<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>
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
