III Growth 19.89 n/a 30.76 16.67 28.20 22.93 2.87
Opportunities:
Initial Class
VIP High Income: 4.78 -2.80 18.98 12.48 16.08 -5.62 6.70
Initial Class
VIP II Index 500: 19.45 -0.79 35.34 21.15 30.91 26.60 18.89
Initial Class
VIP II Investment 4.41 -5.14 15.74 1.78 7.59 7.59 7.38
Grade Bond: Initial
Class
VIP III Mid Cap: 51.01 n/a n/a n/a n/a n/a 46.94
Service Class
------------------------------------------------------
9.41 .48 8.20 11.67 10.05 11.23 40.71
------------------------------------------------------
</TABLE>
1) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration. Non-standard performance is
since the portfolio inception date, which may predate the separate account.
2) Italicized returns are calculated from the inception date through year-end.
3) Represents the inception date of the underlying funds. Performance data for
periods prior to the actual inception of the variable account options is
hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
4
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
5
<PAGE>
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted issues
are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/ CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between one
and 9.99 years. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
6
<PAGE>
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by 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
7
<PAGE>
deviation, alpha and beta, investment objective, inception date and net assets).
We reserve the right to republish figures independently provided by Morningstar
or any similar agency or service.
PART 4 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as of
the close of business on the New York Stock Exchange, which currently is 4:00
p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options, the accumulation unit value is computed by dividing
the value of the securities held by the Option plus any cash or other assets,
less its liabilities, by the number of outstanding units. Securities are valued
using the amortized cost method of valuation, which approximates market value.
Under this method of valuation, the difference between the acquisition cost and
value at maturity is amortized by assuming a constant (straight-line) accretion
of a discount or amortization of a premium to maturity. Cash, receivables and
current payables are generally carried at their face value.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with certain
tax-favored retirement programs, for groups and individuals. Following are brief
descriptions of various types of qualified plans in connection with which
National Integrity may issue a contract. 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.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may begin. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract that apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may begin. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose of
complying with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
8
<PAGE>
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are
excluded from the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms that apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with these
plans should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
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. Plans in existence on
August 20, 1996, should have established a trust, custodial account, or annuity
contract by January 1, 1999. Loans to employees may be permitted under such
plans; however, a Section 457 plan is not required to allow loans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
National Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions.
Participants in qualified plans, with the exception of five-percent owners, must
begin receiving distributions by April 1 of the calendar year following the
later of either (i) the year in which the employee reaches age 70-1/2 or (ii)
the calendar year in which the employee retires. Participants in Traditional
IRAs must begin receiving distributions by April 1 of the calendar year
following the year in which the employee reaches age 70-1/2. Additional
distribution rules apply after the participant's death. If you don't take
mandatory distributions you may owe a 50% penalty tax on any difference between
the required distribution amount and the amount distributed. Owners of
traditional IRAs and five percent owners must begin distributions by age 70-1/2.
9
<PAGE>
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408(a) Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional IRA;
or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP is our independent auditor and serves as independent auditor
of the Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1999, and
for the periods indicated in the financial statements and the statutory basis
financial statements of National Integrity as of and for the years ended
December 31, 1999 and 1998 included in this SAI have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports included herein.
The financial statements of 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
(Statutory Basis)
National Integrity Life
Insurance Company
YEARS ENDED DECEMBER 31, 1999 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors.........................................1
Audited Financial Statements
Balance Sheets (Statutory Basis).......................................2
Statements of 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 (Statutory Basis)........................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, 1999 and 1998, 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
accounting principles generally accepted in the United States. The variances
between such practices and accounting principles generally accepted in the
United States and the effects on the accompanying financial statements are
described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of National Integrity Life Insurance Company at December
31, 1999 and 1998, or the results of its operations or its cash flows for the
years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National Integrity
Life Insurance Company at December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the New York Insurance
Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 31, 2000
1
<PAGE>
National Integrity Life Insurance Company
Balance sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 345,374 $ 360,012
Preferred stocks 9,740 9,740
Mortgage loans 2,350 2,835
Policy loans 29,246 26,695
Cash and short-term investments 110,583 78,883
Receivable for securities 1,826 -
Federal income tax recoverable 2,769 -
Other invested assets 3,776 3,786
-------------------------------
Total cash and invested assets 505,664 481,951
Separate account assets 841,835 771,953
Accrued investment income 9,618 5,062
Other admitted assets 71 718
-------------------------------
Total admitted assets $ 1,357,188 $ 1,259,684
===============================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-----------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 460,159 $ 437,286
Unpaid claims 50 50
Deposits on policies to be issued 1,067 1,243
-----------------------------------
Total policy and contract liabilities 461,276 438,579
Separate account liabilities 841,835 771,953
Accounts payable and accrued expenses 339 13
Transfers to separate accounts due or (accrued), net (14,732) (27,297)
Reinsurance balances payable 334 207
Federal income taxes - 1,005
Asset valuation reserve 3,526 3,204
Interest maintenance reserve 7,884 8,443
Other liabilities 1,547 4,074
-----------------------------------
Total liabilities 1,302,009 1,200,181
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
Unassigned surplus (deficit) (6,065) (2,491)
-----------------------------------
Total capital and surplus 55,179 59,503
-----------------------------------
Total liabilities and capital and surplus $ 1,357,188 $ 1,259,684
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
National Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
(IN THOUSANDS)
-----------------------------------
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 13,615 $ 13,496
Deposit-type funds 137,690 196,927
Net investment income 39,019 36,077
Amortization of the interest maintenance reserve 1,127 1,478
Income from Separate Account Seed Money Investment 14,800 -
Reserve adjustments on reinsurance ceded 78,722 -
Other revenues 16,400 8,331
-----------------------------------
Total premiums and other revenues 301,373 256,309
Benefits paid or provided:
Death benefits 961 4,098
Annuity benefits 20,560 16,475
Surrender benefits 221,211 142,420
Payments on supplementary contracts 1,812 1,637
Increase (decrease) in insurance and annuity reserves 22,961 (9,247)
Other benefits 93 101
-----------------------------------
Total benefits paid or provided 267,598 155,484
Insurance and other expenses:
Commissions 17,791 8,904
General expenses 7,393 14,876
Taxes, licenses and fees 795 228
Net transfers to separate accounts 213 63,171
Other expenses 643 3,871
-----------------------------------
Total insurance and other expenses 26,835 91,050
-----------------------------------
Gain from operations before federal income taxes
and net realized capital gains (losses) 6,940 9,775
Federal income tax expense (benefit) (5,113) 31
Gain from operations before net realized -----------------------------------
capital gains (losses) 12,053 9,744
Net realized capital gains (losses), excluding realized
capital gains (losses) net of tax transferred to the
interest maintenance reserve (1999-$567; 1998-$2,681) (1,255) 147
-----------------------------------
Net income $ 10,798 $ 9,891
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1999 and 1998
<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, 1998 $ 2,000 $ 59,244 $ 750 $ (7,977) $ 54,017
Net income 9,891 9,891
Increase in asse
valuation reserve (1,634) (1,634)
Dividend to shareholder (2,771) (2,771)
-------------------------------------------------------------------------
Balance, December 31, 1998 2,000 59,244 750 (2,491) 59,503
Net income 10,798 10,798
Increase in asset
valuation reserve (322) (322)
Release of Special Surplus Funds (750) 750
Change in surplus in
separate accounts (14,800) (14,800)
-------------------------------------------------------------------------
Balance, December 31, 1999 $ 2,000 $ 59,244 $ - $ (6,065) $ 55,179
==========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 151,305 $ 210,424
Net investment income received 33,836 36,344
Commission and expense allowances received on
reinsurance ceded 83,164 8
Benefits paid (244,637) (164,730)
Insurance expenses paid (25,653) (24,148)
Other income received net of other expenses paid 11,458 4,368
Net transfers from (to) separate accounts 12,352 (66,100)
Federal income taxes recovered (paid) 2,441 (4,670)
-------------------------------------
Net cash used in operations 24,266 (8,504)
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments
of investments:
Bonds 95,849 291,759
Preferred stocks - 38,672
Mortgage loans 485 407
Other invested assets - 8
Net gains on cash and short-term investments 8 64
Total investment proceeds 96,342 330,910
Taxes paid on capital gains (1,407) (1,407)
-------------------------------------
Net proceeds from sales, maturities, or repayments
of investments 94,935 329,503
Cost of investments acquired:
Bonds 80,974 232,584
Preferred stocks - 26,322
-------------------------------------
Total cost of investments acquired 80,974 258,906
Net increase in policy loans and premium notes 2,551 299
-------------------------------------
Net cash provided by investment activities 11,410 70,298
</TABLE>
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Other sources 2,311 8,644
------------------------------
Total other cash provided 2,311 8,644
------------------------------
Other cash applied:
Dividends to shareholder - 2,771
Other applications, net 6,286 862
------------------------------
Total other cash applied 6,286 3,633
------------------------------
Net cash provided by (used in) financing and
miscellaneous activities (3,975) 5,011
------------------------------
Net increase in cash and short-term investments 31,701 66,805
Cash and short-term investments at beginning of year 78,883 12,078
------------------------------
Cash and short-term investments at end of year $ 110,584 $ 78,883
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company (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"). 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 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 accounting principles generally
accepted in the United States ("GAAP"). The more significant variances from GAAP
are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or fair
value based on the National Association of Insurance Commissioners ("NAIC")
rating; for GAAP, such fixed maturity investments are designated at purchase as
held-to-maturity, trading or available-for-sale. Held-to-maturity fixed
investments are reported at amortized cost, and the remaining fixed maturity
investments are reported at fair value with unrealized holding gains and losses
reported in operations for those designated as trading and as a separate
component of shareholder's equity for those designated as available-for-sale. In
addition, fair values of certain investments in bonds and stocks are based on
values specified by the NAIC, rather than on actual or estimated fair values
used for GAAP.
Realized gains and losses are reported in income net of income tax and transfers
to the interest maintenance reserve. Changes between cost and admitted
investment asset amounts are credited or charged directly to unassigned surplus
rather than to a separate surplus account. The Asset Valuation Reserve is
determined by an NAIC prescribed formula and is reported as a liability rather
than unassigned surplus. Under a formula prescribed
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 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 (Statuatory 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,
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying statutory
basis financial statements $ 10,798 $ 9,891
Deferred policy acquisition costs, net of amortization 4,073 9,940
Adjustments to customer deposits (2,613) (4,560)
Adjustments to invested asset carrying values at
acquisition date 19 (32)
Amortization of value of insurance in force (831) (539)
Amortization of interest maintenance reserve (1,127) (1,478)
Adjustments for realized investment gains (losses) (1,106) 3,646
Adjustments for federal income tax expense (8,084) (5,200)
Other (2,629) (107)
------------------------------------
Net income (loss), GAAP basis $ (1,500) $ 11,561
====================================
</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,
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying statutory basis
financial statements $ 55,179 $ 59,503
Adjustments to customer deposits (28,245) (37,356)
Adjustments to invested asset carrying values at
acquisition date (1,231) 77
Asset valuation reserve and interest maintenance reserve 11,410 11,646
Value of insurance in force 3,702 4,159
Deferred policy acquisition costs 48,063 43,497
Net unrealized gains (losses) on available-for-sale securities
(48,105) (7,076)
Other (5,378) 3,474
------------------------------------
Shareholder's equity, GAAP basis $ 35,395 $ 77,924
====================================
</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.
Preferred stocks are reported at cost.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
11
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the average cost method.
BENEFITS
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the 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.
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
annuity contract surrenders are reported as a negative liability rather than an
asset pursuant to prescribed NAIC accounting practices. Policy related activity
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
involving cashflows, such as premiums and benefits, are reported in the
accompanying financial statements of income in separate line items combined with
related general account amounts. Investment income and interest credited on
deposits held in guaranteed separate accounts are included in the accompanying
statements of income as a net amount included in net transfers to (from)
separate accounts. The Company receives administrative fees for managing the
nonguaranteed separate accounts and other fees for assuming mortality and
certain expense risks. Such fees are included in other revenues.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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. In 1998, the NAIC adopted codified 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 Company uses to prepare its statutory basis
financial statements. Codification 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
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
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, 1999:
Mortgage-backed securities $ 120,317 $ 8 $ 4 $ 120,321
Corporate securities 182,138 15 11,959 170,194
Asset-backed securities 22,877 - - 22,877
U.S. Treasury securities and
obligations of U.S. government
agencies 3,229 1 199 3,031
Foreign governments 16,813 94 1,886 15,021
-----------------------------------------------------------------------
Total bonds $ 345,374 118 14,048 331,444
=======================================================================
At December 31, 1998:
Mortgage-backed securities $ 184,619 $ - $ - $ 184,619
Corporate securities 129,725 3,426 7,681 125,470
Asset-backed securities 26,483 - - 26,483
U.S. Treasury securities and
obligations of U.S. government
agencies 2,489 112 - 2,601
Foreign governments 16,696 - 2,471 14,225
-----------------------------------------------------------------------
Total bonds $ 360,012 $ 3,538 $ 10,152 $ 353,398
=======================================================================
</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, 1999 and 1998, the fair
value of investments in bonds includes $242.4 million and $256.2 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, 1999, by contractual maturity, is as
follows:
<TABLE>
COST OR
AMORTIZED COST FAIR VALUE
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 1,068 $ 1,062
After one through five 37,355 37,161
After five through ten 24,019 22,460
After ten 139,738 127,563
Asset-backed securities 22,877 22,877
Mortgage-backed securities 120,317 120,321
------------------------------------
Total $ 345,374 $ 331,444
====================================
</TABLE>
The expected maturities in the foregoing table may differ from the contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties and because
asset-backed and mortgage-backed securities (including floating-rate securities)
provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1999 and 1998 were $40.7
million and $262.0 million; gross gains of $1.4 million and $5.6 million, and
gross losses of $2.8 million and $1.4 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, 1999 and 1998, bonds with an admitted asset value of $1,220,000
and $1,218,000, 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 December 31, 1999,
the Company held no mortgages with interest more than one year past due. During
1999, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 29,956 $ 31,054
Preferred stocks 796 1,328
Mortgage loans 219 245
Policy loans 2,238 2,014
Cash and short-term investments 6,218 2,147
Other 320 279
------------------------------------
Total investment income 39,747 37,067
Investment expenses (725) (656)
Interest expense on repurchase agreements (3) (334)
------------------------------------
Net investment income $ 39,019 $ 36,077
====================================
</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, the Company reinsures risks under certain of its insurance
products with other insurance companies through reinsurance agreements. Through
these reinsurance agreements' substantially all mortality risks associated with
single premium endowment and variable annuity deposits and substantially all
risks associated with variable life business have been reinsured with
non-affiliated insurance companies. A contingent liability exists with respect
to insurance ceded which would become a liability should the reinsurer be unable
to meet the obligations assumed under these reinsurance agreements.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed against
policyholders $229,228 $ 199,389
Reinsurance assumed 10,640 11,757
Reinsurance ceded (88,563) (723)
-------------------------------------
Net premiums, annuity considerations and deposit-
type funds $151,305 $ 210,423
=====================================
</TABLE>
5. FEDERAL INCOME TAXES
The Company files a consolidated return with Integrity. The method of allocation
between the companies is based on separate return calculations with current
benefit taken for the use of the Company's losses and credits in the
consolidated return.
Income before income taxes differs from taxable income principally due to value
of insurance in force, interest maintenance reserves and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
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, 1999 and 1998, the adjusted capital
and surplus of the Company is in excess of the minimum level of RBC that would
require regulatory response.
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1999 and 1998, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
Amount Percent
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1999:
Subject of discretionary withdrawal (with adjustment):
With market value adjustment $ 209,485 17.3%
At book value less surrender charge of 5% or more 156,431 12.9%
----------------
At market value 617,377 50.9%
-----------------
Total with adjustment or at market value 983,293 81.1%
Subject to discretionary withdrawal (without adjustment)
at book value less surrender charge of 5% or more 166,356 13.7%
Not subject to discretionary withdrawal 62,646 5.2%
---------------------------------
Total annuity reserves and deposit fund liabilities
(before reinsurance) 1,212,295
Less reinsurance ceded 3,772
-----------------
Net annuity reserves and deposit fund liabilities $ 1,208,523 100.0%
=================================
At December 31, 1998:
Subject of discretionary withdrawal (with adjustment):
With market value adjustment $ 221,118 20.0%
At book value less surrender charge of 5% or more 71,502 6.5%
At market value 523,230 47.4%
---------------------------------
Total with adjustment or at market value 815,850 73.9%
Subject to discretionary withdrawal (without adjustment)
at book value less surrender charge of 5% or more 228,629 20.7%
Not subject to discretionary withdrawal 60,076 5.4%
---------------------------------
Total annuity reserves and deposit fund liabilities
(before reinsurance) 1,104,555 100.0%
================
Less reinsurance ceded -
-----------------
Net annuity reserves and deposit fund liabilities $ 1,104,555
=================
</TABLE>
19
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS
The Company's guaranteed separate accounts include non-indexed products and
options (i.e., guaranteed rate options). The guaranteed rate options are sold as
a fixed annuity product or as an investment option within the Company's variable
annuity products.
The Company's nonguaranteed separate accounts primarily include variable
annuities. The net investment experience of variable annuities is credited
directly to the policyholder and can be positive or negative.
Assets held in separate accounts are carried at estimated fair values.
Information regarding the separate accounts of the Company as of and for the
year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
*NONINDEXED NONGUARANTEED
GUARANTEED MORE SEPARATE
THAN 4% ACCOUNTS TOTAL
--------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 10,627 $ 60,894 $ 71,521
========================================================
Reserves for separate accounts with assets at
fair value $ 209,485 $ 617,562 $ 827,047
========================================================
Reserves for separate accounts by withdrawal characteristics:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 209,485 $ - $ 209,485
At book value without market value
adjustment and with current surrender
charge of 5% or more - - -
At market value - 617,562 617,562
--------------------------------------------------------
Total with adjustment or at market value 209,485 617,562 827,047
Not subject to discretionary withdrawal - - -
--------------------------------------------------------
Total separate accounts reserves $ 209,485 $ 617,562 $ 827,047
========================================================
</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, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations of the Separate Accounts
Statement:
Transfers to separate accounts $ 71,521 $ 119,350
Transfers from separate accounts (71,472) (56,316)
------------------------------------
Net transfers to separate accounts 49 63,034
Reconciling adjustments:
Other revenues 164 137
------------------------------------
Transfers as reported in the Summary of Operations of the Life,
Accident and Health Annual Statement $ 213 $ 63,171
====================================
</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, 1999 DECEMBER 31, 1998
----------------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------- --------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $345,374 $290,545 $360,012 $348,766
Preferred stocks 9,740 7,680 9,740 7,981
Mortgage loans 2,350 2,350 2,835 2,835
Cash and short-term investments 110,583 110,583 78,883 78,883
Liabilities:
Life and annuity reserves for
investment-type contracts $382,394 $378,233 $360,606 $359,972
Separate accounts annuity
reserves 826,862 826,164 744,349 733,365
</TABLE>
BONDS AND PREFERRED STOCKS
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
MORTGAGE LOANS AND CASH AND SHORT-TERM INVESTMENTS
The carrying amount of mortgage loans and cash and short-term investments
approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS
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
1999 and 1998, the Company was charged $7.6 million and $8.6 million,
respectively, for these services in accordance with the requirements of
applicable insurance law and regulations.
11. OTHER ITEMS
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and its insurance subsidiaries were
significantly lowered several times by four major rating agencies, materially
and adversely affecting the Company's ability to market retail products and
adversely affecting the persistency of its existing business.
In order to preserve and maximize value for policyholders as well as for ARM's
creditors and/or stockholders, ARM requested supervision with respect to it's
insurance subsidiary Integrity from the Ohio Department of Insurance, its
domiciliary regulator. On August 20, 1999, the Ohio Department of Insurance
issued a Supervision Order. Under the terms of the Supervision Order, Integrity
continued payments of death benefits, previously scheduled systematic
withdrawals, previously scheduled immediate annuity payments, and agent
commissions, but could not make other payments without approval from the Ohio
Department of Insurance. The Supervision Order also suspended the processing of
surrenders of policies except in cases of approved hardship. On August 31, 1999,
the Supervision Order was amended to allow Integrity Life Insurance Company to
resume processing surrender requests from its variable life and annuity
policyholders.
On December 17, 1999, ARM entered into a Purchase Agreement (the "Purchase
Agreement") with The Western and Southern Life Insurance Company ("W&S") whereby
W&S agreed to acquire ARM's insurance subsidiaries, Integrity and National
Integrity Insurance Company, the ("Insurance Subsidiaries").
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
11. OTHER ITEMS (CONTINUED)
On March 3, 2000, ARM closed the transaction contemplated by the Purchase
Agreement (the "Closing"). Under the terms of the Purchase Agreement, the
purchase price of $119.3 million is subject to a number of downward price
adjustments (see below) and was placed in an escrow account. The Company does
not expect any remaining proceeds in the escrow (after any such downward
adjustments) to be distributed from the escrow prior to the 12 month anniversary
of the Closing.
The $119.3 million purchase price may be decreased to the extent that the sum of
the Insurance Subsidiaries' statutory surplus and asset valuation reserves set
forth on the Insurance Subsidiaries' final February 29, 2000 balance sheet (less
certain enumerated items) is more than $1 million less than the sum of the
Insurance Subsidiaries' statutory surplus and asset valuation reserves set forth
in the Insurance Subsidiaries September 30, 1999 statutory financial statements
plus $2.2 million. The purchase price may be increased to the extent that the
sum of the Insurance Subsidiaries' statutory surplus and asset valuation
reserves set forth on the Insurance Subsidiaries' final February 29, 2000
balance sheet (less certain enumerated items) is more than $1 million greater
than the sum of the Insurance Subsidiaries' statutory surplus and asset
valuation reserves set forth on the Insurance Subsidiaries' September 30, 1999
statutory financial statements plus $2.2 million.
Subject to certain specified limitations, the purchase price may also be
decreased to the extent of any losses by W&S arising out of any inaccuracy in or
breach of any of ARM's representations, warranties or covenants.
The purchase price may be further decreased to the extent of any "losses" from
the sales or deemed sales of certain securities owned by the Insurance
Subsidiaries (the "Securities"). The Securities, which the parties have agreed
are to be sold, are set forth on a confidential list. "Losses" are calculated as
the aggregate amount by which the "carrying value" of the Securities exceeds the
aggregate net sale proceeds from the sales or deemed sales of the Securities.
The aggregate "carrying value" of the Securities as of February 29, 2000 was
$453.5 million. Losses of $4.7 million have been recognized on securities sold
subsequent to entering into the sale transaction.
24
<PAGE>
Financial Statements
Separate Account I
of
National Integrity Life Insurance Company
DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1999
CONTENTS
Report of Independent Auditors................................................1
Audited Financial Statements
Statement of Assets and Liabilities...........................................2
Statement of Operations.......................................................4
Statements of Changes in Net Assets...........................................6
Notes to Financial Statements................................................10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of 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, Growth & Income, and Mid Cap Service
Class Divisions) as of December 31, 1999, the related statement of operations
for the year then ended and statements of changes in net assets for the periods
indicated therein. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of 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, 1999, by correspondence with the transfer agent of the Fidelity VIP
Funds. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account I of National Integrity Life Insurance
Company at December 31, 1999, and the results of their operations and changes in
their net assets for each of the periods indicated therein, in conformity with
accounting principles generally accepted in the United States.
Louisville, Kentucky /s/ Ernst & Young LLP
April 12, 2000
1
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<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 (aggregate cost of
$351,618,203) $ 21,562,323 $ 31,176,658 $ 75,213,986 $ 81,311,083 $ 21,048,888 $ 10,337,495 $ 30,345,705
Receivable from (payable to) the
general account of National
Integrity 6,039 5,558 (4,712) 3,174 (318) 740 1,612
---------------------------------------------------------------------------------------------------
NET ASSETS $ 21,568,362 $ 31,182,216 $ 75,209,274 $ 81,314,257 $ 21,048,570 $ 10,338,235 $ 30,347,317
===================================================================================================
Unit value $ 13.93 $ 17.05 $ 42.47 $ 82.26 $ 33.94 $ 18.57 $ 31.72
===================================================================================================
Units outstanding 1,548,339 1,828,869 1,770,880 988,503 620,170 556,717 956,725
===================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1999
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $351,618,203) $ 51,803,547 $ 10,933,364 $70,979,245 $ 11,686,202
Receivable from (payable to) the general
account of National Integrity (2,246) (385) 4,929 475
-------------------------------------------------------------------
NET ASSETS $ 51,801,301 $ 10,932,979 $ 70,984,174 $ 11,686,677
===================================================================
Unit value $ 34.30 $ 23.14 $ 30.65 $ 15.16
===================================================================
Units outstanding 1,510,242 472,471 2,315,960 770,889
===================================================================
<CAPTION>
GROWTH & MID CAP
BALANCED INCOME SERVICE CLASS
DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $351,618,203) $ 7,361,316 $ 15,748,886 $ 873,923 $ 440,382,621
Receivable from (payable to) the general
account of National Integrity (1,121) (487) 329 13,587
------------------------------------------------------------
NET ASSETS $ 7,360,195 $ 15,748,399 $ 874,252 $440,396,208
============================================================
Unit value $ 13.59 $ 16.78 $ 12.94
============================================
Units outstanding 541,589 938,522 67,562
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,476,262 $ 3,282,850 $ 4,148,854 $ 7,135,873
EXPENSES
Mortality and expense risk and
administrative charges 397,480 420,008 1,163,594 940,822
----------------------------------------------------------------------
NET INVESTMENT INCOME 1,078,782 2,862,842 2,985,260 6,195,051
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments - (2,822,581) 7,014,671 6,057,567
Net unrealized appreciation (depreciation)
of investments
Beginning of period 11,413 (1,665,786) 17,270,036 16,538,280
End of period 11,413 619,609 11,039,871 25,716,113
----------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period - 2,285,395 (6,230,165) 9,177,833
----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS - (537,186) 784,506 15,235,400
----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,078,782 $ 2,325,656 $ 3,769,766 $ 21,430,451
======================================================================
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
----------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 659,274 $ 513,878 $ 2,564,787
EXPENSES
Mortality and expense risk and
administrative charges 235,500 172,743 451,088
----------------------------------------------
NET INVESTMENT INCOME 423,774 341,135 2,113,699
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments 2,344,821 (28,358) 1,919,584
Net unrealized appreciation (depreciation)
of investments
Beginning of period 771,733 386,531 5,285,685
End of period 4,315,885 (235,957) 4,153,701
----------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 3,544,152 (622,488) (1,131,984)
----------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 5,888,973 (650,846) 787,600
----------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 6,312,747 $ (309,711) $ 2,901,299
==============================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 793,851 $ 824,460 $ 2,614,185 $ 330,938
EXPENSES
Mortality and expense risk and
administrative charges 697,072 155,316 900,642 167,667
----------------------------------------------------------------
NET INVESTMENT INCOME 96,779 669,144 1,713,543 163,271
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments 5,682,354 568,971 5,725,497 614,855
Net unrealized appreciation (depreciation)
of investments
Beginning of period 10,550,064 1,293,807 19,846,348 1,513,343
End of period 13,584,720 1,515,760 25,922,092 1,032,100
----------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 3,034,656 221,953 6,075,744 (481,243)
----------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 8,717,010 790,924 11,801,241 133,612
----------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $8,813,789 $1,460,068 $ 13,514,784 $ 296,883
================================================================
<CAPTION>
GROWTH & MID CAP
BALANCED INCOME SERVICE CLASS
DIVISION DIVISION DIVISION (1) TOTAL
-------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 278,209 $ 227,495 $ 6,263 $24,857,179
EXPENSES
Mortality and expense risk and
administrative charges 96,968 197,762 1,709 5,998,371
--------------------------------------------------------
NET INVESTMENT INCOME 181,241 29,733 4,554 18,858,808
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments 298,900 1,940,706 2,574 29,319,561
Net unrealized appreciation (depreciation)
of investments
Beginning of period 375,864 1,782,414 - 73,959,732
End of period 71,434 865,195 152,482 88,764,418
--------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (304,430) (917,219) 152,482 14,804,686
--------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (5,530) 1,023,487 155,056 44,124,247
--------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 175,711 $1,053,220 $159,610 $62,983,055
========================================================
</TABLE>
(1)For the period June 15, 1999 (commencement of operations) to
December 31, 1999
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,078,782 $ 2,862,842 $ 2,985,260 $ 6,195,051
Net realized gain (loss) on sales of investments - (2,822,581) 7,014,671 6,057,567
Change in net unrealized appreciation/
depreciation during the period - 2,285,395 (6,230,165) 9,177,833
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,078,782 2,325,656 3,769,766 21,430,451
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 3,142,440 1,516,213 1,482,020 1,776,268
Contract terminations and benefits (13,361,824) (5,778,831) (11,730,999) (11,768,764)
Net transfers among investment options (189,190) (465,189) (5,798,175) 8,204,398
-----------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (10,408,574) (4,727,807) (16,047,154) (1,788,098)
-----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (9,329,792) (2,402,151) (12,277,388) 19,642,353
Net assets, beginning of year 30,898,154 33,584,367 87,486,662 61,671,904
-----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 21,568,362 $ 31,182,216 $75,209,274 $ 81,314,257
=================================================================
UNIT TRANSACTIONS
Contributions 231,459 89,689 34,710 26,333
Terminations and benefits (971,025) (351,686) (277,014) (165,572)
Net transfers (14,491) (10,784) (147,514) 111,228
-----------------------------------------------------------------
Net increase (decrease) in units (754,057) (272,781) (389,818) (28,011)
=================================================================
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
---------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 423,774 $ 341,135 $ 2,113,699
Net realized gain (loss) on sales of investments 2,344,821 (28,358) 1,919,584
Change in net unrealized appreciation/
depreciation during the period 3,544,152 (622,488) (1,131,984)
---------------------------------------------
Net increase (decrease) in net assets resulting
from operations 6,312,747 (309,711) 2,901,299
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 355,987 486,069 425,103
Contract terminations and benefits (3,075,353) (1,664,507) (6,239,455)
Net transfers among investment options 987,114 2,559,041 (1,500,014)
---------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (1,732,252) 1,380,603 (7,314,366)
---------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 4,580,495 1,070,892 (4,413,067)
Net assets, beginning of year 16,468,075 9,267,343 34,760,384
---------------------------------------------
NET ASSETS, END OF YEAR $ 21,048,570 $ 10,338,235 $ 30,347,317
=============================================
UNIT TRANSACTIONS
Contributions 13,604 25,872 14,316
Terminations and benefits (112,456) (89,393) (207,128)
Net transfers 36,266 132,996 (51,582)
---------------------------------------------
Net increase (decrease) in units (62,586) 69,475 (244,394)
=============================================
</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, 1999
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 96,779 $ 669,144 $ 1,713,543 $ 163,271
Net realized gain (loss) on sales of investments 5,682,354 568,971 5,725,497 614,855
Change in net unrealized appreciation/
depreciation during the period 3,034,656 221,953 6,075,744 (481,243)
--------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 8,813,789 1,460,068 13,514,784 296,883
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,869,443 383,228 1,562,188 706,335
Contract terminations and benefits (5,905,547) (1,306,422) (9,489,419) (1,009,656)
Net transfers among investment options 578,145 (2,335,710) 1,711,646 790,939
--------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (3,457,959) (3,258,904) (6,215,585) 487,618
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 5,355,830 (1,798,836) 7,299,199 784,501
Net assets, beginning of year 46,445,471 12,731,815 63,684,975 10,902,176
--------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 51,801,301 $ 10,932,979 $ 70,984,174 $ 11,686,677
====================================================================
UNIT TRANSACTIONS
Contributions 61,063 18,189 58,408 47,356
Terminations and benefits (186,967) (61,301) (349,089) (68,546)
Net transfers 26,251 (110,059) 59,242 52,447
--------------------------------------------------------------------
Net increase (decrease) in units (99,653) (153,171) (231,439) 31,257
====================================================================
<CAPTION>
MID CAP
GROWTH & SERVICE
BALANCED INCOME CLASS
DIVISION DIVISION DIVISION (1) TOTAL
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 181,241 $ 29,733 $ 4,554 $ 18,858,808
Net realized gain (loss) on sales of investments 298,900 1,940,706 2,574 29,319,561
Change in net unrealized appreciation/
depreciation during the period (304,430) (917,219) 152,482 14,804,686
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 175,711 1,053,220 159,610 62,983,055
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 555,881 1,001,553 3,500 15,266,228
Contract terminations and benefits (640,873) (1,331,220) (536) (73,303,406)
Net transfers among investment options 1,905,097 2,369,960 711,678 9,529,740
-----------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,820,105 2,040,293 714,642 (48,507,438)
-----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,995,816 3,093,513 874,252 14,475,617
Net assets, beginning of year 5,364,379 12,654,886 - 425,920,591
-----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 7,360,195 $ 15,748,399 $ 874,252 $440,396,208
=================================================================
UNIT TRANSACTIONS
Contributions 41,314 62,203 343
Terminations and benefits (47,835) (82,253) (47)
Net transfers 141,101 146,320 67,266
-----------------------------------------------------
Net increase (decrease) in units 134,580 126,270 67,562
=====================================================
</TABLE>
(1)For the period June 15, 1999 (commencement of operations) to
December 31, 1999
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 888,782 $ 3,728,044 $ 4,069,072 $ 5,745,699
Net realized gain on sales of investments - (801,344) 4,379,481 3,135,995
Change in net unrealized appreciation/
depreciation during the period 11,413 (4,872,337) (591,885) 7,969,381
----------------------------------------------------------------
Net increase in net assets resulting
from operations 900,195 (1,945,637) 7,856,668 16,851,075
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 7,683,172 8,856,054 7,648,252 3,421,968
Contract terminations and benefits (2,691,835) (2,997,649) (5,623,280) (2,755,249)
Net transfers among investment options 6,847,731 (6,026,119) (4,949,952) (1,119,971)
----------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 11,839,068 (167,714) (2,924,980) (453,252)
----------------------------------------------------------------
INCREASE IN NET ASSETS 12,739,263 (2,113,351) 4,931,688 16,397,823
Net assets, beginning of year 18,158,891 35,697,718 82,554,974 45,274,081
----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 30,898,154 $ 33,584,367 $ 87,486,662 $ 61,671,904
================================================================
UNIT TRANSACTIONS
Contributions 584,624 525,737 201,453 69,040
Terminations and benefits (202,925) (181,235) (149,003) (55,771)
Net transfers 513,031 (351,400) (136,924) (23,611)
----------------------------------------------------------------
Net increase (decrease) in units 894,730 (6,898) (84,474) (10,342)
================================================================
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
----------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 930,750 $ 273,063 $ 3,675,533
Net realized gain on sales of investments 978,292 259,705 1,045,088
Change in net unrealized appreciation/
depreciation during the period (305,002) 37,093 (406,409)
---------------------------------------------
Net increase in net assets resulting
from operations 1,604,040 569,861 4,314,212
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,093,541 1,092,650 1,930,458
Contract terminations and benefits (1,055,210) (743,383) (3,832,539)
Net transfers among investment options (430,261) 1,199,932 (228,711)
---------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (391,930) 1,549,199 (2,130,792)
---------------------------------------------
INCREASE IN NET ASSETS 1,212,110 2,119,060 2,183,420
Net assets, beginning of year 15,255,965 7,148,283 32,576,964
---------------------------------------------
NET ASSETS, END OF YEAR $ 16,468,075 $ 9,267,343 $ 34,760,384
=============================================
UNIT TRANSACTIONS
Contributions 46,142 66,699 71,404
Terminations and benefits (45,504) (40,466) (141,174)
Net transfers (21,246) 57,607 (6,639)
---------------------------------------------
Net increase (decrease) in units (20,608) 83,840 (76,409)
=============================================
</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, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 781,829 $ 802,579 $ 2,072,832 $ 96,869
Net realized gain on sales of investments 3,619,609 352,411 2,624,759 225,476
Change in net unrealized appreciation/
depreciation during the period 4,829,291 170,991 8,987,068 1,285,059
-----------------------------------------------------------------------
Net increase in net assets resulting
from operations 9,230,729 1,325,981 13,684,659 1,607,404
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 5,157,740 2,886,782 6,518,733 3,346,797
Contract terminations and benefits (1,781,004) (281,616) (2,443,405) (233,462)
Net transfers among investment options 603,805 948,447 (2,118,664) 2,333,223
-----------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 3,980,541 3,553,613 1,956,664 5,446,558
-----------------------------------------------------------------------
INCREASE IN NET ASSETS 13,211,270 4,879,594 15,641,323 7,053,962
Net assets, beginning of year 33,234,201 7,852,221 48,043,652 3,848,214
-----------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 46,445,471 $ 12,731,815 $ 63,684,975 $ 10,902,176
=======================================================================
UNIT TRANSACTIONS
Contributions 204,765 162,656 305,274 257,477
Terminations and benefits (71,117) (15,048) (114,077) (17,672)
Net transfers 17,967 30,614 (107,575) 178,875
-----------------------------------------------------------------------
Net increase (decrease) in units 151,615 178,222 83,622 418,680
=======================================================================
<CAPTION>
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
---------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 95,616 $ (94,422) $ 23,066,246
Net realized gain on sales of investments 138,125 536,772 16,494,369
Change in net unrealized appreciation/
depreciation during the period 283,572 1,666,976 19,065,211
---------------------------------------------
Net increase in net assets resulting
from operations 517,313 2,109,326 58,625,826
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,434,916 3,045,089 54,116,152
Contract terminations and benefits (145,600) (309,544) (24,893,776)
Net transfers among investment options 1,567,149 3,885,871 2,512,480
---------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 2,856,465 6,621,416 31,734,856
---------------------------------------------
INCREASE IN NET ASSETS 3,373,778 8,730,742 90,360,682
Net assets, beginning of year 1,990,601 3,924,144 335,559,909
---------------------------------------------
NET ASSETS, END OF YEAR $ 5,364,379 $ 12,654,886 $ 425,920,591
=============================================
UNIT TRANSACTIONS
Contributions 125,126 228,119
Terminations and benefits (18,419) (22,336)
Net transfers 125,073 284,554
-----------------------------
Net increase (decrease) in units 231,780 490,337
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1999
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 ("Integrity") which, prior to March 3, 2000, was an indirect wholly
owned subsidiary of ARM Financial Group, Inc. ("ARM"). Effective March 3, 2000,
Integrity and National Integrity were acquired by the Western and Southern Life
Insurance Company ("W&S"). (See Note 4 of Notes to Financial Statements.)
Contract holders may allocate or transfer their account values to one or more of
the Separate Account's investment divisions or, for certain contract holders, to
a guaranteed interest division provided by 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 fourteen investment divisions available. The
investment objective of each division and its corresponding portfolio are the
same. Set forth below is a summary of the investment objectives of the operative
portfolios of the Fidelity VIP Funds at December 31, 1999 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 while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
HIGH INCOME PORTFOLIO seeks a high current income while also considering growth
of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks and convertible securities,
with an emphasis on lower-quality debt securities.
EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities compromising S&P 500. It
normally invests at least 65% of the Portfolio's assets in income-producing
equity securities.
GROWTH PORTFOLIO seeks capital appreciation. It invests in companies that are
believed to have above-average growth potential. These companies tend to have
higher than average price/earnings (P/E) ratios. Companies with strong growth
potential often have new products, technologies, distribution channels or other
opportunities for a strong industry or market position. The stocks of these
companies are often called "growth" stocks.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as is
consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over the
long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to the
total return (i.e., the combination of capital changes and income) of common
stocks publicly traded in the United States. In seeking this objective, the
Portfolio attempts to duplicate the composition and total return of the Standard
& Poor's 500 Composite Stock Price Index while keeping transaction costs and
other expenses low.
11
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks, bonds
and short-term money market instruments. The Portfolio has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The approximate neutral mix for stocks, bonds and short-term
instruments is 70%, 25% and 5%, respectively.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation by investing assets
primarily in common stocks. The Portfolio invests assets in securities of
companies whose value may not fully be recognized by the public. The types of
companies in which the Portfolio may invest include companies experiencing
positive fundamental change such as a new management team or product launch, a
significant cost-cutting initiative, a merger or acquisition, or a reduction in
industry capacity that should lead to improved pricing; companies whose earning
potential has increased or is expected to increase more than generally
perceived; companies that have enjoyed recent market popularity but which appear
to have temporarily fallen out of favor for reasons that are considered
non-recurring or short-term; and companies that are undervalued in relation to
securities of other companies in the same industry.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks. The Portfolio has the ability to purchase other
types of securities, including bonds which may be lower-quality debt securities.
BALANCED PORTFOLIO seeks both income and growth of capital by investing
approximately 65% of assets in stocks and other equity securities, and the
reminder in bonds and other debt securities including lower-quality debt
securities, when its outlook is neutral.
GROWTH & INCOME PORTFOLIO seeks high total return through a combination of
current income and capital appreciation by investing mainly in common stocks
with a focus on those that pay current dividends and show potential for capital
appreciation. Investments may also include bonds, including lower-quality debt
securities, as well as stocks that are not currently paying dividends, but offer
prospects for future income or capital appreciation.
12
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MID CAP SERVICE CLASS PORTFOLIO invest primarily in common stocks with at least
65% of the Portfolio's total assets in securities of companies with medium
market capitalizations. Medium market capitalization companies are those whose
market capitalization is similar to the similar to the capitalization of
companies in the S&P Mid Cap 400 at the time of the investment. Companies whose
capitalization no longer meets this definition after purchase continue to be
considered to have a medium market capitalization for purposes of the 65%
policy.
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
accounting principles generally accepted in the United States for unit
investment trusts.
INVESTMENTS
Investments in shares of the Fidelity VIP Funds are valued at the net asset
values of the respective portfolios, which approximates fair value. The
difference between cost and fair value is reflected as unrealized appreciation
and depreciation of investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Fidelity VIP Fund
portfolios are reinvested in the respective portfolios and are reflected in the
unit value of the divisions of the Separate Account.
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 the
provisions of the policies, National Integrity has the right to charge the
Separate Account for federal income tax attributable to the Separate Account. No
charge is currently being made against the Separate Account for such tax since,
under current tax law, National Integrity pays no tax on investment income and
capital gains reflected in variable life insurance policy reserves. However,
National Integrity retains the right to charge for any federal income tax
incurred which is attributable to the Separate Account if the law is changed.
Charges for state and local taxes, if any, attributable to the Separate Account
may also be made.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
14
<PAGE>
Separate Account I
of
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 1999 and the cost of shares held at December 31, 1999 for
each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $65,716,746 $75,086,003 $ 21,550,910
High Income 32,534,798 34,398,669 30,557,049
Equity-Income 11,144,145 24,175,502 64,174,115
Growth 21,150,065 16,772,352 55,594,970
Overseas 15,412,659 16,722,969 16,733,003
Investment Grade Bond 7,699,189 5,980,542 10,573,452
Asset Manager 4,193,855 9,398,189 26,192,004
Index 500 10,801,872 14,165,038 38,218,827
Asset Manager: Growth 1,861,925 4,454,586 9,417,604
Contrafund 7,914,026 12,424,816 45,057,153
Growth Opportunities 4,310,459 3,658,059 10,654,102
Balanced 5,840,775 3,837,725 7,289,882
Growth & Income 12,207,073 10,139,303 14,883,691
Mid Cap Service Class 757,537 38,670 721,441
--------------------
$351,618,203
====================
</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>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
4. EVENTS RELATING TO NATIONAL INTEGRITY, INTEGRITY AND ARM
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for
the sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and its insurance subsidiaries, including
National Integrity, were significantly lowered several times by four major
rating agencies, materially and adversely affecting National Integrity's
ability to market retail products and adversely affecting the persistency of
its existing business during the remainder of 1999.
On December 17, 1999 ARM entered into a Purchase Agreement (the "Purchase
Agreement") with W&S whereby W&S agreed to acquire Integrity and National
Integrity. On March 3, 2000, W&S and ARM closed the transaction contemplated by
the Purchase Agreement. The Company has been assigned a AAA (Extremely Strong)
rating for financial strength by Standard & Poor's, AAA (Highest) for claims
paying ability from Duff & Phelps' and A (Excellent) for financial strength from
A.M. Best. It is expected that Moody's will assign similar ratings to National
Integrity.
W&S is part of the Western-Southern Enterprise, a financial services group which
also includes Western-Southern Life Assurance Company, Columbus Life Insurance
Company, Touchstone Advisors, Inc., Fort Washington Investment Advisors, Inc.,
Todd Investment Advisors, Inc., Countrywide Financial Services, Capital Analysts
Incorporated and Eagle Realty Group, Inc. Assets owned or under management by
the group exceed $20 billion. Western and Southern is rated A++ (Superior) by
A.M. Best, AAA (Highest) by Duff & Phelps, AAA (Extremely Strong) by Standard &
Poor's, and Aa2 (Excellent) by Moody's.
16
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Condensed Financial Information for the Portfolios
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT I:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statements of Changes in Net Assets for the Years Ended December 31,
1999 and 1998
Notes to Financial Statements
NATIONAL INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1999 and 1998
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1999 and 1998
Statements of Changes in Capital and Surplus (Statutory Basis) for
the Years Ended December 31, 1999 and 1998
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1999 and 1998
Notes to Financial Statements (Statutory Basis)
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of 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 Touchstone Securities, Inc. ("Touchstone
Securities").
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's Form N-4 registration statement (File No.
33-51126), 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.
1
<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.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-56658) filed on May
6, 1998.
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 6, 1998.
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.
2
<PAGE>
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 DEPOSITOR
<S> <C>
John F. Barrett Director
400 Broadway, Cincinnati, Ohio 45202
Dennis L. Carr Director, Executive Vice President and Chief Actuary
515 W. Market, Louisville, Kentucky 40202
Daniel J. Downing Director
15 Matthews Street, Goshen, New York 10924
Eric C. Fast Director
100 First Stamford Place
Stamford, Connecticut 06092
John R. Lindholm Director and President
515 W. Market, Louisville, Kentucky 40202
Cameron F. MacRae Director
125 W. 55th Street, New York, New York 10019
Robert L. Walker Director
400 Broadway, Cincinnati, Ohio 45202
William J. Williams Director
400 Broadway, Cincinnati, Ohio 45202
Donald J. Wuebbling Director
400 Broadway, Cincinnati, Ohio 45202
<CAPTION>
SELECTED OFFICERS
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR
John R. Lindholm* Director and President
Dennis L. Carr* Director, Executive Vice President & Chief Actuary
James G. Kaiser Executive Vice President
333 Ludlow Street
Stamford, CT 06902
Don W. Cummings* Senior Vice President & Chief Financial Officer
William F. Ledwin Senior Vice President & Chief Investment Officer
400 Broadway, Cincinnati, Ohio 45202
William H. Guth* Senior Vice President
Edward J. Haines* Senior Vice President
Kevin L. Howard* Senior Vice President
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
William J. Hrabik* Senior Vice President
Jill Keinsley* Senior Vice President
Scott Vincini Senior Vice President, National Sales Manager
333 Ludlow Street
Stamford, CT 06902
James J. Vance Vice President & Treasurer
400 Broadway, Cincinnati, Ohio 45202
Joseph F. Vap* Director, Financial Operations
Edward J. Babbitt Secretary
400 Broadway, Cincinnati, Ohio 45202
</TABLE>
* Principal Business Address: 515 West Market Street, Louisville, KY 40202
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH NATIONAL INTEGRITY
OR REGISTRANT
The Western and Southern Life Insurance Company ("WSLIC"); Ohio corporation
Western-Southern Life Assurance Company ("WSLAC"); Ohio corporation;
100% owned by WSLIC
Courtyard Nursing Care, Inc.; Ohio corporation; 100% owned by
WSLAC; ownership and operation of real estate.
IFS Financial Services, Inc. ("IFS"); Ohio corporation; 100%
owned by WSLAC; development and marketing of financial
products for distribution through financial institutions.
IFS Systems, Inc.; Delaware corporation; 100%
owned by IFS; development, marketing and
support of software systems.
IFS Insurance Agency, Inc.; Ohio corporation;
99% owned by IFS, 1% owned by William F.
Ledwin; general insurance agency.
Touchstone Securities, Inc.; Nebraska corporation; 100%
owned by IFS; securities broker-dealer.
Touchstone Advisors, Inc.; Ohio corporation; 100% owned
by IFS; registered investment adviser.
IFS Agency Services, Inc.; Pennsylvania
corporation; 100% owned by IFS; general
insurance agency.
IFS Agency, Inc.; Texas corporation; 100% owned
by an individual; general insurance agency.
IFS General Agency, Inc.; Pennsylvania
corporation; 100% owned by William F.
Ledwin; general insurance agency.
Integrity Life Insurance Company; Ohio corporation; 100% owned by WSLIC.
National Integrity Life Insurance Company; New York
corporation; 100% owned by Integrity Life
Insurance Company.
4
<PAGE>
Seasons Congregate Living, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership and operation of real estate.
Latitudes at the Moors, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
WestAd Inc.; Ohio corporation; 100% owned by WSLIC, general advertising,
book-selling and publishing.
Fort Washington Investment Advisors, Inc.; Ohio corporation; 100%
owned by WSLIC; registered investment adviser.
Todd Investment Advisors, Inc.; Kentucky corporation; 100%
owned by Fort Washington Investment Advisors, Inc.;
registered investment adviser.
Countrywide Financial Services, Inc.; Ohio corporation; 100%
owned by Fort Washington Investment Advisors, Inc.
Countrywide Investments, Inc.; Ohio corporation; 100%
owned by Countrywide Financial Services,
Inc.; registered investment advisor and
broker dealer.
CW Fund Distributors, Inc.; Ohio corporation;
100% owned by Countrywide Finacial Services,
Inc.; registered broker dealer
Countrywide Fund Services, Inc.; Ohio corporation; 100%
owned by Countrywide Financial Services,
Inc.
Columbus Life Insurance Company; Ohio corporation; 100% owned by WSLIC;
insurance.
Colmain Properties, Inc.; Ohio corporation; 100% owned by
Columbus Life Insurance Company; acquiring, owning,
managing, leasing, selling real estate.
Colpick, Inc.; Ohio corporation; 100% owned by
Colmain Properties, Inc.; acquiring, owning,
managing, leasing and selling real estate.
CAI Holding Company, Inc.; Ohio corporation; 100% owned by
Columbus Life Insurance Company; holding company.
Capital Analysts Incorporated; Delaware
corporation; 100% owned by CAI Holding
Company; securities broker-dealer and
registered investment advisor.
Capital Analysts Agency, Inc.; Ohio corporation;
99% owned by Capital Analysts
Incorporated, 1% owned by William F.
Ledwin; general insurance agency.
Capital Analysts Agency, Inc.; Texas corporation;
100% owned by an individual who is a
resident of Texas, but under contractual
association with Capital Analysts
Incorporated; general insurance agency.
Capital Analysts Insurance Agency, Inc.;
Massachusetts corporation; 100% owned by
Capital Analysts Incorporated; general
insurance agency.
CLIC Company I; Delaware corporation; 100% owned by Columbus
Life Insurance Company; holding company.
CLIC Company II; Delaware corporation; 100% owned by
Columbus Life Insurance Company; holding company.
Eagle Properties, Inc.; Ohio corporation; 100% owned by WSLIC; ownership,
development and management
5
<PAGE>
of real estate.
Seasons Management Company; Ohio corporation; 100 % owned by
Eagle Properties, Inc.; management of real estate.
Waslic Company II; Delaware corporation; 100% owned by WSLIC; holding
company.
WestTax, Inc.; Ohio corporation, 100% owned by WSLIC; preparation and
electronic filing of tax returns.
Florida Outlet Marts, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
AM Concepts Inc.; Delaware corporation, 100% owned by WSLIC;
venture capital investment in companies engaged in alternative
marketing of financial products.
Western-Southern Agency, Inc.; Ohio corporation; 99% owned by WSLIC; 1%
owned by William F. Ledwin; general insurance agency.
Western-Southern Agency Services, Inc.; Pennsylvania corporation; 100%
owned by WSLIC; general insurance agency.
W-S Agency of Texas, Inc.; Texas corporation; 100% owned by an
individual; general insurance agency.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 1999 there were 5,678 contract owners of Separate
Account I of National Integrity.
ITEM 28. INDEMNIFICATION
BY-LAWS OF NATIONAL INTEGRITY. National Integrity's By-Laws provide, in Article
VII, as follows:
7.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS. To the extent permitted by the law of the State of New York and
subject to all applicable requirements thereof:
(a) any person made or threatened to be made a party to any action
or proceeding, whether civil or criminal, by reason of the fact that
he, his testator or intestate, is or was a director, officer,
employee or incorporator of the Company shall be indemnified by the
Company;
(b) any person made or threatened to be made a party to any action
or proceeding, whether civil or criminal, by reason of the fact that
he, his testator or intestate serves or served any other
organization in any capacity at the request of the Company may be
indemnified by the Company; and
(c) the related expenses of any such person in any other of said
categories may be advanced by the Company.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Touchstone Securities is the principal underwriter for Separate
Account I. Touchstone Securities also serves as an underwriter for the contracts
issued under National Integrity Life Insurance Company's Separate Accounts II
and VUL; Integrity Life Insurance Company's Separate Accounts I, II, VUL and
Ten; contracts issued under Western-Southern Life Assurance Company's Separate
Accounts 1 and 2; The Legends Fund, Inc.; and for the shares of several series
(Funds) of Touchstone Series Trust (formerly Select Advisors Trust A),
Touchstone Strategic Trust, Touchstone Investment Trust and Touchstone Tax-Free
Trust; each of which is affiliated with the Depositor. National Integrity is the
Depositor of Separate Accounts I, II, and VUL.
(b) The names and business addresses of the officers and directors
of, and their positions with, Touchstone Securities, are as follows:
6
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices With Touchstone Securities
- ----------------------------------- -----------------------------------------------
<S> <C>
James N. Clark* Director
Jill T. McGruder Director, Chief Executive Officer and President
311 Pike Street
Cincinnati, Ohio 45202
Edward S. Heenan* Director and Controller
William F. Ledwin* Director
Donald J. Wuebbling* Director
Richard K. Taulbee* Vice President
Robert F. Morand* Secretary
Patricia Wilson Chief Compliance Officer
311 Pike Street
Cincinnati, Ohio 45202
</TABLE>
*Principal Business Address: 400 Broadway, Cincinnati, Ohio 45202
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
are maintained by National Integrity at 515 West Market Street, Louisville,
Kentucky 40202 or 15 Matthews Street, Suite 200, Goshen, New York 10924.
ITEM 31. MANAGEMENT SERVICES
There are currently no management-related services provided to the Registrant.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration
statement as frequently as is necessary to ensure that
the audited financial statements in the registration
statement are never more than 16 months old for so long
as payments under the variable annuity contracts may be
accepted;
(b) to include either (1) as part of any application to
purchase a contract offered by the prospectus, a space
that an applicant can check to request a Statement of
Additional Information, or (2) a postcard or similar
written communication affixed to or included in the
prospectus that the applicant can remove to send for a
Statement of Additional Information; and
(c) to deliver any Statement of Additional Information and
any financial statements required to be made available
under this Form promptly upon written or oral request.
National Integrity represents that aggregate charges under variable annuity
contracts described in this Registration Statement are reasonable in relation to
the services rendered, the expenses expected to be incurred, and the risks
assumed by National Integrity.
7
<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 the 26th day
of April, 2000.
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
8
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Depositor has duly caused this amendment to the Registration Statement
to be signed on its behalf, in the City of Louisville and State of Kentucky on
this 26th day of April, 2000.
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: 04/26/2000
PRINCIPAL FINANCIAL OFFICER: /s/ Don W. Cummings
Don W. Cummings, Senior Vice President and
Chief Financial Officer
Date: 04/26/2000
PRINCIPAL ACCOUNTING OFFICER: /s/ Joseph F. Vap
Joseph F. Vap, Director, Financial Operations
Date: 04/26/2000
DIRECTORS:
/s/ John F. Barrett _____________________
John F. Barrett Cameron F. MacRae
Date: 04/26/2000 Date: 04/26/2000
/s/ Dennis L. Carr /s/ Robert L. Walker
Dennis L. Carr Robert L. Walker
Date: 04/26/2000 Date: 04/26/2000
/s/ Daniel J. Downing /s/ William J. Williams
Daniel J. Downing William J. Williams
Date: 04/26/2000 Date: 04/26/2000
__________________________ /s/ Donald J. Wuebbling
Eric C. Fast Donald J. Wuebbling
Date: 04/26/2000 Date: 04/26/2000
/s/ John R. Lindholm
John R. Lindholm
Date: 04/26/2000
9
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER
3.(b) Form of Variable Contract Principal Underwriter Agreement with Touchstone
Securities, Inc.
10. Consents of Ernst & Young LLP.
10
<PAGE>
VARIABLE CONTRACT PRINCIPAL UNDERWRITER AGREEMENT
THIS AGREEMENT made as of the 3RD day of MARCH , 2000, by and between
National Integrity Life Insurance Company, a New York stock life insurance
company (the "Company") and Touchstone Securities, Inc., a Nebraska corporation
and a registered broker-dealer (the "Distributor").
WITNESSETH:
WHEREAS, the Distributor is registered as a broker-dealer with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934 (the "1934 Act") and is a member of the National Association of
Securities Dealers, Inc. (the "NASD");
WHEREAS, the Company and its Separate Accounts listed on Exhibit A as may
be amended from time to time (the "Accounts"), each a separate investment
account established by the Company pursuant to Section 4240 of the New York
Insurance Law and A REGISTERED INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY
ACT OF 1940 (THE "1940 ACT") OF THE TYPE REFERRED TO AS A UNIT INVESTMENT TRUST,
propose to offer for sale certain variable annuity contracts (the "Contracts")
which may be deemed to be securities under the Securities Act of 1933 (the "1933
Act");
WHEREAS, each Account will invest solely in specified securities of the
underlying mutual funds offered within the Contracts;
WHEREAS, the parties desire to have the Distributor act as principal
underwriter for each Account and assume such supervisory responsibility as is
required by federal and state securities law and applicable requirements of the
NASD for the securities activities of any "person associated" (as that term is
defined in Section 3(a)(18) of the 1934 Act) with the Distributor, including
Company personnel engaged directly or indirectly in the Company's variable
annuity insurance operations (the "Associated Persons");
WHEREAS, the parties desire to have the Company perform certain services in
connection with the sale of the Contracts;
NOW, THEREFORE, in consideration of the covenants and mutual promises
herein contained, the Distributor and the Company agree as follows:
1. The Distributor will act as the principal underwriter of the
Contracts in each state or other jurisdiction where the Contracts may legally be
sold. The Company and the Distributor will from time to time enter into separate
written agreements ("Selling Agreements") on such terms and conditions as the
parties may determine not inconsistent with this Agreement, with one or more
individuals or organizations which agree to participate in the distribution of
the Contracts. Such individuals or organizations ("Dealers") shall be registered
as broker-dealers under the 1934 Act and members of the NASD. Each such Dealer
and its representatives
<PAGE>
soliciting applications for Contracts shall be duly and appropriately licensed
for the sale of the Contracts under the insurance law and any applicable
securities law of each state or other jurisdiction in which the Dealer or
representative is required to be so licensed. The Selling Agreements shall be in
such form as approved by the Company.
2. The Distributor will assume such supervisory responsibility for the
securities activities of, and for securities law compliance by, its Associated
Persons, as is required by applicable federal and state law and NASD
requirements, including the NASD Rules of Fair Practice. The Distributor will
have such responsibility as is contemplated by Section 15(b)(4)(E) of the 1934
Act in connection with the training, supervision and control of its Associated
Persons. The parties understand that certain sales literature and materials
intended for use in connection with the sale of Contracts may require filings
with and/or approvals from the SEC, NASD and other regulatory authorities. In
advance of using any such literature or materials, the Distributor will obtain
the approval of the Company and will make any such required regulatory filing or
seek any such required approval. The Distributor will provide appropriate
training materials for its Associated Persons, use its best efforts to prepare
them to complete satisfactorily any and all applicable NASD and state
qualification exams, register the Associated Persons as its registered
representatives before they engage in securities activities, and supervise them
in the performance of such activities. It is understood and agreed that the
office of the Distributor at 311 Pike Street, Cincinnati, Ohio 45202 will be
designated the Office of Supervisory Jurisdiction of the Distributor and will
perform such functions as are agreed to by the Company and the Distributor.
3. Distributor shall ensure that each Dealer supervises its registered
representatives. Dealers shall assume any legal responsibilities of Company for
the acts, omissions or defalcations of its registered representatives insofar as
they relate to the sale of the Contracts. Applications for Contracts solicited
by such Dealers through its registered representatives shall be transmitted
directly to the Company, and if received by Distributor, shall be forwarded to
Company. All payments under the Contracts received by the Distributor shall be
remitted promptly to Company.
4. The Company will bear the cost of all services and expenses,
including legal services and expenses and registration, filing and other fees,
in connection with (a) registering and qualifying the Accounts, the Contracts,
and (b) licensing the Associated Persons with federal and state regulatory
authorities and the NASD when applicable, and (c) printing and distributing all
of the Accounts' registration statements, prospectuses and statements of
additional information for the Contracts (including amendments), Contracts,
Account notices and periodic reports, proxy solicitation material, and Account
sales literature and advertising.
5. The Company will, in connection with the sale of the Contracts, pay
all amounts (including sales commissions) due to Dealers who sell Contracts
under Selling Agreements, in amounts specified in the Selling Agreements and
agreed to by the Company.
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<PAGE>
6. The Distributor will be responsible for compliance with respect to
the maintenance and preservation in accordance with all applicable federal and
state securities laws and regulations, including Rules 17a-3 and 17a-4 under the
1934 Act, of all books and records required to be maintained in connection with
the offer and sale of the Contracts being distributed pursuant to this
Agreement. The Company shall maintain and preserve such books and records on
behalf of and as the agent for the Distributor in conformity with the
requirements of Rules 17a-3 and 17a-4 under the 1934 Act. Such books and records
shall be the property of the Distributor and shall at all times be subject to
inspection by the NASD and the SEC in accordance with Section 17(a) of the 1934
Act. The Company, acting as agent for the Distributor upon or prior to
completion of each transaction for which a confirmation is legally required,
will send a written confirmation for each such transaction reflecting the facts
of the transaction.
7. The Distributor will execute such papers and do such acts and
things as shall from time to time be reasonably requested by the Company for the
purpose of (a) maintaining the registration statements relating to the Contracts
under the 1933 Act and the 1940 Act, and (b) qualifying and maintaining
qualification of the Contracts for sale under the applicable laws of any state.
It will, however, remain the responsibility of the Company to obtain and
maintain all necessary approvals and registration of the Contracts with all
relevant regulatory authorities.
8. The Distributor is not authorized to give any information, or to
make any representations concerning the Contracts, Accounts or the Company other
than those contained in the current registration statements, prospectuses or
statements of additional information (as amended from time to time) for the
Contracts filed with the SEC or such sales literature and materials as may be
authorized by the Company.
9. The Company guarantees the performance of all of the Distributor's
obligations, imposed by any of Section 27(d) or 27(f) of the 1940 Act or
paragraph (b) of Rule 27d-2 adopted by the SEC under the 1940 Act, to the extent
applicable, to make refunds required of the principal underwriter of the
Contracts issued in connection with the Accounts. If, and to the extent that,
after notifying the Company of its intention to do so, the Distributor makes any
refund of any charges required under Section 27(d) or Section 27(f) of the 1940
Act or Rule 27d-2(b) thereunder, the Company will indemnify the Distributor for,
and hold it harmless against, the payment of such amount.
10. Each party hereto shall advise the other promptly of (a) any
action of the SEC or any authorities of any state or territory, of which it has
knowledge, affecting registration or qualifications of the Accounts or the
Contracts, or the right to offer the Contracts for sale, and (b) the happening
of any event which makes untrue any statement, or which requires the making of
any change in the registration statements or prospectuses or statements of
additional information in order to make the statements therein not misleading.
11. There shall be no compensation for either the services provided by
the Distributor in connection with this Agreement.
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<PAGE>
12. The obligations of the Distributor under this Agreement relate
solely to its status as the principal underwriter of the Contracts and nothing
in this Agreement shall be construed as imposing or giving rise to any duty or
liability of the Distributor with respect to the sale, registration or
qualification of the Underlying Securities.
13. The services of the Distributor and the Company under this
Agreement are not deemed to be exclusive and the Distributor and the Company
shall be free to render similar services to others, including, without implied
limitation, such other separate investment accounts as are now or hereafter
established by the Company, the Distributor or any affiliate of the Distributor.
14. This Agreement shall continue in full force and effect until
terminated. This Agreement may be terminated at any time without penalty by 60
days written notice by either party.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
By:
--------------------------------------
Title:
-----------------------------------
TOUCHSTONE SECURITIES, INC.
By:
--------------------------------------
Title:
-----------------------------------
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<PAGE>
EXHIBIT A
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
SEPARATE ACCOUNTS
Separate Account I of National Integrity Life Insurance Company
Separate Account II of National Integrity Life Insurance Company
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<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post Effective Amendment No. 13 to the Registration Statement (Form N-4 No.
33-56658) and Amendment No. 22 to the Registration Statement (Form N-4 No.
811-4846) and related Prospectuses of Separate Account I of National Integrity
Life Insurance Company and to the use of our reports (a) dated March 31, 2000,
with respect to the statutory basis financial statements of National Integrity
Life Insurance Company, and (b) dated April 12, 2000, 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 1999 filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 2000
