<PAGE>
As filed with the Securities and Exchange Commission
on May 1, 1996.
Registration No. 33-51126
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. 5 [X]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 [X]
---
(Check appropriate box or boxes)
Separate Account II of National Integrity Life Insurance Company
(Exact Name of Registrant)
National Integrity Life Insurance Company
(Name of Depositor)
239 S. Fifth Street, 12th Floor Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
----------------
John McGeeney
National Integrity Life Insurance Company
239 S. Fifth Street, 12th Floor
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[_] on (date) pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
The registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year was
filed on February 29, 1996.
<PAGE>
CROSS REFERENCE SHEET
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information required By Form N-4
PART A: INFORMATION REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Prospectus
<S> <C> <C>
1. Cover Page Cover Page
2. Definitions Part 1 - Summary
3. Synopsis Part 1 - Summary; Table of Annual Fees and
Expenses; Examples
4. Condensed Financial Information Part 1 - Financial Information
5. General Description of Registrant, Part 2 - Integrity and the Separate Account;
Annuity Contracts Part 3 - Your Investment Options
6. Deductions Part 4 - Deductions and Charges
7. General Description of Variable Part 5 - Terms of Your Pinnacle Variable
Annuity contracts Annuity Contract
8. Annuity Period Part 5 - Terms of Your Pinnacle Variable
Annuity Contract
9. Death Benefit Part 5 - Terms of Your Pinnacle Variable
Annuity Contract
10. Purchases and Contract Value Part 5 - Terms of Your Pinnacle Variable
Annuity Contract
11. Redemptions Part 5 - Terms of Your Pinnacle Variable
Annuity Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement Table of Contents
of Additional Information
</TABLE>
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Statement of Additional
Information
<S> <C> <C>
15. Cover Page Cover Page
16. Table of Contents Cover Page
17. General Information and History Part 1 - Integrity and Custodian
18. Services Part 1 - Integrity and Custodian
19. Purchase of Securities Being Offered Part 2 - Distribution of the Contracts
20. Underwriters Part 2 - Distribution of the Contract
21. Calculation of Performance Data Part 3 - Performance Information
22. Annuity Payments Not Applicable
23. Financial Statements Part 5 - Financial Statements
</TABLE>
<PAGE>
Prospectus
==========
PINNACLE FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by NATIONAL INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
National Integrity Life Insurance Company, an indirect wholly owned subsidiary
of ARM Financial Group, Inc. The individual contracts and group certificates
(contracts) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Contributions under the contracts may be allocated to the various
investment divisions of our Separate Account II (Variable Account Options, or
individually, Option) or to fixed rate Guaranteed Rate Options (Guaranteed Rate
Options), or both.
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of The Legends Fund, Inc. (the Fund), and the values
allocated to the Options reflect the investment performance of the Fund's
portfolios. The prospectus for the Fund describes the investment objectives,
policies and risks of each of the Fund's portfolios. There are ten Variable
Account Options available:
<TABLE>
<CAPTION>
<S> <C>
Morgan Stanley Asian Growth Harris Bretall Sullivan & Smith Equity Growth
Morgan Stanley Worldwide High Income Dreman Value
Renaissance Balanced Zweig Equity (Small Cap)
Zweig Asset Allocation Pinnacle Fixed Income
Nicholas-Applegate Balanced ARM Capital Advisors Money Market
</TABLE>
Your allocation to a Guaranteed Rate Option accumulates at a fixed interest rate
we declare at the beginning of the duration you select. A market value
adjustment (Market Value Adjustment) will be made for withdrawals, surrenders,
transfers and certain other transactions before the expiration of your GRO
Account, but your value under a GRO Account may not be decreased below an amount
equal to your allocation plus interest compounded at an annual effective rate of
3% (Minimum Value), less previous withdrawals and any applicable contingent
withdrawal charges.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current prospectus for the Fund, which you should also read.
For further information and assistance, you should contact our Administrative
Office at National Integrity Life Insurance Company, 200 Park Avenue, 20th
Floor, New York, New York 10166. You may also call the following toll-free
number: 1-800-433-1778.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated May 1, 1996, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART 1 - SUMMARY PAGE
<S> <C>
Pinnacle Variable Annuity Contract..................... 1
Your Benefits.......................................... 1
How Your Contract is Taxed............................. 1
Your Contributions..................................... 1
Your Investment Options................................ 1
Variable Account Options............................... 1
Account Value, Adjusted Account Value and Cash Value... 2
Transfers.............................................. 2
Charges and Fees....................................... 2
Withdrawals............................................ 2
Your Initial Right to Revoke........................... 3
Table of Annual Fees and Expenses...................... 4
Financial Information.................................. 7
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National Integrity Life Insurance Company.............. 9
The Separate Account and the Variable Account Options.. 9
Assets of Our Separate Account......................... 9
Changes In How We Operate.............................. 9
PART 3 - YOUR INVESTMENT OPTIONS
The Legends Fund....................................... 10
The Fund's Investment Manager and Sub-Advisers...... 10
Investment Objectives of the Portfolios............. 11
Guaranteed Rate Options................................ 14
Renewals of GRO Accounts............................ 14
Market Value Adjustments............................ 15
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges............................... 16
Annual Administrative Charge........................... 16
Fund Charges........................................... 16
State Premium Tax Deduction............................ 16
Contingent Withdrawal Charge........................... 17
Transfer Charge........................................ 17
Tax Reserve............................................ 18
PART 5 - TERMS OF YOUR PINNACLE VARIABLE ANNUITY
Contributions Under Your Contract...................... 18
Your Account Value..................................... 18
Your Purchase of Units in Our Separate Account......... 18
How We Determine Unit Value............................ 19
Transfers.............................................. 19
Withdrawals............................................ 20
Assignments............................................ 20
Death Benefits and Similar Benefit Distributions....... 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Annuity Benefits............................................... 21
Annuities...................................................... 21
Annuity Payments............................................... 22
Timing of Payment.............................................. 22
How You Make Requests and Give Instructions.................... 22
PART 6 - VOTING RIGHTS
Fund Voting Rights............................................. 23
How We Determine Your Voting Shares............................ 23
How Fund Shares Are Voted...................................... 23
Separate Account Voting Rights................................. 23
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction................................................... 24
Your Contract is an Annuity.................................... 24
Taxation of Annuities Generally................................ 24
Distribution-at-Death Rules.................................... 25
Diversification Standards...................................... 25
Tax-Favored Retirement Programs................................ 26
Individual Retirement Annuities............................. 26
Tax-Sheltered Annuities..................................... 26
Simplified Employee Pensions................................ 26
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans................................... 27
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations............................... 27
Distributions Under Tax-Favored Retirement Programs............ 27
Federal and State Income Tax Withholding....................... 28
Impact of Taxes to National Integrity.......................... 28
Transfers Among Investment Options............................. 28
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals......................................... 28
Dollar Cost Averaging.......................................... 29
Asset Rebalancing.............................................. 29
Systematic Contributions....................................... 29
Performance Information........................................ 30
</TABLE>
Appendix A - Illustration of a Market Value Adjustment
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
<PAGE>
SAI TABLE OF CONTENTS
Part 1 National Integrity and Custodian
Part 2 Distribution of the Contracts
Part 3 Performance Information
Part 4 Death Benefit Information for Contracts Issued Prior to January 1, 1995
Part 5 Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
ATTN: Request for SAI of Separate Account II
Name:
---------------------------------------------------------------------
Address:
------------------------------------------------------------------
City: State: Zip:
-------------------------------- --------- ----------------
<PAGE>
PART 1 SUMMARY
PINNACLE VARIABLE ANNUITY CONTRACT
In this prospectus, we, our and us mean National Integrity Life Insurance
Company (National Integrity), a subsidiary of Integrity Life Insurance Company
(Integrity) and an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM Financial Group). We offer individual variable annuity contracts. In
certain states, we offer certificates under a group variable annuity contract
instead of contracts. When we use the words contract or certificate, we are
referring to both the individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, you
and your mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin.
Your retirement or endowment date (Retirement Date) will be the date you
specify, but no later than your 85th birthday or the tenth contract anniversary,
whichever is later.
YOUR BENEFITS
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part 7, "Tax Aspects of the Contracts"
for detailed information.
HOW YOUR CONTRACT IS TAXED
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part 7, "Tax Aspects of the Contracts."
YOUR CONTRIBUTIONS
The minimum initial contribution currently is $10,000. Subsequent contributions
of at least $1,000 can be made. Special rules for lower minimum initial and
subsequent contributions apply for certain tax-favored retirement plans. See
"Contributions Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may allocate contributions to the Variable Account Options or to the
Guaranteed Rate Options, or both. The Variable Account Options and the
Guaranteed Rate Options are together referred to as the Investment Options.
Contributions may be allocated to up to nine Variable Account Options and GRO
Accounts (as defined under "Guaranteed Rate Options" in Part 3) at any one time.
To select Investment Options most suitable for you, see Part 3, "Your Investment
Options."
VARIABLE ACCOUNT OPTIONS
The Variable Account Options invest in shares of corresponding investment
portfolios of the Fund, a "series" type of mutual fund. Each investment
portfolio is referred to as a Portfolio. The investment objective of each
Variable Account Option and its corresponding Portfolio is the same. Your value
in a Variable Account Option will vary depending on the performance of the
corresponding Portfolio. For a full description of the Fund, see the Fund's
prospectus and the Fund's Statement of Additional Information.
1
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
The sum of your values under Guaranteed Rate Options plus your values in the
Variable Account Options is referred to as the Account Value. Your Adjusted
Account Value is your Account Value, as increased or decreased (but not below
the Minimum Value) by any Market Value Adjustments. Your Cash Value is equal to
your Adjusted Account Value, reduced by any applicable contingent withdrawal
charge and will be reduced by the pro rata portion of the annual administrative
charge, if applicable. See "Charges and Fees" below.
TRANSFERS
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may be
arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under special services we offer to dollar cost
average or rebalance your investment in the Variable Account Options. See Part
8, "Additional Information - Dollar Cost Averaging," and "Additional Information
- - Asset Rebalancing."
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value in the
Variable Account Option is made daily. We make this charge to cover mortality
and expense risks (1.20%) and certain administrative expenses (.15%). The charge
will never be greater than an effective annual rate of 1.35% of the Account
Value in the assets in each Variable Account Option. If your contract is issued
on or after January 1, 1995, the effective annual rate will reduce to 1.10%
after your contract has been in effect for six years. See Part 4, "Deductions
and Charges."
Investment management fees and other expenses are deducted from amounts invested
by the Separate Account in the Fund. For providing investment management
services to the Portfolios of the Fund, ARM Capital Advisors, Inc. (ARM Capital
Advisors), the investment manager of the Fund, receives fees from the Portfolios
ranging from an annual rate of .50% to 1.05% of the average net assets of the
Portfolio. ARM Capital Advisors has entered into a sub-advisory agreement for
each Portfolio except the Money Market Portfolio, and ARM Capital Advisors pays
fees to the sub-advisers ranging from an annual rate of .50% to .90% of average
net assets of each Portfolio. The fees paid to ARM Capital Advisors and the sub-
advisers cannot be increased without the consent of Fund shareholders. See
"Table of Annual Fees and Expenses" below and "The Fund's Investment Manager and
Sub-Advisers" in Part 3.
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part 4.
When you make withdrawals from your contract, a contingent withdrawal charge may
be deducted from your Account Value. This sales charge will be in addition to
the Market Value Adjustment applicable to early withdrawals from GRO Accounts.
See "Withdrawals" below and "Guaranteed Rate Options" in Part 3.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A sales charge of up to
7% of the amount withdrawn, in excess of any free withdrawal amount (defined
below), will be deducted from your Account Value, unless one of the exceptions
applies. This charge defrays marketing expenses. See "Contingent Withdrawal
Charge" in
2
<PAGE>
Part 4. Most withdrawals made by you prior to age 59-1/2 are also subject to a
10% federal tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts." For partial
withdrawals, the amount deducted from your Account Value will include the
withdrawal amount requested, any applicable Market Value Adjustment, and any
applicable withdrawal charge, so that the net amount you receive will be the
amount requested.
The free withdrawal amount is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to the greater of
(i) 10% of the Account Value, minus cumulative prior withdrawals in the current
contract year, and (ii) the investment gain under the contract during the prior
contract year, minus such cumulative withdrawals.
YOUR INITIAL RIGHT TO REVOKE
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. We will refund all your contributions with an
adjustment for any investment gain or loss on the contributions put into each
Variable Account Option from the date units were purchased until the date your
contract is received by us. If state law instead requires a refund of your
contributions without any adjustment, we will return that amount to you. For
allocations to any of the Guaranteed Rate Options, we will refund to you the
amount of your contributions.
3
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses
- -----------------------------------
<TABLE>
<CAPTION>
<S> <C>
Sales Load on Purchases............................................................ $ 0
Deferred Sales Load (1)............................................................ 7% Maximum
Exchange Fee (2)................................................................... $ 0
Annual Administrative Charge (3)................................................... $ 30
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ----------------------------------------
Mortality and Expense Risk Fees.................................................... 1.20%
Administrative Expenses............................................................ .15%
----
Total Separate Account Annual Expenses............................................. 1.35%
====
</TABLE>
Fund Annual Expenses After Reimbursement
(as a percentage of average net assets) (5)
- -------------------------------------------
Portfolio
- ---------
<TABLE>
<CAPTION>
Management Other Total Annual
Fees Expenses (5) Expenses(5)
---------- ------------ -------------
<S> <C> <C> <C>
Morgan Stanley Asian Growth.................... 1.00% 1.00% 2.00%
Morgan Stanley Worldwide High Income........... .85% 1.00% 1.85%
Renaissance Balanced........................... .65% .36% 1.01%
Zweig Asset Allocation......................... .90% .34% 1.24%
Nicholas-Applegate Balanced.................... .65% .33% .98%
Harris Bretall Sullivan & Smith Equity Growth.. .65% .50% 1.15%
Dreman Value................................... .65% .50% 1.15%
Zweig Equity (Small Cap)....................... 1.05% .50% 1.55%
Pinnacle Fixed Income.......................... .70% .50% 1.20%
ARM Capital Advisors Money Market.............. .50% .50% 1.00%
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
may make a partial withdrawal of up to 10% of the Account Value in any contract
year or the investment gain under the contract during the previous contract
year, whichever is greater, less withdrawals during the current contract year,
without assessment of any withdrawal charge.
(2) After the first twelve transfers during a contract year, National Integrity
has the right to impose a transfer charge of $20 per transfer. This charge would
not apply to transfers made for dollar cost averaging or asset rebalancing. See
"Deductions and Charges - Transfer Charge" in Part 4.
(3) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to your
Retirement Date. See "Deductions and Charges - Annual Administrative Charge" in
Part 4.
(4) See "Deductions and Charges - Separate Account Charges" in Part 4. If your
contract is issued on or after January 1, 1995, Mortality and Expense Risk Fees
will reduce to .95% so that Total Separate Account Annual Expenses will then be
1.10% after your contract has been in effect for six years.
4
<PAGE>
(5) The Fund's expenses for the fiscal year ended June 30, 1995 have been
restated due to material changes in the annual expense structure. The Manager of
the Fund has agreed to reimburse each of the Portfolios for operating expenses
(including management fees) above an annual rate of 1.00% of average net assets
for Morgan Stanley Asian Growth Portfolio and Morgan Stanley Worldwide High
Income Portfolio, and above an annual rate of .50% of average net assets for all
other Portfolios. Without reimbursements, total annual restated expenses for the
Funds's fiscal year ended June 30, 1995 would have been 2.25% for the Morgan
Stanley Asian Growth Portfolio, 2.36% for the Morgan Stanley Worldwide High
Income Portfolio, 1.21% for the Harris Bretall Sullivan & Smith Equity Growth
Portfolio, 1.43% for the Dreman Value Portfolio, 2.01% for the Zweig Equity
(Small Cap) Portfolio, 2.15% for the Pinnacle Fixed Income Portfolio, and 1.68%
for the ARM Capital Advisors Money Market Portfolio. The Manager has reserved
the right to withdraw or modify its policy of expense reimbursement for the
Portfolios, but has no current intention to do so during 1996. In the Fund's
prospectus, see "Management of the Fund."
EXAMPLES
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $60,000 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>
Option 1 year 3 years 5 years 10 years
- ------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Morgan Stanley Asian Growth.................... $104.83 $155.96 $209.12 $360.43
Morgan Stanley Worldwide High Income........... $103.29 $151.44 $201.75 $346.40
Renaissance Balanced........................... $94.68 $125.86 $159.54 $263.70
Zweig Asset Allocation......................... $97.04 $132.91 $171.25 $287.05
Nicholas-Applegate Balanced.................... $94.38 $124.93 $158.01 $260.61
Harris Bretall Sullivan & Smith Equity Growth.. $96.12 $130.15 $166.68 $277.98
Dreman Value................................... $96.12 $130.15 $166.68 $277.98
Zweig Equity (Small Cap)....................... $100.22 $142.36 $186.85 $317.68
Pinnacle Fixed Income.......................... $96.63 $131.68 $169.22 $283.03
ARM Capital Advisors Money Market.............. $94.58 $125.55 $159.03 $262.67
</TABLE>
9
<PAGE>
Expenses per $1,000 investment if you do not surrender your contract at the end
of the applicable period:
<TABLE>
<CAPTION>
Option 1 year 3 years 5 years 10 years
- ------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
Morgan Stanley Asian Growth.................... $34.83 $105.96 $179.12 $360.43
Morgan Stanley Worldwide High Income........... $33.29 $101.44 $171.75 $346.40
Renaissance Balanced........................... $24.68 $ 75.86 $129.54 $263.70
Zweig Asset Allocation......................... $27.04 $ 82.91 $141.25 $287.05
Nicholas-Applegate Balanced.................... $24.38 $ 74.93 $128.01 $260.61
Harris Bretall Sullivan & Smith Equity Growth.. $26.12 $ 80.15 $136.68 $277.98
Dreman Value................................... $26.12 $ 80.15 $136.68 $277.98
Zweig Equity (Small Cap)....................... $30.22 $ 92.36 $156.85 $317.68
Pinnacle Fixed Income.......................... $26.63 $ 81.68 $139.22 $283.03
ARM Capital Advisors Money Market.............. $24.58 $ 75.55 $129.03 $262.67
</TABLE>
Expenses per $1,000 investment if you elect the normal form of annuity at the
end of the applicable period:
Same expenses per $1,000 investment as shown in table above.
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment management fees and other expenses of the
Fund as they were for the year ended December 31, 1995. 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 $60,000 average
contract value, so that the administrative charge per $1,000 of net asset value
in the Separate Account is $0.50. Such per $1,000 charge would be higher for
smaller Account Values and lower for higher values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
10
<PAGE>
FINANCIAL INFORMATION
The table below shows the unit value for each Variable Account Option at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the beginning and end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993 INCEPTION
------- -------- -------- ---------
<S> <C> <C> <C> <C>
MORGAN STANLEY ASIAN GROWTH DIVISION
Unit value at beginning of period $9.21 -- -- $10.00
Unit value at end of period $10.07 $ 9.21 --
Number of units outstanding at end of period 240,475 241,331 --
MORGAN STANLEY WORLDWIDE HIGH INCOME
DIVISION
Unit value at beginning of period $9.44 -- -- $10.00
Unit value at end of period $11.23 $ 9.44 --
Number of units outstanding at end of period 30,033 36,427 --
RENAISSANCE BALANCED DIVISION
Unit value at beginning of period $10.49 $ 11.01 -- $10.00
Unit value at end of period $12.83 $ 10.49 $ 11.01
Number of units outstanding at end of period 685,870 549,857 197,669
ZWEIG ASSET ALLOCATION DIVISION
Unit value at beginning of period $10.65 $ 10.75 -- $10.00
Unit value at end of period $12.75 $ 10.65 $ 10.75
Number of units outstanding at end of period 421,439 535,776 205,268
NICHOLAS-APPLEGATE BALANCED DIVISION
Unit value at beginning of period $11.11 $ 11.28 -- $10.00
Unit value at end of period $13.15 $ 11.11 $ 11.28
Number of units outstanding at end of period 797,185 753,834 341,488
HARRIS BRETALL SULLIVAN & SMITH EQUITY
GROWTH DIVISION
Unit value at beginning of period $10.07 $ 9.81 -- $10.00
Unit value at end of period $13.08 $ 10.07 $ 9.81
Number of units outstanding at end of period 374,724 280,091 83,619
DREMAN VALUE DIVISION
Unit value at beginning of period $10.43 $ 10.65 -- $10.00
Unit value at end of period $14.98 $ 10.43 $ 10.65
Number of units outstanding at end of period 244,538 156,325 80,112
ZWEIG EQUITY (SMALL CAP) DIVISION
Unit value at beginning of period $10.52 $ 10.73 -- $10.00
Unit value at end of period $12.57 $ 10.52 $ 10.73
Number of units outstanding at end of period 234,629 180,961 68,249
PINNACLE FIXED INCOME DIVISION
Unit value at beginning of period $9.90 $ 10.43 -- $10.00
Unit value at end of period $11.43 $ 9.90 $ 10.43
Number of units outstanding at end of period 143,799 142,037 84,916
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 Inception
------- -------- -------- ---------
<S> <C> <C> <C> <C>
ZWEIG EQUITY (SMALL CAP) DIVISION
Unit value at beginning of period............. $10.52 $ 10.73 - $10.00
Unit value at end of period................... $12.57 $ 10.52 $ 10.73
Number of units outstanding at end of period.. 234,629 180,961 68,249
PINNACLE FIXED INCOME DIVISION
Unit value at beginning of period............. $9.90 $ 10.43 - $10.00
Unit value at end of period................... $11.43 $ 9.90 $ 10.43
Number of units outstanding at end of period.. 143,799 142,037 84,916
ARM CAPITAL ADVISORS MONEY MARKET DIVISION
Unit value at beginning of period............. $10.18 $ 10.02 - $10.00
Unit value at end of period................... $10.54 $ 10.18 $ 10.02
Number of units outstanding at end of period.. 336,264 190,506 97,936
</TABLE>
* Inception Dates for the Variable Account Options were January 13, 1993 for
all Options except for the Morgan Stanley Asian Growth and Morgan Stanley
Worldwide High Income Options, which were June 15, 1994.
8
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
National Integrity is a stock life insurance company organized under the laws of
New York. Our home office is in New York, New York. We are authorized to sell
life insurance and annuities in eight states and the District of Columbia. In
addition to the contracts, we sell flexible premium annuity contracts with an
underlying investment medium other than the Fund, and fixed single premium
annuity contracts. We are currently licensed to sell variable contracts in five
states. In addition to issuing annuity products, we have entered into agreements
with other insurance companies to provide administrative and investment support
for products to be designed, underwritten and sold by these companies.
National Integrity is an indirect wholly owned subsidiary of ARM Financial
Group. ARM Financial Group is a financial services company providing retail and
institutional products and services to the long-term savings and retirement
market. At December 31, 1995, ARM Financial Group had $5.4 billion of customer
deposits and funds under management.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account is established and maintained under the insurance laws of
the State of New York. It is a unit investment trust registered with the
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (1940 Act). A unit investment trust is a type of investment company. SEC
registration does not involve any supervision by the SEC of the management or
investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio of the Fund. We plan to establish
additional Options, some of which may not be available for your allocations. The
Variable Account Options currently available to you are listed on the cover page
of this prospectus.
ASSETS OF OUR SEPARATE ACCOUNT
Under New York law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate in
the Separate Account in proportion to the amounts relating to their contracts.
The Separate Account's assets supporting the variable portion of these variable
contracts may not be used to satisfy liabilities arising out of any other
business of ours. Under certain unlikely circumstances, one Variable Account
Option may be liable for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may permit charges owed to us to
stay in the Separate Account, and thus may participate proportionately in the
Separate Account. Amounts in the Separate Account in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(General Account).
CHANGES IN HOW WE OPERATE
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. WE MAY:
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- - register or end the registration of the Separate Account under the 1940
Act;
9
<PAGE>
- - operate our Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of National Integrity
under the 1940 Act);
- - restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Fund;
- - operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
THE LEGENDS FUND
The Legends Fund, Inc., a Maryland corporation (the Fund), is an open-end
diversified management investment company registered under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policies of the Fund. The Fund is a "series" type of investment
company with diversified portfolios. The Fund does not impose a sales charge or
"load" for buying and selling its shares. The shares of the Portfolios of the
Funds are bought and sold by the Separate Account at their respective net asset
values.
The Fund is designed to serve as an investment vehicle for variable annuity and
variable life contracts of insurance companies. Shares of the Portfolios of the
Fund currently are available to the separate accounts of National Integrity and
Integrity, the parent of National Integrity.
Shares of Portfolios of the Fund are made available to the Separate Account
under a Participation Agreement (Participation Agreement). The Participation
Agreement is among the Fund, SBM Financial Services, Inc. (SBM Financial
Services), a wholly owned subsidiary of ARM Financial Group which is the
principal underwriter for Fund shares, and National Integrity. If state or
federal law precludes the sale of the Fund's or any Portfolio's shares to the
Separate Account, or in certain other circumstances, sales of shares to the
Separate Account may be suspended and/or the Participation Agreement may be
terminated as to the Fund or the affected Portfolio. Also, the Participation
Agreement may be terminated by any party thereto with one year's written notice.
Notwithstanding termination of the Participation Agreement, the Fund and SBM
Financial Services are obligated to continue to make the Fund's shares available
for contracts outstanding on the date the Participation Agreement terminates,
unless the Participation Agreement was terminated due to an irreconcilable
conflict among contract owners of different separate accounts. If for any reason
the shares of any Portfolio are no longer available for purchase by the Separate
Account for outstanding contracts, the parties to the Participation Agreement
have agreed to cooperate to comply with the 1940 Act in arranging for the
substitution of another funding medium as soon as reasonably practicable and
without disruption of sales of shares to the Separate Account or any Variable
Account Option.
The Fund's Investment Manager and Sub-Advisers. ARM Capital Advisors became the
investment adviser to the Fund on February 1, 1996. ARM Capital Advisors is a
wholly owned subsidiary of ARM Financial Group registered as an investment
adviser under the Investment Advisers Act of 1940. Its offices are located at
200 Park Avenue, 20th Floor, New York, New York 10166.
ARM Capital Advisors has entered into a sub-advisory agreement with a
professional manager for investment of the assets of each of the Portfolios,
except for the Money Market Portfolio. The sub-adviser for each Portfolio is
listed under "Investment Objectives of the Portfolios" below. The Portfolios pay
monthly investment management fees to ARM Capital Advisors, and ARM Capital
Advisors pays the sub-advisers for their services to the Portfolios. ARM Capital
Advisors retains a management fee at an annual rate between .15% and .20% of
Portfolio net assets (depending upon Portfolio) as compensation for
10
<PAGE>
providing certain services to the Portfolios (except that ARM Capital Advisors
retains the full management fee for the ARM Capital Advisors Money Market
Portfolio which it manages directly without a sub-adviser.) The management fees
paid by each Portfolio to ARM Capital Advisors as a percentage of net assets are
set forth below:
Portfolio Management Fee
--------- --------------
Morgan Stanley Asian Growth.................... 1.00%
Morgan Stanley Worldwide High Income........... .85%
Renaissance Balanced........................... .65%
Zweig Asset Allocation......................... .90%
Nicholas-Applegate Balanced.................... .65%
Harris Bretall Sullivan & Smith Equity Growth.. .65%
Dreman Value................................... .65%
Zweig Equity (Small Cap)....................... 1.05%
Pinnacle Fixed Income.......................... .70%
ARM Capital Advisors Money Market.............. .50%
Investment Objectives of the Portfolios. Set forth below is a summary of the
investment objectives of the Portfolios of the Fund. There can be no assurance
that these objectives will be achieved. YOU SHOULD READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING.
MORGAN STANLEY ASIAN GROWTH PORTFOLIO
-------------------------------------
Morgan Stanley Asian Growth Portfolio seeks long-term capital appreciation
through investment primarily in the common stocks of Asian issuers, excluding
Japan. The production of any current income is incidental to this objective.
Under normal market conditions, the Portfolio will invest at least 65% of the
value of its total assets in common stocks that are traded on recognized stock
exchanges of Asian countries and in common stocks of companies organized under
the laws of an Asian country whose business is conducted principally in Asia.
The remaining portion of the Portfolio will be kept in any combination of debt
instruments, bills and bonds of governmental entities in Asia and the United
States, in notes, debentures and bonds of companies in Asia and in money market
instruments of the United States. The Portfolio does not intend to invest in
securities which are traded in markets in Japan or in companies organized under
the laws of Japan. Morgan Stanley Asset Management Inc. is the sub-adviser to
the Portfolio.
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO
----------------------------------------------
Morgan Stanley Worldwide High Income Portfolio seeks high current income
consistent with relative stability of principal and, secondarily, capital
appreciation through investing primarily in a portfolio of high-yielding fixed-
income securities of issuers located throughout the world. The Portfolio seeks
to achieve its investment objective by allocating its assets among any or all of
three investment sectors: U.S. corporate lower-rated and unrated debt
securities, emerging country debt securities and global fixed-income securities
offering high real yields. Under normal conditions, the Portfolio will invest
between 80% and 100% of its total assets in some or all of these three
categories of higher yielding securities, some of which may entail increased
credit and market risk. The Portfolio may invest a portion of its assets, which
may be up to 100% of its total assets, in lower-rated and unrated bonds ("junk
bonds") considered to be speculative with regard to the payment of interest and
return of principal, and purchasers should carefully assess the risks associated
with an investment in this Portfolio. Additional information concerning the
investment objectives and policies of the Morgan Stanley Worldwide High Income
Portfolio can be found in the Fund's prospectus, which should be read carefully
before making any allocation to this Portfolio. Morgan Stanley Asset Management
Inc. is the sub-adviser to the Portfolio.
11
<PAGE>
RENAISSANCE BALANCED PORTFOLIO
------------------------------
Renaissance Balanced Portfolio seeks capital appreciation and income in rising
markets and the preservation of capital in declining markets. Its assets are
allocated among common stocks of issuers with large capitalizations, United
States government and high-quality corporate debt securities, and high quality
cash equivalent issues, such as commercial paper. Equity investments will
generally range from 10% to 75% of the total assets in the Portfolio, and under
normal market conditions at least 25% of total assets will be invested in senior
fixed income securities. Renaissance Investment Management is the sub-adviser to
the Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
--------------------------------
Zweig Asset Allocation Portfolio seeks long-term capital appreciation. It
invests primarily in Blue Chip Stocks, consistent with preservation of capital
and the reduction of portfolio exposure to market risk, as determined by the
sub-adviser to the Portfolio. Blue Chip Stocks are stocks which the sub-adviser
considers comparable to the stocks included in the S&P 500 at the time of
purchase, and that have a minimum of $400 million market capitalization, average
daily trading volume of 50,000 shares or $425 million in total assets, and which
are traded on the New York Stock Exchange (NYSE), American Stock Exchange
(AMEX), over-the-counter (OTC) or on foreign exchanges. Zweig/Glaser Advisers is
the sub-adviser to the Portfolio.
NICHOLAS-APPLEGATE BALANCED PORTFOLIO
-------------------------------------
Nicholas-Applegate Balanced Portfolio seeks maximum total return in both the
equity and fixed income portion of its investments. Under normal market
conditions, the Portfolio will have 60% to 65% of its total assets invested in
equity securities, including common stocks and securities convertible into or
exchangeable for common stocks (such as convertible preferred stocks and
convertible debentures). The remaining 35% to 40% of total assets will be
invested in United States government securities or cash equivalent issues.
Nicholas-Applegate Capital Management is the sub-adviser to the Portfolio.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
-------------------------------------------------------
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital
appreciation. It primarily invests in stocks of established companies with
proven records of superior and consistent growth. The Portfolio may invest all
or a portion of its assets in cash and cash equivalents if the sub-adviser
considers the equity markets to be overvalued. The Portfolio may invest in U.S.
government securities when this appears desirable in light of the Portfolio's
investment objective or when market conditions warrant. Harris Bretall Sullivan
& Smith, Inc. is the sub-adviser to the Portfolio.
DREMAN VALUE PORTFOLIO
----------------------
Dreman Value Portfolio seeks primarily long-term capital appreciation with a
secondary objective of current income. It invests principally in a diversified
portfolio of securities believed by the sub-adviser to be undervalued. The sub-
adviser's philosophy centers on identifying stocks of large, well-known
companies with solid financial strength and generous dividend yields that have
low price-earnings ratios and have been generally overlooked by the market.
Dreman Value Advisors, Inc. is the sub-adviser to the Portfolio.
12
<PAGE>
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
----------------------------------
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation. It
invests primarily in Small Company Stocks, consistent with preservation of
capital and reduction of portfolio exposure to market risk, as determined by the
sub-adviser. Current income is not an objective. Small Company Stocks are the
2,500 stock positions immediately after the 500 largest stocks ranked in terms
of market capitalization and/or trading volume, and which are traded on the
NYSE, AMEX, OTC or on foreign exchanges. Zweig/Glaser Advisers is the sub-
adviser to the Portfolio.
PINNACLE FIXED INCOME PORTFOLIO
-------------------------------
Pinnacle Fixed Income Portfolio seeks as high a level of current income as is
consistent with the preservation of capital. It invests primarily in corporate
debt securities; U.S. Government securities (including mortgage-backed
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association, and the Federal Home Loan Mortgage Corporation);
obligations of other governmental issuers such as the Federal Farm Credit System
and the Federal Home Loan Banks; asset-backed securities; repurchase agreements
with respect to securities in which the Portfolio may invest; and instruments
used in certain hedging and related income strategies. The Portfolio may also
invest in certain private placements and in debt securities of foreign
governments and governmental entities. The Portfolio will principally invest in
securities rated at least investment grade, or, if not rated, determined by the
sub-adviser to be of comparable quality. However, the Portfolio may invest up to
15% of its total assets in securities rated below investment grade or of
equivalent quality, if not rated, including defaulted securities. J.P. Morgan
Investment Management Inc. is the adviser to the Portfolio.
ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO
-------------------------------------------
ARM Capital Advisors Money Market Portfolio seeks maximum current income
consistent with liquidity and conservation of capital. It invests in high grade
money market instruments, with remaining maturities of 13 months or less, and
repurchase agreements secured by such instruments, and maintains a dollar-
weighted average portfolio maturity of 90 days or less. ARM Capital Advisors is
the sub-adviser to the Portfolio.
GUARANTEED RATE OPTIONS
Because of applicable exemptive and exclusionary provisions, interests in
contracts attributable to Guaranteed Rate Options have not been registered under
the Securities Act of 1933 ("1933 Act"), nor under the Investment Company Act of
1940 ("1940 Act"). Thus, neither such contracts nor our General Account, which
guarantees the values and benefits under those contracts, are generally subject
to regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
we have been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosure in this prospectus relating to the Guaranteed
Rate Options or the General Account. Disclosures regarding the Guaranteed Rate
Options or the General Account may, however, be subject to certain generally
applicable provisions of the Federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
We offer Guaranteed Rate Options (GROs) with durations of two, four, six and ten
years. We may from time to time change the durations available. Each allocation
to a Guaranteed Rate Option locks in a fixed effective annual interest rate
declared by us (Guaranteed Interest Rate) for the duration you select (your GRO
Account). Each contribution or transfer to a Guaranteed Rate Option establishes
a new GRO Account at the then-current Guaranteed Interest Rate declared by us.
We will not declare an interest rate less than 3%. Each GRO Account expires at
the end of the duration you have selected. See "Renewals of GRO Accounts" below.
Values and benefits under your contract attributable to Guaranteed Rate Options
are guaranteed by the reserves in our GRO separate account as well as by our
General Account.
13
<PAGE>
The value of each of your GRO Accounts is referred to as a GRO Value. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
Each group of GRO Accounts of the same duration is referred to as a Guaranteed
Rate Option, i.e. all of your two-year GRO Accounts are one Guaranteed Rate
Option while all of your four-year GRO Accounts are another Guaranteed Rate
Option.
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
ALLOCATIONS TO GUARANTEED RATE OPTIONS MAY NOT BE MADE UNDER CONTRACTS ISSUED IN
CERTAIN STATES.
Renewals of GRO Accounts. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO Accounts. You
must notify us prior to the expiration of your GRO Accounts of any changes you
desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew a GRO Account that expires
after your Retirement Date.
Market Value Adjustments. A Market Value Adjustment is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
14
<PAGE>
The Market Value Adjustment for a GRO Account is determined under the following
formula:
MVA = GRO Value x [(1 + I)/N/12/ / (1 + J + .0025)/N/12/ - 1], where
I is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
J is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, J will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining J we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
15
<PAGE>
Part 4 DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
National Integrity deducts from the unit value every calendar day an amount
equal to an effective annual rate of 1.35% of the Account Value in the Variable
Account Options. This daily expense rate cannot be increased without your
consent. If your contract is issued on or after January 1, 1995, the effective
annual rate will reduce to 1.10% after your contract has been in effect for six
years. Various portions of this total charge, as described below, pay for
certain services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse National
Integrity for expenses actually incurred, without profit.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for National Integrity's assuming the
expense risk (.85%) and the mortality risk (.35%) under the contract. If your
contract is issued on or after January 1, 1995, the effective annual rate will
reduce to .95% after your contract has been in effect for six years, of which
.60% covers expense risk and .35% covers mortality risk. The expense risk is the
risk that our actual expenses of administering the contracts will exceed the
annual administrative expense charge. In this context, mortality risk refers to
the cost of insuring the risk National Integrity takes that annuitants, as a
class of persons, will live longer than estimated and therefore require National
Integrity to pay out more annuity benefits than anticipated. The relative
proportion of the mortality and expense risk charges may be modified, but the
total effective annual risk charge of 1.20% of the value of the Variable Account
Options may not be increased.
National Integrity may realize a gain from these daily charges to the extent
they are not needed to meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, National Integrity charges an annual
administrative charge of $30. This charge is deducted from your Account Value in
each Investment Option on a pro-rata basis. The portion of the charge applicable
to the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to the Guaranteed Rate Options is withdrawn
in dollars. The annual administrative charge will be pro-rated based on the
number of days that have elapsed in the contract year in the event of the
Annuitant's retirement, death, or termination of a contract during a contract
year.
FUND CHARGES
Our Separate Account purchases shares of the Fund at net asset value. That price
reflects investment management fees and other direct expenses that have already
been deducted from the assets of the Fund. The amount charged for investment
management may not be increased without the prior approval of the Fund's
shareholders. See "The Legends Fund" in Part 3.
STATE PREMIUM TAX DEDUCTION
National Integrity will not deduct state premium taxes from your contributions
before applying the contributions to the Investment Options, unless required to
pay such taxes under applicable state law. If the Annuitant elects an annuity
benefit, National Integrity will deduct any applicable state premium taxes from
the amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
16
<PAGE>
CONTINGENT WITHDRAWAL CHARGE
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 7%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal--that is, the contract year in which
each contribution was made. The maximum percentage of 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contract year. No withdrawal charge applies when you withdraw
contributions made earlier than your fifth prior contract year. For purposes of
calculating the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn and more recent contributions next, and (2) partial
withdrawals up to the free withdrawal amount will not be considered a withdrawal
of any contributions. For partial withdrawals, the total amount deducted from
your Account Value will include the withdrawal amount requested, any applicable
Market Value Adjustment and any applicable withdrawal charge, so that the net
amount you receive will be the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is the greater of (i) 10% of your Account Value or (ii) any
investment gain during the prior contract year; less withdrawals during the
current contract year. Investment gain is calculated as the increase in the
Account Value during the prior contract year, minus contributions during such
year, plus withdrawals made during such year. If any partial withdrawal exceeds
the free withdrawal amount, we will deduct the applicable contingent withdrawal
charge with respect to such excess amount. The contingent withdrawal charge is a
sales charge to defray our costs of selling and promoting the contracts. We do
not expect that revenues from contingent withdrawal charges will cover all of
such costs. Any shortfall will be made up from our General Account assets,
including any profits from other charges under the contracts.
Contract year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
Current................... 7%
First Prior............... 6
Second Prior.............. 5
Third Prior............... 4
Fourth Prior.............. 3
Fifth Prior............... 2
Sixth Prior and Earlier... 0
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from National Integrity an
immediate annuity benefit with life contingencies or an immediate annuity
without life contingencies which provides for level payments over five or more
years, with a restricted prepayment option. Similarly, no charge will be applied
if the Annuitant dies and the withdrawal is made by the Annuitant's beneficiary.
See "Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, National Integrity will make
withdrawals (including any applicable charges) from the Investment Options in
the same ratio the Annuitant's Account Value in each Investment Option bears to
the Annuitant's total Account Value. The minimum withdrawal permitted is $300.
TRANSFER CHARGE
No charge is made for your first twelve transfers (excluding dollar cost
averaging and asset rebalancing transfers) among the Variable Account Options or
the Guaranteed Rate Options during a contract year. We are, however, permitted
to charge up to $20 for each additional transfer during that contract year. See
"Transfers" in Part 5. Transfers from a Guaranteed Rate Option may be subject to
a Market Value Adjustment. See "Guaranteed Rate Options" in Part 3.
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<PAGE>
TAX RESERVE
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
PART 5 TERMS OF YOUR PINNACLE VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $1,000 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $10,000.
We will accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Special Rules for Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are 76 to 79 years of age. Once you reach age
80, we may refuse to accept any contribution made for you. Contributions may
also be limited by various laws or prohibited by National Integrity for all
Annuitants under the contract. If your contributions are made under a tax-
favored retirement program, we will not measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have received (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options, provided that at any time you may have
amounts in not more than nine Variable Account Options and Guaranteed Rate
Options. Wire transfers of federal funds are deemed received on the day of
transmittal if credited to our account by 3 p.m. Eastern Time, otherwise they
are deemed received on the next Business Day. Contributions by check or mail are
deemed received not later than the second Business Day after they are delivered
to our Administrative Office. A Business Day is any day other than a weekend or
a national bank holiday.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. For
contributions allocated to the Variable Account Options, there are no guaranteed
values. The value of your contributions allocated to the Guaranteed Rate Options
is guaranteed, subject to any applicable Market Value Adjustments. See
"Guaranteed Rate Options" in Part 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
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The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Fund which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Fund's expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, will not vary because of changes in unit values.
Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option at the end of each day
we are open for business and changes in the value of Fund shares have a material
effect on unit values. We are closed on national business holidays and also on
Martin Luther King, Jr. Day and the Friday after Thanksgiving. The end of a day
for purposes of determining unit values is 4 pm Eastern Time.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a net investment factor for each Option as follows:
- - First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Fund.
- - Next, we add any dividends or capital gains distributions by the Fund on
that day.
- - 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).
- - Then, 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
.00003723, which is an effective annual rate of 1.35%. If your contract is
issued on or after January 1, 1995, the daily charge will reduce to reflect
an effective annual rate of 1.10% after your contract has been in effect
for six years. This charge is for the mortality risk, administrative
expenses and expense risk assumed by us under the contract.
- - Finally, we subtract any daily charge for taxes or amounts set aside as a
reserve for taxes.
Generally, this means that we adjust unit values to reflect what happens to the
Fund, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
Guaranteed Rate Options, subject to National Integrity's then current transfer
restrictions. Transfers to a Guaranteed Rate Option must be to a newly elected
Guaranteed Rate Option (i.e. to a Guaranteed Rate Option that you have not
elected before) at the then-current Guaranteed Interest Rate, unless National
Integrity otherwise consents. Transfers from a Guaranteed Rate Option other than
within 30 days prior to the
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expiration date of a GRO Account are subject to a Market Value Adjustment. See
"Guaranteed Rate Options" in Part 3. For amounts in Guaranteed Rate Options,
transfers will be made according to the order in which monies were originally
allocated to any Guaranteed Rate Option.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our dollar cost averaging or asset rebalancing programs, described in Part
8. Once annuity payments begin, transfers are no longer permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN Code). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 am - 5:00 pm, Eastern Time, on any day we
are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 pm Eastern Time will be processed using unit values
as of the close of business on the next Business Day after the day you call. All
transfers will be confirmed in writing.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A withdrawal charge of
up to 7% of the total withdrawal, as adjusted for any applicable Market Value
Adjustment and the withdrawal charge itself will be deducted from your Account
Value, unless one of the exceptions applies. See "Guaranteed Rate Options" in
Part 3 and "Contingent Withdrawal Charge" in Part 4. Most withdrawals made by
you prior to age 59-1/2 are also subject to a 10% federal tax penalty. In
addition, some tax-favored retirement programs limit withdrawals. See Part 7,
"Tax Aspects of the Contracts" for further information regarding various tax
consequences associated with the contracts.
ASSIGNMENTS
You may not assign the contract as collateral or security for a loan, but an
Annuitant whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part 7, "Tax
Aspects of the Contracts." National Integrity will not be bound by an assignment
unless it is in writing and we have received it at the Administrative Office.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
A death benefit is available to a beneficiary if the Annuitant dies prior to the
Retirement Date. The amount of the death benefit is the greatest of:
. your Account Value
. the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
. your total contributions less the sum of withdrawals
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"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
SEE THE STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996 REGARDING DEATH
BENEFIT INFORMATION FOR CONTRACTS ISSUED PRIOR TO JANUARY 1, 1995.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 85th birthday or the tenth contract anniversary,
whichever is later. The terms of the contracts applicable to the various
retirement programs, along with the federal tax laws, establish certain minimum
and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment without a withdrawal charge applying.
ANNUITIES
Alternate forms of annuity benefits can provide for fixed payments which may be
made monthly, quarterly, semi-annually or annually. For any annuity, the minimum
amount applied to the annuity must be $2,000 and the minimum initial payment
must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 85th birthday or your tenth
contract anniversary, whichever is later. You will receive a lump sum benefit if
you do not make an election by such date.
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We currently offer the following types of annuities:
A period certain annuity provides for fixed payments to the Annuitant or the
Annuitant's beneficiary (the payee) for a fixed period. The amount is determined
by the period selected. The Annuitant, or if the payee dies before the end of
the period selected, the payee's beneficiary, may elect to receive the total
present value of future payments in cash.
A period certain life annuity provides for fixed payments for at least the
period selected and thereafter for the life of the payee or the payee and
another annuitant under a joint and survivor annuity. You may not change or
redeem the annuity once payments have begun. If the payee (or the payee and the
other annuitant under a joint and survivor annuity) dies before the period
selected ends, the remaining payments will go to another named payee who may
have the right to redeem the annuity and secure the present value of future
guaranteed payments in a lump sum. The NORMAL FORM OF ANNUITY is a fixed life
income annuity with 10 years of payments guaranteed, funded through our General
Account.
A life income annuity provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If National Integrity's
current annuity rates then in effect would yield a larger payment, those current
rates will apply instead of the tables.
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits National
Integrity to defer action in order to protect persons with interests in the
Separate Account. National Integrity can defer payment of your GRO Values for up
to six months, and interest will be paid on any such payment delayed for 30 days
or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
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PART 6 - VOTING RIGHTS
FUND VOTING RIGHTS
National Integrity is the legal owner of the shares of the Fund 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 Fund's Board of Directors, to ratify the
selection of independent auditors for the Fund, and on any other matters
described in the Fund's current prospectus or requiring a vote by shareholders
under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under EDC
Plans and certain Qualified Plans, your voting instructions must be communicated
to us indirectly, through your employer, but we are not responsible for any
failure by your employer to solicit your instructions or to communicate your
instructions to us. We will vote any Fund shares that we are entitled to vote
directly, because of amounts we have accumulated in our Separate Account, in the
same proportions that other Owners vote. If the federal securities laws or
regulations or interpretations of them change so that we are permitted to vote
shares of the Fund in our own right or to restrict Owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by the
Fund's Board for the Fund's shareholders' meeting. The record date for this
purpose must be no more than 60 days before the meeting of the Fund. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
HOW FUND SHARES ARE VOTED
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of the Fund are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by National Integrity from its
Owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
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PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on National Integrity's tax status, on the
type of retirement plan, if any, for which the contract is purchased, and upon
the tax and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. NATIONAL INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (nonqualified annuity), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (qualified annuity). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Internal Revenue Code of 1986, as amended (the Code), governs
the taxation of annuities. In general, a contract Owner is not taxed on
increases in value under a contract until some form of withdrawal or
distribution is made under the contract. However, under certain circumstances,
the increase in value may be subject to current federal income tax. For example,
corporations, partnerships, trusts and other non-natural persons cannot defer
the taxation of current income credited to the contract unless an exception
applies. In addition, if an Owner transfers an annuity as a gift to someone
other than a spouse (or divorced spouse), any increase in its value will be
taxed at the time of transfer. The assignment or pledge of any portion of the
value of a contract will be treated as a distribution of that portion of the
value of the contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract equals
the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
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Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion Ratio). The remainder of each payment will be ordinary
income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies National Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) part of a series of substantially equal
periodic payments (not less frequently than annually) for the life (or life
expectancy) of the taxpayer or joint lives (or joint life expectancies) of the
taxpayer and beneficiary; (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; or (8) under an immediate annuity as defined in Code Section
72(u)(4).
All annuity contracts issued by National Integrity or its affiliates to one
Annuitant during any calendar year are treated as a single contract in measuring
the taxable income that results from surrenders and withdrawals under any one of
the contracts.
DISTRIBUTION-AT-DEATH RULES
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies on
or after the Retirement Date and before the entire interest in the contract has
been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
DIVERSIFICATION STANDARDS
Each Portfolio of the Fund will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Funds monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
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The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
of the investments of a segregated asset account may cause the investor (i.e.,
the Contract Owner), rather than the insurance company, to be treated as the
owner of the assets in the account." This announcement also stated that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets." As of the date of this
prospectus, no such guidance has been issued.
TAX FAVORED RETIREMENT PROGRAMS
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Contract
Owners, Annuitants, and beneficiaries are cautioned that the rights of any
person to any benefits under qualified plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the contract. In addition, loans from qualified contracts, where allowed, are
subject to a variety of limitations, including restrictions as to the amount
that may be borrowed, the duration of the loan, and the manner in which the
loans must be repaid. (Owners should always consult their tax advisors and
retirement plan fiduciaries prior to exercising their loan privileges.) Also,
special rules apply to the time at which distributions must commence and the
form in which the distributions must be paid. THEREFORE, NO ATTEMPT IS MADE TO
PROVIDE MORE THAN GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE
VARIOUS TYPES OF QUALIFIED PLANS.
National Integrity reserves the right to change its administrative rules, such
as minimum contribution amounts, as needed to comply with the Code as to tax-
favored retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract.
Individual Retirement Annuities
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-favored retirement program
to an IRA contract. Your IRA contract will be issued with a rider outlining the
special terms of your contract which apply to IRAs.
Tax Sheltered Annuities
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax
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advice as to the tax treatment and suitability of such an investment. Your
contract will be issued with a rider outlining the special terms which apply to
a TSA.
Simplified Employee Pensions
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAs) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with such plans
should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity does not administer such plans.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. Loans to employees are not permitted under such plans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax favored plans are subject to certain restrictions.
Distributions of minimum amounts specified by the Code must commence by April 1
of the calendar year following the calendar year in which the participant
reaches age 70 1/2. Additional distribution rules apply after the participant's
death. Failure to make mandatory distributions may result in the imposition of a
50% penalty tax on any difference between the required distribution amount and
the amount distributed. Distributions to a participant from all plans (other
than 457 plans) in a calendar year that exceed a specific limit under the Code
are generally subject to a 15% penalty tax (in addition to any ordinary income
tax) on the excess portion of the distributions.
Distributions from a tax favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
27
<PAGE>
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective contract
Owner considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
FEDERAL AND STATE INCOME TAX WITHHOLDING
National Integrity will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a contract unless the
distributee notifies National Integrity at or before the time of the
distribution of an election not to have any amounts withheld. In certain
circumstances, National Integrity may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic payments
(including withdrawals prior to the maturity date) is 10%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES TO NATIONAL INTEGRITY
The contracts provide that National Integrity may charge the Separate Account
for taxes. National Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your retirement date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $300. You may also specify an account for direct deposit
of your systematic withdrawals. To enroll under our systematic withdrawal
program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal
28
<PAGE>
date you do not have sufficient values to make all of the withdrawals you have
specified, no withdrawals will be made and your enrollment in the program will
be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO
THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWALS UNDER THE CONTRACTS AND TO
INCOME TAXATION. See Part 7, "Tax Aspects of the Contracts."
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which allocations to the ARM
Capital Advisors Money Market Option are automatically transferred on a monthly
or quarterly basis to one or more other Variable Account Options. You must
specify a dollar amount to be transferred into each Variable Account Option, and
the current minimum transfer to each Option is $250. No transfer charge will
apply to transfers under our dollar cost averaging program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the ARM Capital Advisors 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.
ASSET REBALANCING
We offer an asset rebalancing program. You can select the frequency for
rebalancing. Frequencies available include rebalancing monthly, quarterly, semi-
annually or annually. The value in the Variable Account Options will be
automatically rebalanced by transfers among such Variable Account Options and
you will receive a confirmation notice after each rebalancing. Transfers will
occur only to and from those Variable Account Options where you have current
contribution allocations. No transfer charge will apply to transfers under our
asset rebalancing program, and such transfers will not count towards the twelve
transfers you may make in a contract year before we may impose a transfer
charge.
Fixed Accounts are not eligible for the asset rebalancing program.
To enroll under our asset rebalancing program, you must deliver the appropriate
administrative form to our Administrative Office. You should be aware that other
allocation programs, such as dollar cost averaging, as well as transfers and
withdrawals that you make, may not work in concert with the asset rebalancing
program. You should, therefore, monitor your use of such other programs,
transfers, and withdrawals while the asset rebalancing program is in effect. You
or we may terminate your participation in the program upon one day's prior
written notice, and we may terminate or amend the asset rebalancing program at
any time.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly withdrawals from your checking account for payment to us. To enroll
under our program, you must deliver the appropriate administrative form to our
Administrative Office. You or we may terminate your participation in the program
upon 30 days' prior written notice. Your participation may be terminated by us
if your
29
<PAGE>
bank declines to make any payment. The minimum amount for systematic
contributions is $1,000 per month.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the ARM Capital Advisors Money Market Option, the yield of
the other Options, and the total return of all of the Options may appear in
advertisements or sales literature. Performance data for any Option reflects
only the performance of a hypothetical investment in the Option during the
particular time period on which the calculations are based. Performance
information should be considered in light of the investment objectives and
policies of the Portfolio in which the Option invests and the market conditions
during the given time period, and it should not be considered as a
representation of performance to be achieved in the future.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if a contract Owner surrendered
the contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A cumulative total return reflects an Option's performance over a stated period
of time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise yield. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The ARM Capital Advisors Money Market Option may advertise its current and
effective yield. Current yield reflects the income generated by an investment in
the Option over a specified 7-day period. Effective yield is calculated in a
similar manner except that income earned is assumed to be reinvested. The
Pinnacle Fixed Income Option may advertise a 30-day yield which reflects the
income generated by an investment in such Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
30
<PAGE>
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution:................. $40,000.00
GRO Account duration:......... 6 Years
Guaranteed Interest Rate:..... 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may effect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the Participation Date. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $40,000 contribution is $53,603.83 at the expiration of
the GRO Account. After three years, the GRO Value is $46,305.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been three years remaining in your GRO Account. These examples also show
the withdrawal charge which would be calculated separately.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.5% for a three-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0483785 = [(1 + .05)/36/12/ / (1 + .065 + .0025)/36/12]/ - 1
The Market Value Adjustment is a reduction of $2,240.17 from the GRO Value:
-$2,240.17 = -0.0483785 X $46,305.00
The Market Adjusted Value would be:
$44,064.83 = $46,305.00 - $2,240.17
A withdrawal charge of 4% would be assessed against the $40,000 original
contribution:
$1,600.00 = $40,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$42,464.83 = $46,305.00 - $2,240.17 - $1,600.00
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<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
Greater of:
a) $4,630.50 = $46,305.00 X .10
or
b) $2,205.00 = gain in prior contract year
Free Amount = $4,630.50
The non-free amount would be:
$15,369.50 = $20,000.00 - $4,630.50
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $743.55 = - .0483785 X $15,369.50
The withdrawal charge would be:
$671.38 = [($15,369.50 + $743.55)/1 - .04] - ($15,369.50 + 743.55)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,414.93 = $20,000.00 + $743.55 + $671.38
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
three-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
0.0217384 = [(1 + .05)/36/12/ / (1 + .04 + .0025)/36/12]/ - 1
The Market Value Adjustment is an increase of $1,006.60 to the GRO Value:
$1,006.60 = 0.0217384 X $46,305.00
The Market Adjusted Value would be:
$47,311.60 = $46,305.00 + $1,006.60
A withdrawal charge of 4% would be assessed against the $40,000 original
contribution:
$1,600.00 = $40,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$45,711.60 = $46,305.00 + $1,006.60 - $1,600.00
32
<PAGE>
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 = $ 4,630.50
Non-Free Amount = $15,369.50
The Market Value Adjustment would be:
$334.11 = .0217384 X $15,369.50
The withdrawal charge would be:
$626.47 = [($15,369.50 - $334.11)/1 - .04] - ($15,369.50 - $334.11)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,292.36 = $20,000.00 - $334.11 + $626.47
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account.
33
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
FOR
PINNACLE FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - National Integrity and Custodian.................................. 2
Part 2 - Distribution of the Contracts..................................... 3
Part 3 - Performance Information........................................... 3
Part 4 - Death Benefit Information for Contracts Issued Prior to
January 1, 1995.................................................. 10
Part 5 - Financial Statements............................................... 11
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 1996.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at National Integrity Life Insurance Company
("National Integrity"), 200 Park Avenue, 20th Floor, New York, New York 10166,
or by calling 1-800-325-8583.
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity is a New York stock life insurance company that sells life
insurance and annuities. Its offices are located at 200 Park Avenue, 20th Floor,
New York, New York 10166. National Integrity, the depositor of Separate Account
II, is a wholly owned subsidiary of Integrity Life Insurance Company. Integrity
Life Insurance Company is a wholly owned subsidiary of Integrity Holdings, Inc.,
a Delaware corporation which is a holding company engaged in no active business.
All outstanding shares of Integrity Holdings, Inc. are owned by ARM Financial
Group, Inc., a Delaware corporation which is a financial services company
focusing on the long-term savings and retirement marketplace by providing retail
and institutional products and services throughout the United States (ARM). ARM
owns 100% of the stock of (i) SBM Financial Services, Inc., a Minnesota
corporation (SBM Financial Services), registered with the SEC as a broker-dealer
and a member of the National Association of Securities Dealers, Inc., (ii) ARM
Capital Advisors, Inc., a New York corporation registered with the SEC as an
investment adviser, (iii) SBM Certificate Company, a Minnesota corporation
registered with the SEC as an issuer of face-amount certificates, and (iv) ARM
Transfer Agency, Inc., a Delaware corporation registered with the SEC as a
transfer and dividend disbursing agency. Approximately 91% of the outstanding
voting stock of ARM is owned by The Morgan Stanley Leveraged Equity Fund II,
L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P., and MSCP III 892 Investors, L.P., each of which is a Delaware
limited partnership (collectively, the MSCP Funds). The MSCP Funds are private
equity funds sponsored by Morgan Stanley Group, Inc., a Delaware corporation
that, through its subsidiaries, provides a wide range of financial services on a
global basis (Morgan Stanley). The general partner of each of the MSCP Funds is
a wholly owned subsidiary of Morgan Stanley. Oldarm Limited Partnership, a
Kentucky limited partnership, New ARM, LLC, a Kentucky limited liability
company, and certain employees and management of ARM own in the aggregate
approximately 9% of the voting stock of ARM.
No person has the direct or indirect power to control Morgan Stanley except
insofar as he or she may have such power by virtue of his or her capacity as a
director or executive officer thereof. Morgan Stanley is publicly held; no
individual beneficially owns more than 5% of the common shares; however,
approximately 31% of such shares are subject to a stockholders' agreement or
voting agreement among certain current and former principals and employees of
Morgan Stanley and its predecessor.
Beginning in 1994, ARM Financial Group provided substantially all of the
services required to be performed on behalf of the Separate Account. Total fees
paid to ARM Financial Group by National Integrity for management services in
1995, including services applicable to the Registrant, were $5,640,827.
National Integrity is the custodian for the shares of The Legends Fund, Inc.
owned by the Separate Account. The Fund's shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of National Integrity, as determined by A.M. Best Company,
Moody's Investor Service, Standard & Poor's Corporation, Duff & Phelps
Corporation, or other recognized rating services. National Integrity is
currently rated "A" (Excellent) by A.M. Best Company, and has received claims
paying ability ratings of "A" (Good) from Standard & Poor's Corporation, Baa1
from Moody's Investors Service, Inc., and "A+" (High) from Duff and Phelps
Credit Rating Company. However, National Integrity does not guarantee the
investment performance of the portfolios, and these ratings do not reflect
protection against investment risk.
2
<PAGE>
PART 2 - DISTRIBUTION OF THE CONTRACTS
SBM Financial Services, an affiliate of National Integrity, is the principal
underwriter of the contracts. SBM Financial Services is registered with the SEC
as a broker-dealer and is a member in good standing of the National Association
of Securities Dealers, Inc. The contracts are offered through SBM Financial
Services on a continuous basis.
We generally pay a maximum distribution allowance of 6% of contributions. The
amount of distribution allowances paid was $123,719, $684,838 and $435,752 for
the years ended December 31, 1995, 1994, and 1993, respectively. National
Integrity may from time to time pay or allow additional promotional incentives,
in the form of cash or other compensation, to broker-dealers that sell
contracts. In some instances, such other incentives may be offered only to
certain broker-dealers that sell or are expected to sell during specified time
periods certain minimum amounts of the contracts.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The ARM Capital
Advisors Money Market Option may also from time to time include the Yield and
Effective Yield of its shares in information furnished to shareholders.
Performance information is computed separately for each Option in accordance
with the formulas described below. At any time in the future, total return and
yields may be higher or lower than in the past and there can be no assurance
that any historical results will continue.
Total Returns
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. Quotations also will assume a termination (surrender) at the
end of the particular period and reflect the deductions of the contingent
withdrawal charge, if applicable. Total returns may be shown simultaneously that
do not take into account deduction of the contingent withdrawal charge, and/or
the annual administrative charge.
Average annual total returns are calculated by determining the growth or decline
in the value of a hypothetical historical investment in the Option over certain
periods, including 1, 5, and 10 years (up to the life of the Option), and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. Investors should realize that the Option's performance is not constant
over time, but changes from year to year, and that the average annual returns
represent the averages of historical figures as opposed to the actual historical
performance of an Option during any portion of the period illustrated. Average
annual returns are calculated pursuant to the following formula:
P(1+T)/n/ = ERV, where P is a hypothetical initial payment of $1,000, T is the
average annual total return, n is the number of years, and ERV is the withdrawal
value at the end of the period.
Cumulative total returns are unaveraged and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
3
<PAGE>
Yields
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
Current yield and effective yield are calculated for the Money Market Option.
Current Yield is based on the change in the value of a hypothetical investment
(exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the base period), and stated as a percentage of the investment at the start of
the base period (the base period return). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)/365/7/} - 1
4
<PAGE>
The table below provides average annual total returns for each Option for the
one year period ending March 31, 1996 and from inception through March 31, 1996.
The "contract continues" columns show returns if the contract continues and is
not terminated, and the "contract surrendered" columns show returns if the
contract is surrendered at the end of the period, in which case contingent
withdrawal charges may apply. The performance information is based on the
historical investment experience of the Options and does not indicate or
represent future experience. This table is based upon average Account Values
over $50,000 for which the annual administrative charge is $0.
AVERAGE ANNUAL TOTAL RETURNS FOR ONE YEAR PERIOD ENDING 03/31/96 AND SINCE
INCEPTION*
<TABLE>
<CAPTION>
Period Since Inception One Year Period Three Year
---------------------- ----------------------- ----------
Contract Contract
Contract Surrendered Contract Surrendered Contract
Option Continues 03/31/96 Continues 03/31/96 Continues
- ------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Dreman Value 14.91% 13.99% 37.77% 31.77% 14.30%
Zweig Asset Allocation 9.46% 8.34% 18.25% 12.25% 9.34%
Zweig Equity
(Small Cap) 8.57% 7.52% 21.55% 15.55% 8.32%
Renaissance Balanced 8.67% 7.63% 17.07% 11.07% 8.11%
Harris Bretall Sullivan &
Smith Equity Growth 9.12% 8.09% 20.88% 14.88% 10.90%
Nicholas-Applegate
Balanced 9.73% 8.71% 15.60% 9.60% 8.28%
Pinnacle Fixed Income 3.26% 2.09% 7.68% 1.68% 2.92%
Morgan Stanley Asian
Growth 4.11% 0.83% 17.69% 11.69% n/a
Morgan Stanley
Worldwide High Income 6.87% 3.65% 24.66% 18.66% n/a
</TABLE>
*The inception date for each Option is set forth in the table below.
5
<PAGE>
The table below provides cumulative total returns for each Option from inception
through March 31, 1996, and Year-To-Date from January 1, 1996 through March 31,
1996. The "contract continues" columns show returns if the contract continues
and is not terminated, and the "contract surrendered" column shows returns if
the contract is surrendered at the end of the period, in which case contingent
withdrawal charges apply. The performance information is based on the
historical investment experience of the Options and does not indicate or
represent future experience.
CUMULATIVE TOTAL RETURNS FOR PERIOD SINCE INCEPTION TO 03/31/96 AND FOR YEAR-TO-
DATE PERIOD FROM 01/01/96 THROUGH 03/31/96
<TABLE>
<CAPTION>
Year-To-Date
Period Since Inception Through
------------------------- 3/31/96 Three Year
Contract ------------ ----------
Contract Surrendered Contract Contract Inception
Option Continues 03/31/96 Continues Continues Date*
- ------ --------- ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Dreman Value 56.39% 52.39% 4.41% 49.31% 01/12/93
Zweig Asset
Allocation 31.33% 27.33% 2.98% 30.72% 03/26/93
Zweig Equity
(Small Cap) 30.22% 26.22% 3.57% 27.08% 01/14/93
Renaissance Balanced 30.66% 26.66% 1.88% 26.36% 01/12/93
Harris Bretall Sullivan
& Smith Equity 32.42% 28.42% 1.23% 36.38% 01/12/93
Growth
Nicholas-Applegate
Balanced 34.82% 30.82% 2.50% 26.94% 01/12/93
Pinnacle Fixed Income 10.87% 6.87% -2.97% 9.01% 01/12/93
Morgan Stanley Asian
Growth 7.49% 1.49% 6.77% n/a 06/16/94
Morgan Stanley
Worldwide High
Income 12.64% 6.64% 0.34% n/a 06/16/94
</TABLE>
*Inception Dates reflect date of first trade.
Performance Comparisons
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donahue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products traced by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used
6
<PAGE>
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.
7
<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
8
<PAGE>
currencies: Australian dollars, Canadian dollars, European Currency Units,
French francs, Japanese yen, Netherlands guilder, Swiss francs, UK pounds
sterling, U.S. dollars, and German deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
Stocks, Bonds, Bills and Inflation, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that 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
9
<PAGE>
Fund Report, (3) other appropriate indices of investment securities and averages
for peer universe of funds which are described in this Statement of Additional
Information, or (4) data developed by National Integrity or any of the Sub-
Advisers derived from such indices or averages.
Individualized Computer Generated Illustrations
National Integrity may from time to time use computer-based software available
through Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 4 - DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED PRIOR TO JANUARY 1, 1995
Notwithstanding anything in the prospectus to the contrary, for contracts issued
prior to January 1, 1995, the amount of the death benefit is the greatest of:
. your Account Value
. the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
. your total contributions less the sum of withdrawals
. for Annuitants less than 70 years old on the birthday nearest the date
on which their contract was issued, an enhanced minimum death benefit.
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
The enhanced minimum death benefit is equal to the guaranteed death benefit,
except that the guaranteed death benefit may not exceed the maximum guaranteed
death benefit. The guaranteed death benefit on your Participation Date is your
initial contribution. On a monthly basis thereafter we recalculate that portion
of your guaranteed death benefit allocated to the Separate Account by adding
interest at an annual rate of 7% until the contract anniversary on which your
nearest birthday is your 70th, subject to the maximum, and subtracting the sum
of any withdrawals or transfers from the Separate Account during the month and a
pro rata amount of the interest accumulated relative to such withdrawn or
transferred amount. Therefore, your guaranteed death benefit at any time,
subject to the maximum, is equal to the sum of (1) your Guarantee Period Values,
and (2) your Separate Account contributions and the amount of interest
calculated on your Separate Account values for purposes of determining the
guaranteed death benefit less any withdrawals or transfers and less the interest
calculated on a pro rata basis on such withdrawn or transferred amount. Your
maximum guaranteed death benefit is determined by totalling your contributions
during your first five participation years, subtracting all withdrawals
inclusive of any market value adjustments made under the contract, multiplying
the result by two, and then adding to that amount your total contributions made
after the first five participation years.
10
<PAGE>
PART 5 - FINANCIAL STATEMENTS
Ernst & Young LLP, 400 West Market Street, Louisville, Kentucky 40202, is our
independent auditor and serves as independent auditor of the Separate Account.
Ernst & Young LLP on an annual basis will audit certain financial statements
prepared by management and express an opinion on such financial statements based
on their audits.
The financial statements of the Separate Account and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1995 and 1994 included in this SAI have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports included herein.
The financial statements of National Integrity should be distinguished from the
financial statements of the Separate Account and should be considered only as it
relates to the ability of National Integrity to meet its obligations under the
contract. They should not be considered as relating to the investment
performance of the assets held in the Separate Account.
11
<PAGE>
Financial Statements
Separate Account II
of
National Integrity Life Insurance Company
December 31, 1995
With Report of Independent Auditors
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................... 1
Audited Financial Statements
Statement of Assets and Liabilities.................................... 2
Statement of Operations................................................ 4
Statements of Changes in Net Assets.................................... 6
Notes to Financial Statements.......................................... 10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account II of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account II of National Integrity Life Insurance Company (comprising,
respectively, the Renaissance Balanced, Zweig Asset Allocation, Nicholas-
Applegate Balanced, Harris Bretall Sullivan & Smith Equity Growth, Dreman Value,
Zweig Equity (Small Cap), Mitchell Hutchins Fixed Income, Mitchell Hutchins
Money Market, Morgan Stanley Asian Growth, and Morgan Stanley Worldwide High
Income Divisions) as of December 31, 1995, and 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned in The Legends Fund, Inc. as of
December 31, 1995, by correspondence with the transfer agent of the Legends
Fund, Inc. 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 II of National Integrity Life Insurance
Company at December 31, 1995, and the results of their operations and changes in
their net assets for each of the periods indicated herein in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 19, 1996
1
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
HARRIS
BRETALL
NICHOLAS- SULLIVAN &
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY DREMAN
BALANCED ALLOCATION BALANCED GROWTH VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in The Legends Fund, Inc. at
value (cost of $39,669,503) $8,792,730 $5,374,643 $10,477,051 $4,902,513 $3,661,773
Receivable from (payable to) the general
account of National Integrity 6,982 (1,296) 5,932 (1,123) 1,406
----------------------------------------------------------------
NET ASSETS $8,799,712 $5,373,347 $10,482,983 $4,901,390 $3,663,179
================================================================
Unit value $ 12.83 $ 12.75 $ 13.15 $ 13.08 $ 14.98
================================================================
Units outstanding 685,870 421,439 797,185 374,724 244,538
================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1995
<TABLE>
<CAPTION>
MORGAN
MITCHELL MITCHELL MORGAN STANLEY
ZWEIG HUTCHINS HUTCHINS STANLEY WORLDWIDE
EQUITY FIXED MONEY ASIAN HIGH
(SMALL CAP) INCOME MARKET GROWTH INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in The Legends Fund, Inc. at
value (cost of $39,669,503) $2,949,901 $1,642,317 $3,542,707 $2,421,395 $ 337,208 $44,102,238
Receivable from (payable to) the general
account of National Integrity (614) 1,306 1,516 188 63 14,360
------------------------------------------------------------------------
NET ASSETS $2,949,287 $1,643,623 $3,544,223 $2,421,583 $ 337,271 $44,116,598
========================================================================
Unit value $ 12.57 $ 11.43 $ 10.54 $ 10.07 $ 11.23
===========================================================
Units outstanding 234,629 143,799 336,264 240,475 30,033
===========================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
HARRIS
BRETALL
NICHOLAS- SULLIVAN &
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY DREMAN
BALANCED ALLOCATION BALANCED GROWTH VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from The Legends Fund, Inc. $ 273,799 $ 128,416 $ 188,578 $ 36,451 $ 72,788
EXPENSES
Mortality and expense risk and
administrative charges 104,034 71,385 126,007 48,804 33,645
----------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 169,765 57,031 62,571 (12,353) 39,143
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of
investments 77,487 149,185 171,724 407,573 72,280
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (276,170) (65,978) (138,840) 76,235 (67,348)
End of period 994,499 652,133 1,159,728 448,600 733,905
----------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 1,270,669 718,111 1,298,568 372,365 801,253
----------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 1,348,156 867,296 1,470,292 779,938 873,533
----------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $1,517,921 $ 924,327 $ 1,532,863 $ 767,585 $ 912,676
================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
MORGAN
MITCHELL MITCHELL MORGAN STANLEY
ZWEIG HUTCHINS HUTCHINS STANLEY WORLDWIDE
EQUITY FIXED MONEY ASIAN HIGH
(SMALL CAP) INCOME MARKET GROWTH INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from The Legends Fund, Inc. $ 29,426 $ 82,451 $ 131,996 $ 12,715 $ 35,792 $ 992,412
EXPENSES
Mortality and expense risk
and administrative charges 28,347 20,070 37,594 33,413 5,025 508,324
------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 1,079 62,381 94,402 (20,698) 30,767 484,088
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on
sales of investments 21,120 (2,906) - (11,326) 2,303 887,440
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (40,058) (77,081) - (183,241) (18,047) (790,528)
End of period 303,671 75,660 - 50,234 14,275 4,432,705
------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 343,729 152,741 - 233,475 32,322 5,223,233
------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 364,849 149,835 - 222,149 34,625 6,110,673
------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 365,928 $ 212,216 $ 94,402 $ 201,451 $ 65,392 $ 6,594,761
========================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
HARRIS
BRETALL
NICHOLAS- SULLIVAN &
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY DREMAN
BALANCED ALLOCATION BALANCED GROWTH VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 169,765 $ 57,031 $ 62,571 $ (12,353) $ 39,143
Net realized gain (loss) on sales of
investments 77,487 149,185 171,724 407,573 72,280
Change in net unrealized appreciation/
depreciation during the period 1,270,669 718,111 1,298,568 372,365 801,253
----------------------------------------------------------------
Net increase in net assets resulting from
operations 1,517,921 924,327 1,532,863 767,585 912,676
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 541,100 357,200 1,759,155 1,253,010 244,000
Contract terminations and benefits (355,156) (296,653) (716,973) (156,906) (79,358)
Net transfers among investment
options 1,326,424 (1,317,416) (464,721) 217,683 955,920
----------------------------------------------------------------
Net increase (decrease) in net assets
derived from contract related
transactions 1,512,368 (1,256,869) 577,461 1,313,787 1,120,562
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 3,030,289 (332,542) 2,110,324 2,081,372 2,033,238
Net assets, beginning of period 5,769,423 5,705,889 8,372,659 2,820,018 1,629,941
----------------------------------------------------------------
NET ASSETS, END OF PERIOD $8,799,712 $5,373,347 $10,482,983 $4,901,390 $3,663,179
================================================================
UNIT TRANSACTIONS
Contributions 47,396 29,147 142,006 91,868 18,733
Terminations and benefits (36,045) (29,548) (62,316) (13,992) (5,987)
Net transfers 124,662 (113,936) (36,339) 16,757 75,467
----------------------------------------------------------------
NET INCREASE (DECREASE) IN UNITS 136,013 (114,337) 43,351 94,633 88,213
================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
MORGAN
MITCHELL MITCHELL MORGAN STANLEY
ZWEIG HUTCHINS HUTCHINS STANLEY WORLDWIDE
EQUITY FIXED MONEY ASIAN HIGH
(SMALL CAP) INCOME MARKET GROWTH INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 1,079 $ 62,381 $ 94,402 $ (20,698) $ 30,767 $ 484,088
Net realized gain (loss) on sales of
investments 21,120 (2,906) - (11,326) 2,303 887,440
Change in net unrealized appreciation/
depreciation during the period 343,729 152,741 - 233,475 32,322 5,223,233
------------------------------------------------------------------------
Net increase in net assets resulting from
operations 365,928 212,216 94,402 201,451 65,392 6,594,761
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 399,642 31,253 332,573 403,323 33,502 5,354,758
Contract terminations and benefits (41,254) (68,196) (1,869,693) (137,527) (9,957) (3,731,673)
Net transfers among investment options 321,733 62,848 3,046,901 (268,943) (95,363) 3,785,066
------------------------------------------------------------------------
Net increase (decrease) in net assets
derived from contract related
transactions 680,121 25,905 1,509,781 (3,147) (71,818) 5,408,151
------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,046,049 238,121 1,604,183 198,304 (6,426) 12,002,912
Net assets, beginning of period 1,903,238 1,405,502 1,940,040 2,223,279 343,697 32,113,686
------------------------------------------------------------------------
NET ASSETS, END OF PERIOD $2,949,287 $1,643,623 $3,544,223 $2,421,583 $ 337,271 $44,116,598
========================================================================
UNIT TRANSACTIONS
Contributions 32,827 2,757 34,024 41,227 3,593
Terminations and benefits (3,578) (6,336) (183,434) (13,519) (972)
Net transfers 24,419 5,341 295,168 (28,564) (9,015)
-----------------------------------------------------------
NET INCREASE (DECREASE) IN UNITS 53,668 1,762 145,758 (856) (6,394)
===========================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1994
<TABLE>
<CAPTION>
HARRIS
BRETALL
NICHOLAS- SULLIVAN &
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY DREMAN
BALANCED ALLOCATION BALANCED GROWTH VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 44,090 $ (21,841) $ (17,351) $ (23,312) $ 7,068
Net realized gain (loss) on sales of
investments (7,191) 25,321 (9,052) 24,065 12,077
Change in net unrealized appreciation/
depreciation during the period (291,953) (91,340) (110,524) 62,321 (78,165)
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (255,054) (87,860) (136,927) 63,074 (59,020)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 4,304,007 4,534,930 4,909,152 1,672,515 866,960
Contract terminations and benefits (229,862) (228,559) (268,433) (177,566) (127,190)
Net transfers among investment
options (226,983) (719,064) 16,403 441,752 96,268
----------------------------------------------------------------
Net increase in net assets
derived from contract related
transactions 3,847,162 3,587,307 4,657,122 1,936,701 836,038
----------------------------------------------------------------
INCREASE IN NET ASSETS 3,592,108 3,499,447 4,520,195 1,999,775 777,018
Net assets, beginning of period 2,177,315 2,206,442 3,852,464 820,243 852,923
----------------------------------------------------------------
NET ASSETS, END OF PERIOD $5,769,423 $5,705,889 $8,372,659 $2,820,018 $1,629,941
================================================================
UNIT TRANSACTIONS
Contributions 396,386 418,806 436,657 171,25 178,988
Terminations and benefits (21,377) (20,550) (24,458) (18,892) (12,011)
Net transfers (22,821) (67,748) 147 44,113 9,236
----------------------------------------------------------------
NET INCREASE IN UNITS 352,188 330,508 412,346 196,472 76,213
================================================================
</TABLE>
See accompanying notes.
8
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
MORGAN
MITCHELL MITCHELL MORGAN STANLEY
ZWEIG HUTCHINS HUTCHINS STANLEY WORLDWIDE
EQUITY FIXED MONEY ASIAN HIGH
(SMALL CAP) INCOME MARKET GROWTH INCOME
DIVISION DIVISION DIVISION DIVISION* DIVISION* TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 910 $ 10,723 $ 30,251 $ (10,374) $ (2,492) $ 17,672
Net realized gain (loss) on sales of
investments 8,408 (7,155) - (2,173) (2,697) 41,603
Change in net unrealized appreciation/
depreciation during the period (49,222) (77,926) - (183,241) (18,047) (838,097)
------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (39,904) (74,358) 30,251 (195,788) (23,236) (778,822)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 1,001,251 609,118 3,481,089 1,837,678 819,407 24,036,107
Contract terminations and benefits (8,593) (3,317) (102,108) (20,051) (3,036) (1,168,715)
Net transfers among investment options 218,263 (11,339) (2,450,287) 601,440 (449,438) (2,482,985)
------------------------------------------------------------------------
Net increase in net assets derived from
contract related transactions 1,210,921 594,462 928,694 2,419,067 366,933 20,384,407
------------------------------------------------------------------------
INCREASE IN NET ASSETS 1,171,017 520,104 958,945 2,223,279 343,697 19,605,585
Net assets, beginning of period 732,221 885,398 981,095 - - 12,508,101
------------------------------------------------------------------------
NET ASSETS, END OF PERIOD $1,903,238 $1,405,502 $1,940,040 $2,223,279 $ 343,697 $32,113,686
========================================================================
UNIT TRANSACTIONS
Contributions 92,731 58,273 345,129 183,528 82,490
Terminations and benefits (909) (324) (10,091) (4,245) (306)
Net transfers 20,890 (828) (242,468) 62,048 (45,757)
-----------------------------------------------------------
NET INCREASE IN UNITS 112,712 57,121 92,570 241,331 36,427
===========================================================
</TABLE>
*For the period June 15, 1994 (commencement of operations) to December 31, 1994.
See accompanying notes.
9
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
National Integrity Life Insurance Company ("National Integrity") established
Separate Account II (the "Separate Account") on May 21, 1992 under the insurance
laws of the state of New York for the purpose of issuing flexible payment
variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940. The operations of the Separate Account
are part of National Integrity.
National Integrity is a wholly owned subsidiary of Integrity Life Insurance
Company ("Integrity") and their ultimate parent is ARM Financial Group, Inc.
("ARM"). ARM is a financial services company focusing on the long-term saving
and retirement marketplace by providing retail and institutional products and
services throughout the United States.
Contract holders may allocate or transfer their account values to one or more
investment divisions of the Separate Account or to one or more fixed guaranteed
rate options of National Integrity's Separate Account GPO. The Separate Account
divisions invest in shares of corresponding investment portfolios of The Legends
Fund, Inc. ("Legends Fund"), a "series" type mutual fund. Integrity served as
investment advisor to the Legends Fund. Integrity had entered into a sub-
advisory agreement with a professional manager for investment of the assets of
each of the portfolios. Effective February 1, 1996 ARM Capital Advisors, Inc.
("ARM Capital Advisors"), a wholly owned subsidiary of ARM, assumed Integrity's
role as investment adviser to the Legends Fund. ARM Capital Advisors is
registered with the SEC under the Investment Advisers Act of 1940. The contract
holder's account value in a Separate Account division will vary depending on the
performance of the corresponding portfolio. The Separate Account currently has
ten investment divisions available. The investment objective of each division
and its corresponding portfolio are the same. Set forth below is a summary of
the investment objectives of the portfolios of the Legends Fund.
10
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Renaissance Balanced Portfolio seeks capital appreciation and income in rising
markets and the preservation of capital in declining markets. Its assets are
allocated among common stocks of issuers with large capitalizations, United
States government and high-quality corporate debt securities, and high quality
cash equivalent issues, such as commercial paper. Equity investments will
generally range from 10% to 75% of the total assets in the portfolio, and under
normal market conditions at least 25% of total assets will be invested in senior
fixed income securities. Renaissance Investment Management is the sub-adviser to
the portfolio.
Zweig Asset Allocation Portfolio seeks long-term capital appreciation. It
invests primarily in blue chip stocks, consistent with preservation of capital
and the reduction of portfolio exposure to market risk, as determined by the
sub-adviser to the portfolio. Blue chip stocks are stocks which the sub-adviser
considers comparable to the stocks included in the S&P 500 at the time of
purchase, and that have a minimum of $400 million market capitalization, average
daily trading volume of 50,000 shares or $425 million in total assets, and which
are traded on the New York Stock Exchange ("NYSE"), American Stock Exchange
("AMEX"), over-the-counter ("OTC") or on foreign exchanges. Zweig/Glaser
Advisers is the sub-adviser to the portfolio.
Nicholas-Applegate Balanced Portfolio seeks maximum total return in both the
equity and fixed income portion of its investments. Under normal market
conditions, the portfolio will have 60% to 65% of its total assets invested in
equity securities, including common stocks and securities convertible into or
exchangeable for common stocks (such as convertible preferred stocks and
convertible debentures). The remaining 35% to 40% of total assets will be
invested in U.S. government securities or cash equivalent issues. Nicholas-
Applegate Capital Management is the sub-adviser to the portfolio.
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital
appreciation. It primarily invests in stocks of established companies with
proven records of superior and consistent growth. The portfolio may invest all
or a portion of its assets in cash and cash equivalents if the sub-adviser
considers the equity markets to be overvalued. The portfolio may invest in U.S.
government securities when this
11
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
appears desirable in light of the portfolio's investment objective or when
market conditions warrant. Harris Bretall Sullivan & Smith, Inc. is the sub-
adviser to the portfolio.
Dreman Value Portfolio seeks primarily long-term capital appreciation with a
secondary objective of current income. It invests principally in a diversified
portfolio of securities believed by the sub-adviser to be undervalued. The sub-
adviser's philosophy centers on identifying stocks of large, well-known
companies with solid financial strength and generous dividend yields that have
low price-earnings ratios and have been generally overlooked by the market.
Dreman Value Advisors, Inc. is the sub-adviser to the portfolio.
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation. It
invests primarily in small company stocks, consistent with preservation of
capital and reduction of portfolio exposure to market risk, as determined by the
sub-adviser. Current income is not an objective. Small Company Stocks are the
2,500 stock positions immediately after the 500 largest stocks ranked in terms
of market capitalization and/or trading volume, and which are traded on the
NYSE, AMEX, OTC or on foreign exchanges. Zweig/Glaser Advisers is the sub-
adviser to the portfolio.
Mitchell Hutchins Fixed Income Portfolio seeks as high a level of current income
as is consistent with the preservation of capital. It invests in corporate bonds
and mortgage-backed securities (including mortgage-backed certificates issued by
the Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation), repurchase
agreements with respect to securities in which the portfolio may invest and
instruments used in certain hedging and related income strategies. The portfolio
will principally invest in securities rated at least investment grade or, if not
rated, determined by the sub-adviser to be of comparable quality. The portfolio
may invest up to 15% of its total assets in securities rated below investment
grade or of equivalent quality, including defaulted securities. Mitchell
Hutchins Institutional Investors, Inc. ("Mitchell Hutchins"), a subsidiary of
PaineWebber Incorporated, was the sub-adviser to the portfolio.
12
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mitchell Hutchins Money Market Portfolio seeks maximum current income consistent
with liquidity and conservation of capital. It invests in high grade money
market instruments, with remaining maturities of 13 months or less, and
repurchase agreements secured by such instruments, and maintains a dollar-
weighted average portfolio maturity of 90 days or less. Mitchell Hutchins was
the sub-adviser to the portfolio.
Morgan Stanley Asian Growth Portfolio seeks long-term capital appreciation
through investment primarily in the common stocks of Asian issuers, excluding
Japan. Under normal market conditions, the portfolio will invest at least 65% of
the value of its total assets in common stocks that are traded on recognized
stock exchanges of Asian countries and in common stocks of companies organized
under the laws of an Asian country whose business is conducted principally in
Asia. The portfolio does not intend to invest in securities which are traded in
markets in Japan or in companies organized under the laws of Japan. The
portfolio's relatively large investment in countries with limited or developing
capital markets may involve greater risks than investments in more developed
markets and the prices of such investments may be volatile.
Morgan Stanley Worldwide High Income Portfolio seeks high current income
consistent with relative stability of principal and, secondarily, capital
appreciation through investing primarily in a portfolio of high-yielding fixed-
income securities of issuers located throughout the world. The portfolio seeks
to achieve its investment objective by allocating its assets among any or all of
three investment sectors: U.S. corporate lower-rated and unrated debt
securities, emerging country debt securities and global fixed-income securities
offering high yields. The portfolio's relatively large investment in countries
with limited or developing capital markets may involve greater risks than
investments in more developed markets and the prices of such investments may be
volatile.
Morgan Stanley Asset Management Inc. ("MSAM") serves as sub-advisor to the
Morgan Stanley Asian Growth portfolio and the Morgan Stanley Worldwide High
Income portfolio. MSAM is a wholly owned subsidiary of Morgan Stanley Group Inc.
("Morgan Stanley"). Approximately 91% of the shares outstanding voting stock of
ARM is owned
13
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
by private equity funds sponsored by Morgan Stanley, therefore these two
entities are considered affiliates.
The assets of the Separate Account are owned by National Integrity. The portion
of the Separate Account's assets supporting the contracts may not be used to
satisfy liabilities arising out of any other business of National Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Legends Fund 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 Legends Fund shares are determined based on the identified cost basis.
Dividends from income and capital gain distributions are recorded on the ex-
dividend date. Dividends from the portfolios are reinvested in the portfolios
and are reflected in the unit value of the divisions of the Separate Account.
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted for all activity in the
Separate Account.
14
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES
Operations of the Separate Account are included in the income tax return of
National Integrity which is taxed as a life insurance company under the Internal
Revenue Code. The Separate Account will not be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code. Under existing federal
income tax, no taxes are payable on the investment income or on the capital
gains of the Separate Account.
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1995 and the cost of shares held
at December 31, 1995 for each division were as follows:
DIVISION PURCHASES SALES COST
- --------------------------------------------------------------------------------
Renaissance Balanced $2,921,360 $1,242,438 $7,798,201
Zweig Asset Allocation 1,011,966 2,210,218 4,722,510
Nicholas-Applegate Balanced 3,571,385 2,929,918 9,317,323
Harris Bretall Sullivan & Smith Equity
Growth 3,503,147 2,200,846 4,453,913
Dreman Value 1,591,649 432,508 2,927,868
Zweig Equity (Small Cap) 1,098,160 416,148 2,646,230
Mitchell Hutchins Fixed Income 549,442 461,705 1,566,657
Mitchell Hutchins Money Market 9,959,120 8,356,484 3,542,707
Morgan Stanley Asian Growth 1,132,690 1,156,843 2,371,161
Morgan Stanley Worldwide High Income 207,080 248,189 322,933
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 administrative
15
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES (CONTINUED)
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).
4. SUBSEQUENT EVENTS
On February 16, 1996, the Board of Directors of the Legends Fund voted to
terminate the sub-advisory agreements with the sub-advisers of the Mitchell
Hutchins Fixed Income Portfolio ("Fixed Income Portfolio") and the Mitchell
Hutchins Money Market Portfolio ("Money Market Portfolio"). The two sub-advisory
agreements terminated effective March 31, 1996. On April 1, 1996, J.P. Morgan
Investment Management, Inc. ("J.P. Morgan") became the sub-adviser for the Fixed
Income Portfolio. The new name of the Fixed Income Portfolio is the Pinnacle
Fixed Income Portfolio. Concurrently, the Legends Fund's Board of Directors also
voted to amend the Management Agreement between the Fixed Income Portfolio and
ARM Capital Advisors to reduce the annual advisory fee relating to the Fixed
Income Portfolio from .90% to .70% of average net assets. ARM Capital Advisors
will compensate J.P. Morgan for its services as sub-adviser at the annual rate
of .50% of average net assets. On April 1, 1996, ARM Capital Advisors began
managing the Money Market Portfolio directly without any sub-adviser. The new
name of the Money Market Portfolio is ARM Capital Advisors Money Market
Portfolio. Concurrently, the Legends Fund's Board of Directors also voted to
amend the fees payable under the Management Agreement for the Money Market
Portfolio from .65% to .50% of average net assets. The investment objectives of
the portfolios will remain unchanged.
16
<PAGE>
Financial Statements
(Statutory Basis)
National Integrity Life
Insurance Company
Years Ended December 31, 1995 and 1994
with Report of Independent Auditors
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors............................................... 1
Audited Financial Statements
Balance Sheets (Statutory Basis)............................................. 3
Statements of Operations (Statutory Basis)................................... 5
Statements of Changes in Capital and Surplus (Statutory Basis)............... 6
Statements of Cash Flows (Statutory Basis)................................... 7
Notes to Financial Statements................................................ 9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheet of National
Integrity Life Insurance Company as of December 31, 1995 and 1994, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the New York Insurance Department. The
variances between such practices and generally accepted accounting principles
and the effects on the accompanying financial statements are described in
Note 1.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of National
Integrity Life Insurance Company at December 31, 1995 and 1994, or the results
of its operations or its cash flows for the years then ended. However, in our
opinion, the supplementary information included in Note 1 presents fairly, in
all material respects, shareholder's equity at December 31, 1995 and 1994, and
net income for the years then ended in conformity with generally accepted
accounting principles.
1
<PAGE>
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Integrity Life
Insurance Company at December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the New York Insurance
Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 23, 1996
2
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------------------
(In Thousands)
<S> <C> <C>
Admitted assets
Cash and invested assets:
Bonds $ 635,249 $ 560,165
Preferred stocks 14,428 13,355
Mortgage loans 5,318 6,644
Policy loans 22,606 19,730
Cash and short-term investments 20,268 21,071
Other invested assets 8,827 -
------------------------
Total cash and invested assets 706,696 620,965
Separate account assets 265,264 143,262
Broker balances receivable - 849
Accrued investment income 7,959 8,128
Federal income tax recoverable - 2,259
Other admitted assets - 66
------------------------
Total admitted assets $ 979,919 $ 775,529
========================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------------
(In Thousands)
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 671,322 $ 589,063
Unpaid claims 1,813 2,135
Deposits on policies to be issued - 716
-------------------------
Total policy and contract liabilities 673,135 591,914
Separate account liabilities 265,264 143,262
Accounts payable and accrued expenses 264 1,052
Transfers to Separate Accounts due or accrued, net (16,329) (9,563)
Reinsurance balances payable 98 1,138
Federal income taxes 1,005 -
Asset valuation reserve 1,969 698
Interest maintenance reserve 6,992 10,665
Broker balances payable 6,082 -
Other liabilities 2,300 806
-------------------------
Total liabilities 940,780 739,972
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued and outstanding 2,000 2,000
Paid-in capital 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (22,855) (26,437)
-------------------------
Total capital and surplus 39,139 35,557
-------------------------
Total liabilities and capital and surplus $ 979,919 $ 775,529
=========================
</TABLE>
See accompanying notes.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 1,262 $ 2,604
Deposit-type funds 261,378 154,851
Net investment income 46,548 43,751
Amortization of the interest maintenance reserve 823 1,564
Other income 3,913 2,191
---------------------
Total premiums and other revenues 313,924 204,961
Benefits paid or provided:
Death benefits 9,098 5,809
Annuity benefits 3,581 3,135
Surrender benefits 119,789 63,653
Payments on supplementary contracts 1,869 1,669
Increase in insurance and annuity reserves 80,945 9,953
Other benefits 1,492 112
---------------------
Total benefits paid or provided 216,774 84,331
Insurance and other expenses:
Commissions 4,809 5,275
General expenses 8,150 9,910
Taxes, licenses and fees 301 300
Net transfers to separate account 77,166 100,369
---------------------
Total insurance and other expenses 90,426 115,854
---------------------
Gain from operations before federal income taxes and net
realized capital losses 6,724 4,776
Federal income taxes 991 23
---------------------
Gain from operations before net realized capital losses 5,733 4,753
Net realized capital gains (losses), less capital gains
tax expense (benefit) (1995-$1,800,000;
1994-$(1,923,000)) and excluding net gains (losses)
transferred to the interest maintenance reserve
(1995-$(2,850,000); 1994-$(8,756,000)) (900) (800)
---------------------
Net income $ 4,833 $ 3,953
=====================
</TABLE>
See accompanying notes.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SPECIAL TOTAL
COMMON PAID-IN SURPLUS UNASSIGNED CAPITAL AND
STOCK SURPLUS FUNDS SURPLUS SURPLUS
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $2,000 $ 59,244 $ 750 $(29,735) $ 32,259
Net income 3,953 3,953
Increase in nonadmitted assets (4) (4)
Increase in asset valuation
reserve (651) (651)
----------------------------------------------------
Balance, December 31, 1994 2,000 59,244 750 (26,437) 35,557
Net income 4,833 4,833
Decrease in nonadmitted assets 20 20
Increase in asset valuation
reserve (1,271) (1,271)
----------------------------------------------------
Balance, December 31, 1995 $2,000 $ 59,244 $ 750 $(22,855) $ 39,139
====================================================
</TABLE>
See accompanying notes.
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
----------------------
(In Thousands)
<S> <C> <C>
Operations:
Premiums, policy proceeds, and other considerations
received $ 262,639 $ 157,455
Net investment income received 47,165 44,687
Commission and expense allowances received on
reinsurance ceded 906 36
Benefits paid (134,780) (74,154)
Insurance expenses paid (13,461) (15,299)
Other income received net of other expenses paid 166 173
Net transfers to separate account (89,932) (107,601)
Federal income taxes paid - (358)
---------------------
Net cash provided by operations 78,703 4,939
Proceeds from sales, maturities, or repayments of
investments:
Bonds 339,361 206,582
Preferred stocks 6,913 3,356
Subsidiary - 25
Mortgage loans 1,326 941
---------------------
Total investment proceeds 347,600 210,904
Taxes paid on capital gains - (2,468)
---------------------
Net proceeds from sales, maturities, or repayments of
investments 347,600 208,436
Other cash provided:
Other sources 7,899 662
---------------------
Total other cash provided 7,899 662
---------------------
Total cash provided 434,202 214,037
---------------------
</TABLE>
7
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Cost of investments acquired:
Bonds $ 416,110 $ 253,894
Preferred stocks 7,818 16,711
Other invested assets 8,841 -
----------------------
Total investments acquired 432,769 270,605
Other cash applied:
Other applications, net 2,236 9,324
----------------------
Total other cash applied 2,236 9,324
----------------------
Total cash used 435,005 279,929
----------------------
Net decrease in cash and short-term investments (803) (65,892)
Cash and short-term investments at beginning of year 21,071 86,963
----------------------
Cash and short-term investments at end of year $ 20,268 $ 21,071
======================
</TABLE>
See accompanying notes.
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1995
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity" or the
"Company") is a wholly owned subisidiary of Integrity Life Insurance Company
("Integrity") which is an indirect wholly owned subsidiary of ARM Financial
Group, Inc. ("ARM"). ARM acquired Integrity and the Company from The National
Mutual Life Association of Australasia Limited ("National Mutual"). The Company
is domiciled in the state of New York. The Company, currently licensed in eight
states and the District of Columbia, provides retail and institutional products
to the long-term savings and retirement marketplace.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the New York
Insurance Department. Such practices vary from generally accepted accounting
principles ("GAAP"); the more significant variances from GAAP are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or
market value based on their 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 market values. Mortgage loans on real
estate in good standing are reported at unpaid principal balances. 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 account. The Asset Valuation
Reserve is determined by an NAIC prescribed formula and is reported as a
liability rather than surplus. Under a formula prescribed by the
NAIC, National Integrity defers the portion of
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity based on the individual security sold using the seriatim method.
The net deferral is reported as the "interest maintenance reserve" in the
accompanying balance sheets. Under GAAP, realized gains and losses are
reported in the income statement on a pretax basis in the period that the
asset giving rise to the gain or loss is sold and valuation allowances are
provided when there has been a decline in value deemed other than temporary,
in which case, the provision for such declines would be charged to income.
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 present value of expected gross profits from surrender charges and
investment, mortality, and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally agents' debit
balances, are excluded from the accompanying balance sheets and are charged
directly to unassigned surplus.
PREMIUMS
Revenues for investment-type products consist of the entire premium received
and benefits represent the death benefits paid and the change in policy
reserves. Under GAAP, such premiums received are accounted for as deposits
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.
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 4,833 $ 3,953
Deferred policy acquisition costs, net of
amortization 7,614 10,350
Adjustments to policyholder deposits (3,669) (7,183)
Adjustments to invested asset carrying values at
acquisition date (180) (1,236)
Amortization of value of insurance in force (2,905) (1,556)
Amortization of interest maintenance reserve (823) (1,564)
Adjustments for realized investment gains (losses) (747) (10,807)
Adjustments for federal income tax benefit (expense) 564 (292)
Other 356 (1,331)
------------------------
Net income (loss), GAAP basis $ 5,043 $ (9,676)
========================
</TABLE>
11
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---------------------
(In Thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 39,139 $ 35,557
Adjustments to policyholder deposits (26,792) (23,123)
Adjustments to invested asset carrying values at
acquisition date (5,889) (4,962)
Asset valuation reserve and interest
maintenance reserve 20,567 20,119
Value of insurance in force 15,393 18,288
Deferred policy acquisition costs 18,541 10,927
Net unrealized gains (losses) on available-for-sale
investments 5,577 (31,571)
Other (246) (1,146)
---------------------
Shareholder's equity, GAAP basis $ 66,280 $ 24,089
=====================
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks, common stocks, and short-term investments, are stated
at values prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost; the
discount or premium on bonds is amortized using the interest method. For
loan-backed bonds, anticipated prepayments are considered when determining
the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities were
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preferred stocks are reported at cost or amortized cost.
Mortgage loans and policy loans are reported at unpaid principal balances.
Short-term investments includes investments with maturities of less than one
year at the date of acquisition.
Realized capital gains and losses are determined using the specific
identification method.
BENEFITS
Insurance 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 on 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.
POLICY AND CONTRACT CLAIMS
Unpaid benefits and related expenses are established for estimates of payments
to be made on individual insurance claims that have been incurred and reported,
and estimates of losses which have occurred but have not been reported.
Management believes that its reserve estimate for policy and contract claims is
adequate.
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
Reinsurance premiums, benefits and expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Premiums, benefits and expenses, and the
reserves for policy and contract liabilities are reported net, rather than
gross, of reinsured amounts.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
variable annuity contracts. Separate account assets are reported at market
value. Surrender charges collectible by the general account in the event of
variable policy surrenders are reported as a negative liability rather than an
asset pursuant to prescribed NAIC accounting practices. The operations of the
separate accounts are not included in the accompanying financial statements,
except for separate accounts with guarantees.
USE OF ESTIMATES
The preparation of financial statements in compliance with statutory accounting
practices requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation of the 1995 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
a state, and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in 1997, will
likely change, to some extent, prescribed statutory accounting practices, and
may result in changes to the accounting practices that the Company uses to
prepare its statutory financial statements. Although the recodification project
is meant to be surplus neutral, there is not enough available information for
the industry to assess the impact of such project.
3. INVESTMENTS
The cost or amortized cost and the fair, or comparable, value of investments in
bonds are summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1995:
U.S. treasury securities
and obligations of U.S.
government agencies $ 51,434 $ 1,381 $ 22 $ 52,793
States and political subdivisions 5,997 43 - 6,040
Foreign governments 1,898 62 - 1,960
Public utilities 19,861 190 41 20,010
Other corporate securities 229,776 5,366 1,653 233,489
Asset-backed securities 27,695 - - 27,695
Mortgage-backed securities 298,588 - - 298,588
---------------------------------------------
Total bonds $ 635,249 $ 7,042 $ 1,716 $ 640.575
=============================================
</TABLE>
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1994:
U.S. treasury securities
and obligations of U.S.
government agencies $ 1,233 $ - $ 11 $ 1,222
States and political subdivisions 11,628 - 1,318 10,310
Foreign governments 4,965 - 715 4,250
Public utilities 42,303 - 3,951 38,352
Other corporate securities 219,363 - 16,460 202,903
Asset-backed securities 15,208 - - 15,208
Mortgage-backed securities 265,465 - 568 264,897
---------------------------------------------
Total bonds $ 560,165 $ - $ 23,023 $ 537,142
=============================================
</TABLE>
Fair values are based on published quotations of the Securities Valuation Office
of the NAIC. Fair values generally represent quoted market value prices for
securities traded in the public marketplace, or analytically determined values
using bid or closing prices for securities not traded in the public marketplace.
However, for certain investments for which the NAIC does not provide a value,
the Company uses the amortized cost amount as a substitute for fair value in
accordance with prescribed guidance. As of December 31, 1995 and 1994, the fair
value of investments in bonds includes $426,972,000 and $343,698,000,
respectively, of bonds that were valued at amortized cost.
16
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1995, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-----------------------------
(In Thousands)
<S> <C> <C>
Years to maturity:
One or less $ 3,348 $ 3,348
After one through five 119,032 118,398
After five through ten 68,617 68,611
After ten 117,969 123,935
Asset-backed securities 27,695 27,695
Mortgage-backed securities 298,588 298,588
-----------------------------
Total $ 635,249 $ 640,575
=============================
</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 1995 and 1994 were
$286,601,000 and $143,164,000; gross gains of $4,404,000 and $385,000, and
gross losses of $5,621,000 and $11,064,000 were realized on those sales,
respectively.
At December 31, 1995 and 1994, bonds with an admitted asset value of $1,234,000
and $1,233,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
The Company has made no new investments in mortgage loans during 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 is 75%. Fire insurance at
least equal to the excess of the loan over the maximum loan which would be
permitted by law on the land without the buildings is required on all properties
covered by mortgage loans. As of year-end the Company held no mortgages with
interest more than one year past due. During 1995, no interest rates of
outstanding mortgage loans were reduced. No amounts have been advanced by the
Company.
In connection with the change in control of the Company during 1993, National
Mutual agreed to indemnify the Company pursuant to a Guaranty Agreement dated
November 26, 1993, with respect to (i) principal (up to 100%) of the Company's
mortgage loans' statutory book value as of December 31, 1992 and (ii)
contractual interest payments (based on the original principal amount) of all
acquired commercial and agricultural mortgage loans. In support of its
indemnification obligations, National Mutual has placed $23.0 million into
escrow in favor of the Company and National Integrity until the mortgage loans
have been repaid in full.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-------------------------
(In Thousands)
<S> <C> <C>
Income:
Bonds $ 43,591 $ 41,326
Preferred stocks 1,282 356
Mortgage loans 565 633
Policy loans 1,751 1,478
Short-term investments and cash 773 1,117
Other investment income (loss) 383 5
-------------------------
Total investment income 48,345 44,915
Investment expenses (1,797) (1,164)
--------------------------
Net investment income $ 46,548 $ 43,751
==========================
</TABLE>
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
4. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, National Integrity reinsures mortality risks under certain
of its insurance products with other insurance companies through reinsurance
agreements. These reinsurance agreements primarily cover single premium
endowment contracts and variable life insurance policies. Through these
reinsurance agreements, substantially all mortality risks associated with SPE
deposits and substantially all risks associated with variable life business have
been reinsured with non-affiliated insurance companies. A contingent liability
exists with respect to insurance ceded which would become a liability should the
reinsurer be unable to meet the obligations assumed under these reinsurance
agreements. Reinsurance ceded is not significant to the Company's premiums,
benefits or policy and contract liabilities. During 1995, the Company entered
into a reinsurance agreement with General American Life Insurance Company to
assume, on a 50% coinsurance basis, guaranteed investment contracts ("GICs").
Policy and contract liabilities assumed under this agreement were $117,770,000
at December 31, 1995. Reinsurance assumed has increased premiums and benefits
paid in 1995 by $117,175,000 and $1,400,000, respectively.
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.
Income before income taxes differs from taxable income principally due to value
of insurance in-force, policy acquisition costs, and differences in policy and
contract liabilities and investment income for tax and financial reporting
purposes.
The December 31, 1995 tax provision was calculated including net operating loss
carryover benefits of $4,304,000.
6. SURPLUS
The ability of the Company to pay dividends is limited by state insurance laws.
Under New York insurance law, 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.
19
<PAGE>
National Integity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
6. SURPLUS (CONTINUED)
The NAIC adopted Risk-Based Capital ("RBC") requirements which became effective
December 31, 1993, that attempt to evaluate the adequacy of a life insurance
company's adjusted statutory capital and surplus in relation to investment,
insurance and other business risks. The RBC formula will be used by the states
as an early warning tool to identify possible under capitalized companies for
the purpose of initiating regulatory action and is not designed to be a basis
for ranking the financial strength of insurance companies. In addition, the
formula defines a new minimum capital standard which supplements the previous
system of low fixed minimum capital and surplus requirements. The RBC
requirements provide for four different levels of regulatory attention depending
on the ratio of the company's adjusted capital and surplus to its RBC. As of
December 31, 1995 and 1994, the adjusted capital and surplus of the Company is
substantially in excess of the minimum level of RBC that would require
regulatory response.
20
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1995 and 1994, the Company's 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, 1995:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 67,407 8.1%
At book value less current surrender charge of 5% or more 190,629 22.7
At market value 180,991 21.6
------------------
Total with adjustment or at market value 439,027 52.4
Subject to discretionary withdrawal (without adjustment) at
book value with minimal or no charge or adjustment
337,299 40.2
Not subject to discretionary withdrawal 67,710 7.4
------------------
Total annuity reserves and deposit fund liabilities--before
reinsurance 838,036 100.0%
======
Less reinsurance ceded -
Net annuity reserves and deposit fund liabilities $ 838,036
==========
At December 31, 1994:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 37,840 5.9%
At book value less current surrender charge of 5% or more 220,038 34.4
At market value 96,158 15.0
------------------
Total with adjustment or at market value 354,036 55.3
Subject to discretionary withdrawal (without adjustment) at
book value with minimal or no charge or adjustment
229,231 35.8
Not subject to discretionary withdrawal 57,224 8.9
------------------
Total annuity reserves and deposit fund liabilities--before
reinsurance 640,491 100.0%
======
Less reinsurance ceded 325
----------
Net annuity reserves and deposit fund liabilities $ 640,166
==========
</TABLE>
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS
Separate accounts assets and liabilities represent funds segregated for the
benefit of variable annuity and variable life policyholders who generally bear
the investment risk (mutual fund options), or for certain policyholders who are
guaranteed a fixed rate of return (guaranteed rate options). Assets held in
separate accounts are carried at estimated fair values.
Information regarding the separate accounts of the Company as of and for the
year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
*NON-
INDEXED NON-
GUARANTEE GUARANTEED
LESS THAN OR SEPARATE
EQUAL TO 4% ACCOUNTS TOTAL
---------------------------------
(In Thousands)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 25,771 $ 71,211 $ 96,982
=================================
Reserves for separate accounts with assets
at fair value $ 67,407 $181,059 $248,466
=================================
Reserves for separate accounts by withdrawal
characteristics:
Subject to discretionary withdrawal (with
adjustment):
With market value adjustment $ 67,407 $ - $ 67,407
At market value - 181,059 181,059
---------------------------------
Total with adjustment or at market value 67,407 181,059 248,466
Not subject to discretionary withdrawal - - -
---------------------------------
Total separate account reserves $ 67,407 $181,059 $248,466
=================================
</TABLE>
*Separate accounts with guarantees.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
1995 1994
------------------
(In Thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
Separate Accounts Statement:
Transfers to Separate Accounts $ 96,982 $110,843
Transfers from Separate Accounts (21,800) (11,473)
------------------
Net transfers to Separate Accounts 75,182 99,370
Reconciling adjustments:
Mortality and expense charges reported as other income 1,928 1,017
Other income (expenses) 56 (18)
------------------
Transfers as reported in the Summary of Operations of the
Life, Accident and Health Annual Statement $ 77,166 $100,369
==================
</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
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- --------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------- --------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Bonds $635,249 $666,955 $560,165 $517,098
Preferred stocks 14,428 15,964 13,355 13,304
Mortgage loans 5,318 5,318 6,644 6,644
Liabilities:
Life and annuity reserves
for investment-type contracts $472,037 $474,465 504,176 492,496
Separate account reserves 248,398 247,220 133,674 132,945
</TABLE>
Mortgage Loans on Real Estate
Pursuant to the terms of the acquisition, payments of principal and interest on
mortgage loans are guaranteed by National Mutual. Principal received in excess
of statutory book value is to be returned to National Mutual. Accordingly, book
value is deemed to be fair value.
Life and Annuity Reserves for Investment-type Contracts
The fair value of structured settlements and immediate annuities are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of structured settlements and immediate
annuities represents the fair values of those insurance policies as a whole. The
fair value amounts of the remaining annuities are based on the cash surrender
value of the underlying policies.
Separate Account Reserves
The fair value of separate account reserves for investment-type products equals
the cash surrender values.
24
<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
1995 and 1994, the Company was charged $5,641,000 and $5,648,000, respectively,
for these services in accordance with the requirements of applicable insurance
law and regulations.
25
<PAGE>
PART C
OTHER INFORMATION
-----------------
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements included in Part A:
---------------------------------------
Part 1 - Financial Information
Financial Statements included in Part B:
----------------------------------------
Separate Account II:
--------------------
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1995
Statement of Operations for the Year Ended December 31, 1995
Statements of Changes in Net Assets for the Years Ended December 31,
1995 and 1994
Notes to Financial Statements
National Integrity Life Insurance Company:
------------------------------------------
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1995 and 1994
Statements of Operations (Statutory Basis) for the Years Ended
December 31, 1995 and 1994
Statements of Changes in Surplus (Statutory Basis) for the Years Ended
December 31, 1995 and 1994
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1995 and 1994
Notes to Financial Statements
(b) Exhibits:
--------
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of National Integrity
Life Insurance Company (National Integrity) and Certification
of Chief Executive Officer authorizing the establishment of the
Separate Account II, the Registrant. Incorporated by reference
from Registrant's registration statement filed on August 20,
1992.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement among National
Integrity, Integrity Financial Services, Inc. (IFS) and
Painewebber Incorporated, incorporated by reference to Pre-
Effective Amendment No. 1 to Registrant's registration
statement on Form N-4 filed October 23, 1992.
3.(b) Form of Variable Contract Principal Underwriter Agreement with
SBM Financial Services (FILED HEREWITH).
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's registration statement filed on August 20, 1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference from Form N-4 registration statement (File No.
33-56658).
<PAGE>
4.(c) Form of variable annuity certificate. Incorporated by reference
from Form N-4 registration statement (File No. 33-56658).
4.(d) Form of riders to certificate for qualified plans. Incorporated
by reference from pre-effective amendment no. 1 to Registrant's
registration statement filed on October 23, 1992.
5. Form of application. Incorporated by reference from post-
effective amendment no.1 to Registrant's Form S-1 registration
statement (File No. 33-51122).
6.(a) Certificate of Incorporation of National Integrity.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-33119).
6.(b) By-Laws of National Integrity. Incorporated by reference to
Registrant's Form N-4 registration statement (File No.
33-33119).
7.(a) Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA).
Incorporated by reference to Registrant's Form N-4 registration
statement (File No. 33-51126), filed on April 28, 1995.
7.(b) Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA) effective
January 1, 1995 (filed herewith).
8. Form of Participation Agreement among Integrity Series Fund,
Inc., National Integrity and IFS incorporated by reference to
Registrant's registration statement on Form N-4 filed August
20, 1992.
9. Opinion and Consent of John R. McGeeney, Co-General Counsel
(filed herewith).
10. Consents of Ernst & Young LLP (filed herewith).
11. Not applicable.
12. Not applicable.
13. Schedule for computation of performance quotations (filed
herewith).
14. Not applicable.
<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 National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Debra E. Abramovitz Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Kenneth F. Clifford Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
James S. Cole Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
John Franco Director, Co-Chairman of the Board and Co-Chief
ARM Financial Group, Inc. Executive Officer
239 S. Fifth Street, 12th Floor
Louisville, Kentucky 40202
Dudley J. Godfrey, Jr. Director
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
Donald B. Henderson, Jr. Director
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019-4513
Edward D. Powers Director
6064 Shipyard Lane
Easton, Maryland 21601
William G. Primps Director
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019-4513
David R. Ramsay Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Martin H. Ruby Director, Co-Chairman of the Board and Co-Chief
ARM Financial Group Inc. Executive Officer
239 S. Fifth Street, 12th Floor
Louisville, Kentucky 40202
</TABLE>
<PAGE>
Directors, continued
- --------------------
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Irwin T. Vanderhoof Director
18 Two Bridges Road
Towaco, New Jersey
Peter R. Vogelsang Director
Morgan Stanley Group Inc.
1221 Avenue of the Americas
New York, New York 10020
Emad A. Zikry Director, President and Chief Investment Officer
ARM Capital Advisors, Inc.
200 Park Avenue, 20th Floor
New York, New York 10166
</TABLE>
Selected Officers: (The business address for each of the principal officers
listed below is 239 S. Fifth Street, 12th Floor, Louisville,
Kentucky 40202.)
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Robert H. Scott Co-General Counsel and Secretary
Peter S. Resnik Treasurer
Dennis L. Carr Executive Vice President-Chief Actuary
David E. Ferguson Executive Vice President-Chief Administrative Officer
John R. Lindholm Executive Vice President-Chief Marketing Officer
Edward L. Zeman Executive Vice President-Chief Financial Officer
Barry G. Ward Controller
John R. McGeeney Co-General Counsel
Rose M. Culbertson Tax Officer
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH NATIONAL INTEGRITY
---------------------------------------------------------------------
OR REGISTRANT
-------------
National Integrity, the depositor of Separate Account II, is a wholly
owned subsidiary of Integrity Life Insurance Company, an Ohio stock life
insurance corporation. Integrity Life Insurance Company is a wholly owned
subsidiary of Integrity Holdings, Inc., a Delaware corporation which is a
holding company engaged in no active business. All outstanding shares of
Integrity Holdings, Inc. are owned by ARM Financial Group, Inc., a Delaware
corporation which is a financial services company focusing on the long-term
savings and retirement marketplace by providing retail and institutional
products and services throughout the United States (ARM). ARM owns 100% of the
stock of (i) SBM Financial Services, Inc., a Minnesota corporation (SBM
Financial Services) registered with the SEC as a broker-dealer and a member of
the National Association of Securities Dealers, Inc., (ii) ARM Capital Advisors,
Inc., a New York corporation registered with the SEC as an investment adviser,
(iii) SBM Certificate Company, a Minnesota corporation registered with the SEC
as an issuer of face-amount certificates, and (iv) ARM Transfer Agency, Inc., a
Delaware corporation registered with the SEC as a transfer and disbursing
agency. Approximately 91% of the outstanding voting stock of ARM is owned by The
Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners
III, L.P., Morgan Stanley Capital Investors,
<PAGE>
L.P., and MSCP III 892 Investors, L.P., each of which is a Delaware limited
partnership (collectively, the MSCP Funds). The MSCP Funds are private equity
funds sponsored by Morgan Stanley Group Inc., a Delaware corporation that,
through its subsidiaries, provides a wide range of financial services on a
global basis (Morgan Stanley). The general partner of each of the MSCP Funds is
a wholly owned subsidiary of Morgan Stanley. Oldarm Limited Partnership, a
Kentucky limited partnership, New ARM, LLC, a Kentucky limited liability
company, and certain employees and management of ARM own in the aggregate
approximately 9% of the voting stock of ARM.
No person has the direct or indirect power to control Morgan Stanley
except insofar as he or she may have such power by virtue of his or her capacity
as a director or executive officer thereof. Morgan Stanley is publicly held; no
individual beneficially owns more than 5% of the common shares; however,
approximately 31% of such shares are subject to a stockholders' agreement or
voting agreement among certain current and former principals and employees of
Morgan Stanley and its predecessor.
The following is a complete list of the subsidiaries of Morgan
Stanley. All subsidiaries are wholly owned by their immediate parent company and
are incorporated in Delaware, except where noted otherwise in parentheses.
MORGAN STANLEY GROUP INC.
- -------------------------
Fourth Street Development Co. Incorporated
Fourth Street Ltd.
Jolter Investments Inc.
Morgan Rundle Inc.
MR Ventures Inc.
Morgan Stanley Advisory Partnership Inc.
Morgan Stanley Asset Management Inc.
Morgan Stanley Asset Management Holdings Inc.
*Miller Anderson & Sherrerd, LLP (Pennsylvania)
Morgan Stanley Baseball, Inc.
Morgan Stanley Capital I Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Capital Partners III, Inc.
Morgan Stanley Capital Services Inc.
Morgan Stanley Commercial Mortgage Capital, Inc.
Morgan Stanley Commodities Management, Inc.
Morgan Stanley Derivative Products Inc.
Morgan Stanley Developing Country Debt II, Inc.
Morgan Stanley Emerging Markets Inc.
Morgan Stanley Equity (C.I.) Limited (Jersey, Channel, Islands)
Morgan Stanley Equity Investors Inc.
Morgan Stanley Finance (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Insurance Agency Inc.
Morgan Stanley (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley LEF I, Inc.
Morgan Stanley Leveraged Capital Fund Inc.
Morgan Stanley Leveraged Equity Fund II, Inc.
Morgan Stanley Capital Partners Asia Limited (Hong Kong)
Morgan Stanley Leveraged Equity Holdings Inc.
Morgan Stanley Market Products Inc.
Morgan Stanley Mortgage Capital Inc. (New York)
Morgan Stanley Real Estate Investment Management Inc.
Morgan Stanley Real Estate Fund, Inc.
MSREF I, L.L.C.
MSREF I-CO, L.L.C.
Morgan Stanley Real Estate Investment Management II, Inc.
MSREF II-CO, L.L.C.
Morgan Stanley Realty Incorporated
Brooks Harvey & Co., Inc.
<PAGE>
Morgan Stanley Realty of California Inc. (California)
Morgan Stanley Realty of Illinois Inc.
Brooks Harvey of Florida, Inc. (Florida)
Brooks Harvey & Co. of Hawaii, Inc.
Morgan Stanley Realty Japan Ltd. (Japan)
BH-MS Realty Inc.
BH-MS Leasing Inc.
BH-Sartell Inc.
The Morgan Stanley Scholarship Fund, Inc. (Not-for-Profit)
Morgan Stanley Services Inc.
Morgan Stanley Technical Services Inc.
Morgan Stanley Technical Services MB/VC Inc.
Morgan Stanley Trust Company (New York)
MS Prospect & Co.
Morgan Stanley Venture Capital Inc.
Morgan Stanley Venture Capital II, Inc.
Morgan Stanley Ventures Inc.
Morstan Development Company, Inc.
Moranta, Inc. (Georgia)
Porstan Development Company, Inc. (Oregon)
MS 10020, Inc.
MS Financing Inc.
Morgan Stanley 750 Building Corp.
MS Tokyo Properties Ltd. (Japan)
MS Holdings Incorporated
MS SP Urban Horizons, Inc.
MS Urban Horizons, Inc.
MS Venture Capital (Japan) Inc.
MSAM/Kokusai, Inc.
MSBF Inc.
MSCP III Holdings, Inc.
MSPL Co. Inc.
MSREF II, Inc.
MSREF II, L.L.C.
MS/USA Leasing Inc.
PG Holdings, Inc.
PG Investors, Inc.
PG Investors II, Inc.
Pierpont Power, Inc. (New York)
Romley Computer Leasing Inc.
Strategic Investments I, Inc.
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
- -------------------------------------------------
(The general partner of which is Morgan Stanley Leveraged Equity Fund II, Inc.)
<PAGE>
American Italian Pasta Company
Amerin Corporation
Amerin Guaranty Corporation
ARM Financial Group, Inc.
CIMIC Holdings Limited
Consolidated Hydro, Inc.
Fort Howard Corporation
Hamilton Services Limited
PageMart Nationwide, Inc.
PSF Finance L.P.
Premium Standard Forms, Inc.
Container Corporation of America
Risk Management Solutions
Silgan Holding Inc.
Silgan Corporation
Sullivan Holdings Inc.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
- -----------------------------------------
(The general partner of the general partner which is Morgan Stanley Capital
Partners III, Inc.)
ARM Financial Group, Inc.
CSG Systems International, Inc.
The Compucare Company
Highlands Gas Corporation
ECO II Holdings
PSF Finance, L.P.
Premium Standard Forms, Inc.
Nokia Aluminum
SITA Telecommunications Holdings, N.V.
MORGAN STANLEY & CO. INCORPORATED
- ---------------------------------
(100% owned by Morgan Stanley Group Inc.)
HRJ Corporation
Morgan Stanley Flexible Agreements Inc.
Morgan Stanley Securities Trading Inc.
Morgan Stanley Stock Loan Inc.
MS Securities Services Inc.
NRSD Corporation
Prime Dealer Services Corp.
MORGAN STANLEY INTERNATIONAL INCORPORATED
- -----------------------------------------
(100% owned by Morgan Stanley Group Inc.)
Bank Morgan Stanley AG (Switzerland)
Morgan Stanley AOZT (Russia)
Morgan Stanley Asia (China) Limited (Hong Kong)
Morgan Stanley Asia Holdings I Inc.
Morgan Stanley Asia Holdings II Inc.
Morgan Stanley Asia Holdings III Inc.
Morgan Stanley Asia Holdings IV Inc.
Morgan Stanley Asia Holdings V Inc.
Morgan Stanley Asia Holdings VI Inc.
Morgan Stanley Asia Pacific (Holdings) Limited (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) I LLC (Cayman Islands)
Morgan Stanley Asia Limited (Hong Kong)
Morgan Stanley Futures (Hong Kong) Limited (Hong Kong)
Morgan Stanley Hong Kong Securities Limited (Hong Kong)
Morgan Stanley Pacific Limited (Hong Kong)
Morgan Stanley Asia Regional (Holdings) II LLC (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) III LLC (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) IV LLC (Cayman Islands)
**Morgan Stanley Japan (Holdings) Ltd. (Cayman Islands)
Morgan Stanley Japan Limited (Hong Kong)
Morgan Stanley Asia Pacific (Holdings) I Limited (Cayman Islands)
Morgan Stanley Asia (Singapore) Pte Ltd (Republic of Singapore)
Morgan Stanley Asia (Taiwan) Ltd. (Republic of China)
Morgan Stanley Asset & Investment Trust Management Co., Limited (Japan)
Morgan Stanley Asset Management Singapore Limited (Republic of Singapore)
Morgan Stanley Australia Limited (Australia)
Morgan Stanley Bank Luxembourg S.A. (Luxembourg)
Morgan Stanley Canada Limited (Canada)
Morgan Stanley Capital SA (France)
Morgan Stanley Capital Group (Singapore) Pte Ltd (Republic of Singapore)
Morgan Stanley Capital (Luxembourg) S.A. (Luxembourg)
Morgan Stanley Developing Country Debt, Ltd. (Bermuda)
<PAGE>
Morgan Stanley Financial Services Beteiligungs GmbH (Germany)
Morgan Stanley Futures (Singapore) Pte Ltd (Republic of Singapore)
Morgan Stanley Group (Europe) Plc (England)
Morgan Stanley Asset Management Limited (England)
Morgan Stanley Capital Group Limited (England)
Morgan Stanley (Europe) Limited (England)
Morgan Stanley Finance plc (England)
Morgan Stanley Properties Limited (England)
Morgan Stanley Property Management (UK) Limited (England)
Morgan Stanley Services (UK) Limited (England)
Morgan Stanley UK Group (England)
Morgan Stanley & Co. International Limited (England)
Morgan Stanley International Nominees Limited (England)
Morgan Stanley & Co. Limited (England)
Morgan Stanley Securities Limited (England)
Morstan Nominees Limited (England)
MS Leasing UK Limited (England)
MS Volatility Fund N.V. (Netherlands Antilles)
Morgan Stanley Holding (Deutschland) GmbH (Germany)
Morgan Stanley Bank AG (Germany)
Morgan Stanley Hong Kong Nominees Limited (Hong Kong)
Morgan Stanley International Insurance Ltd. (Bermuda)
Morgan Stanley Latin America Incorporated
Morgan Stanley do Brasil Limitada (Brazil)
MS Carbocol Advisors Incorporated (Delaware)
MS Ferrovias Advisors Incorporated (Delaware)
Morgan Stanley Mauritius Company Limited (Mauritius)
***Morgan Stanley Asset Management India Private Limited (India)
***Morgan Stanley India Securities Private Limited (India)
Morgan Stanley Offshore Investment Company Ltd. (Cayman Islands)
Morgan Stanley Overseas Services (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley S.A. (France)
Morgan Stanley SICAV Management S.A. (Luxembourg)
Morgan Stanley South Africa (Pty) Limited (South Africa)
Morgan Stanley (Structured Products) Jersey Limited (Jersey, Channel Islands)
Morgan Stanley Wertpapiere GmbH (Germany)
MS Italy (Holdings) Inc.
Banca Morgan Stanley SpA (Italy)
MS LDC, Ltd.
MSL Incorporated
___________________________
* 95% owned by Morgan Stanley Asset Management Holdings Inc., 3% owned by MSL
Incorporated and 2% owned by MS Holdings Incorporated.
** 25% owned by Morgan Stanley Asia Pacific (Holdings) I Limited.
*** 25% owned by non-Morgan Stanley entities.
[THERE ARE NO SUBSIDIARIES OF NATIONAL INTEGRITY. THE FINANCIAL
STATEMENTS FOR NATIONAL INTEGRITY ARE NOT CONSOLIDATED WITH ANY AFFILIATE.]
ITEM 27. NUMBER OF CONTRACT OWNERS
-------------------------
As of April 9, 1996 there were 885 contractholders.
<PAGE>
ITEM 28. INDEMNIFICATION
---------------
By-Laws of National Integrity. National Integrity's By-Laws provide, in Article
VII, as follows:
7.1 Indemnification of Directors, Officers, Employees and
Incorporators. To the extent permitted by the law of the State of New York and
subject to all applicable requirements thereof:
(a) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate, is or was a director, officer, employee or
incorporator of the Company shall be indemnified by the Company;
(b) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate serves or served any other organization in
any capacity at the request of the Company may be indemnified by the
Company; and
(c) the related expenses of any such person in any other of said
categories may be advanced by the Company.
By-Laws of SBM Financial Services: SBM Financial Services' By-Laws provide, in
Sections 4.01 and 4.02, as follows:
Section 4.01 Indemnification. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
Section 4.02 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
Agreements. National Integrity and SBM Financial Services, including each
director, officer, and controlling person of National Integrity and SBM
Financial Services, are entitled to indemnification against certain liabilities
as described in Sections 5.2, 5.3 and 5.5 of the Selling Agreement and Section 9
of the Form of Variable Contract Principal Underwriter Agreement filed as
Exhibit 3(a) to this Registration Statement. Those sections are incorporated by
reference into this response. In addition, National Integrity and SBM Financial
Services, including each director, officer and controlling person of National
Integrity and SBM Financial Services, are entitled to indemnification against
certain liabilities as described in Article VIII of the Participation Agreement
filed as Exhibit 8 to this Registration Statement. That article is incorporated
by reference into this response. Certain officers and directors of National
Integrity are officers and directors of SBM Financial Services (see Item 25 and
Item 29 of this Part C).
Insurance. The directors and officers of National Integrity and SBM Financial
Services are insured under a policy, issued by National Union. The total annual
limit on such policy is $10 million, and the policy insures the officers and
directors against certain liabilities arising out of their conduct in such
capacities.
Undertaking. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
----------------------
(a) SBM Financial Services is the principal underwriter for Separate
Account II. SBM Financial Services also serves as an underwriter for Separate
Account I of National Integrity, Separate Accounts I and II of Integrity, The
Legends Fund, Inc. and the State Bond group of mutual funds. National Integrity
is the Depositor of Separate Accounts II, I and VUL.
(b) The names and business addresses of the officers and directors of,
and their positions with, SBM Financial Services, are as follows:
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with SBM Financial Services
- ----------------------------------- ------------------------------------------------
<S> <C>
Edward J. Haines Director and President
239 South Fifth Street
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General Counsel and Compliance Officer
239 South Fifth Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
239 South Fifth Street
Louisville, Kentucky 40202
Walter W. Balek Vice President
200 East Wilson Bridge Road
Worthington, Ohio 43085
Dale C. Bauman Vice President
200 East Wilson Bridge Road
Worthington, Ohio 43085
Robert Bryant Vice President
200 East Wilson Bridge Road
Worthington, Ohio 43085
Richard Carlblom Vice President
200 East Wilson Bridge Road
Worthington, Ohio 43085
Ronald Geiger Vice President
200 East Wilson Bridge Road
Worthington, Ohio 43085
Barry G. Ward Controller
239 South Fifth Street
Louisville, Kentucky 40202
Rose M. Culbertson Tax Officer
239 South Fifth Street
Louisville, Kentucky 40202
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
William H. Guth Operations Officer
200 East Wilson Bridge Road
Worthington, Ohio 43085
David L. Anders Marketing Officer
200 East Wilson Bridge Road
Worthington, Ohio 43085
Patricia L. Mack Assistant Secretary
239 South Fifth Street
Louisville, Kentucky 40202
</TABLE>
(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 239 S. Fifth Street, 12th Floor,
Louisville, Kentucky 40202.
ITEM 31. MANAGEMENT SERVICES
-------------------
The contract under which management-related services are provided to
National Integrity is discussed under Part 1 of Part B.
ITEM 32. UNDERTAKINGS
------------
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration
statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted;
(b) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant
can check to request a Statement of Additional Information, or
(2) a postcard or similar written communication affixed to or
included in the prospectus that the applicant can remove to send
for a Statement of Additional Information;
(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.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant and the Depositor certify that they meet all of the
requirements for effectiveness of this post-effective amendment to their
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and have duly caused this amendment to the Registration Statement to be signed
on their behalf, in the City of Louisville and State of Kentucky on this 1st
day of May, 1996.
SEPARATE ACCOUNT II OF
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: National Integrity Life Insurance Company
(Depositor)
By: /s/ Emad A. Zikry
--------------------------------------------
Emad A. Zikry
President and Chief Investment Officer
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Emad A. Zikry
--------------------------------------------
Emad A. Zikry
President and Chief Investment Officer
<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 1st day of May, 1996.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Emad A. Zikry
--------------------------------------------
Emad A. Zikry
President and Chief Investment Officer
As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ Emad A. Zikry
--------------------------------------------
Emad A. Zikry, President and Chief
Investment Officer
Date:
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
--------------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date:
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
--------------------------------------------
Barry G. Ward, Controller
Date:
DIRECTORS:
/s/ Debra E. Abramovitz /s/ William G. Primps
- -------------------------------------- ---------------------------------------
Debra E. Abramovitz William G. Primps
Date: Date:
/s/ Kenneth F. Clifford /s/ David R. Ramsay
- -------------------------------------- ---------------------------------------
Kenneth F. Clifford David R. Ramsay
Date: Date:
/s/ James S. Cole /s/ Martin H. Ruby
- -------------------------------------- ---------------------------------------
James S. Cole Martin H. Ruby
Date: Date:
/s/ John Franco /s/ Irwin T. Vanderhoof
- -------------------------------------- ---------------------------------------
John Franco Irwin T. Vanderhoof
Date: Date:
/s/ Dudley J. Godfrey, Jr. /s/ Peter R. Vogelsang
- -------------------------------------- ---------------------------------------
Dudley J. Godfrey, Jr. Peter R. Vogelsang
Date: Date:
/s/ Donald B. Henderson, Jr. /s/ Emad A. Zikry
- -------------------------------------- ---------------------------------------
Donald B. Henderson, Jr. Emad A. Zikry
Date: Date:
/s/ Edward D. Powers
- --------------------------------------
Edward D. Powers
Date:
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
3 Form of Variable Contract Principal Underwriter Agreement with SBM
Financial Services.
7(b) Reinsurance Agreement between National Integrity and Connecticut
General Life Insurance Company.
9 Opinion and Consent of John R. McGeeney, Co-General Counsel.
10 Consents of Ernst & Young LLP.
13 Schedule for computation of performance quotations.
<PAGE>
EXHIBIT 3
FORM OF
-------
VARIABLE CONTRACT PRINCIPAL UNDERWRITER AGREEMENT
-------------------------------------------------
THIS AGREEMENT made as of the ___ day of ___________, 19___, by and between
National Integrity Life Insurance Company, a New York stock life insurance
company (the "Company") and SBM Financial Services, Inc., a Minnesota
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
<PAGE>
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 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 239 S. Fifth Street, 12th Floor, Louisville,
Kentucky 40202 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.
-2-
<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 net compensation for either the services provided by
the Distributor or the services provided by the Company in connection with this
Agreement.
-3-
<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.
-4-
<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:______________________________________
SBM FINANCIAL SERVICES, 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
-6-
<PAGE>
EXHIBIT 7
VARIABLE ANNUITY GUARANTEED DEATH BENEFIT
Effective JANUARY 1, 1995
between
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(LOUISVILLE, KENTUCKY)
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CIGNA REINSURANCE
(Hartford, Connecticut)
<PAGE>
REINSURANCE AGREEMENT, Effective JANUARY 1, 1995
between
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(LOUISVILLE, KENTUCKY)
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CIGNA REINSURANCE
(Hartford, Connecticut)
INDEX
-----
ARTICLE PAGE
------- ----
Access to Records XI 10
Amounts at Risk II 1
Arbitration XVI 13
Automatic Excess Reinsurance III 2
Claims VII 7
Currency XIII 11
DAC Tax Regulation Election XVII 14
Delays, Errors, or Omissions XII 11
Effective Date; Term and Termination XVIII 15
Extra Contractual Obligations VIII 8
Hold Harmless XIV 11
Insolvency XV 12
Liability of Connecticut General IV 4
Litigation IX 10
Notices XIX 17
Offset X 10
Parties to the Agreement I 1
Premium Accounting VI 6
Reinsurance Premiums V 5
SCHEDULES
---------
A. Maximum Limits of Reinsurance in Connecticut General
B. Policy Forms and Funds Subject to this Reinsurance Agreement
C. Limits and Rules of NATIONAL INTEGRITY
D. Quarterly Reinsurance Premium Rates
E. Quarterly Reporting Format
<PAGE>
REINSURANCE AGREEMENT
(hereinafter called Agreement)
between
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(hereinafter called NATIONAL INTEGRITY)
and
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
(hereinafter called Connecticut General)
It is agreed by the two companies as follows:
ARTICLE I PARTIES TO THE AGREEMENT
------------------------------------
This Agreement is solely between NATIONAL INTEGRITY and Connecticut General and
the performance of obligations of each party under the Agreement shall be
rendered solely to the other party. It shall not create any right, interest or
legal relationship to or with anyone other than NATIONAL INTEGRITY or
Connecticut General. Nor shall this Agreement create any legal relationship,
interest or right whatever between Connecticut General and any certificate
holder, beneficiary, policy owner, applicant, or assignee under any policy
and/or policies issued by NATIONAL INTEGRITY.
ARTICLE II AMOUNTS AT RISK
----------------------------
A. The reinsurance death benefit is the excess of the minimum guaranteed death
benefit over the contract value. At issue, the minimum guaranteed death
benefit is equal to the purchase price of the contract. Upon a contract
withdrawal or additional purchase payment, the guaranteed minimum death
benefit is decreased or increased to reflect the transaction. On each policy
anniversary, to attained age 85, the minimum guaranteed death benefit equals
the greater of:
a) contract value;
b) the prior anniversary guaranteed minimum death benefit plus any purchase
payments less any withdrawals since the prior anniversary;
Please refer to Schedule C for a detailed discussion of the guaranteed
minimum death benefit.
B. After age 85, the minimum guaranteed death benefit is the annuity value and
the reinsurance amount at risk is zero.
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<PAGE>
C. The contract value represents the certificate holder's invested assets in
the funds in Schedule B as it appears in the records of NATIONAL INTEGRITY
before application of any surrender charges, on any given date.
D. The amount at risk each quarter will be calculated as the reinsurance death
benefit for each variable annuity contract covered under this agreement. For
determining the amount at risk, the minimum guaranteed death benefit and the
contract value are calculated as the average of the values at the end of the
current quarter and the end of the prior quarter. The amount at risk cannot
fall below zero.
ARTICLE III AUTOMATIC EXCESS REINSURANCE
------------------------------------------
A. On and after the effective date of this Agreement, NATIONAL INTEGRITY shall
cede and Connecticut General shall accept reinsurance of the reinsurance
death benefit for all variable annuity contracts, subject to the following:
1. the maximum reinsurance provided on any one life shall not exceed the
amounts set forth in Schedule A;
2. policies where the certificate holder has an attained age 85 or older
will be excluded;
3. the policy issued by NATIONAL INTEGRITY shall be on the specimen forms,
enhancements, and supplemental materials that NATIONAL INTEGRITY has
furnished Connecticut General and identified on Schedule B, attached
hereto;
4. reinsurance will only apply to assets invested in those funds identified
on Schedule B, attached hereto;
5. the policies underwritten by NATIONAL INTEGRITY shall be issued pursuant
to the limits and rules furnished Connecticut General and attached to
this Agreement as Schedule C;
6. the terms, conditions and restrictions contained in this Agreement.
B. NATIONAL INTEGRITY and Connecticut General further agree that the forms,
supplemental materials, and funds identified on Schedule B were reviewed and
approved by Connecticut General prior to the effective date of this
Agreement. It is also agreed that NATIONAL INTEGRITY shall not issue
coverage under new or revised forms or funds unless such new or revised
forms or funds have been reviewed and approved by Connecticut General.
NATIONAL INTEGRITY shall provide written notice of its intention to issue
coverage based on new or revised forms or funds and Connecticut General
shall be entitled to thirty (30) calendar days following receipt of such
notice in which to review such new or revised forms or funds. If
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<PAGE>
Connecticut General fails to provide written notice within the thirty (30)
calendar day review period of its decision to deny approval, Connecticut
General shall be deemed to have provided approval on the basis that
NATIONAL INTEGRITY requested.
C. NATIONAL INTEGRITY shall provide written notice to Connecticut General of
any changes in its published limits and rules identified on Schedule C, and
Connecticut General shall have no liability pursuant to revised limits and
rules unless and until Connecticut General provides written notice to
NATIONAL INTEGRITY that such revised limits and rules are acceptable. If
Connecticut General fails to provide written notice of acceptance within
thirty (30) days, such changes in limits shall be considered to have been
approved.
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<PAGE>
ARTICLE IV LIABILITY OF CONNECTICUT GENERAL
---------------------------------------------
Connecticut General's liability for reinsurance under this Agreement shall
follow that of NATIONAL INTEGRITY in every case, and be subject in all respects
to the general stipulations, terms, clauses, conditions, waivers and
modifications of the policies issued by NATIONAL INTEGRITY as supplemented.
In no event shall Connecticut General have any reinsurance liability unless the
policy issued by NATIONAL INTEGRITY is in force and the underwriting and
issuance of coverage by NATIONAL INTEGRITY constitutes the doing of business in
a state of the United States of America in which NATIONAL INTEGRITY is properly
licensed and authorized to do business.
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<PAGE>
ARTICLE V REINSURANCE PREMIUMS
--------------------------------
The quarterly premiums for reinsurance subject to the terms and conditions of
this Agreement shall be determined by application of the rates set forth in
Schedule D to the amount of reinsurance coverage provided for each annuity
insured by NATIONAL INTEGRITY, subject to the following:
1. The reinsurance premiums shall be based on the annuitant's age at the
end of each quarter. If the contract is jointly owned, the reinsurance
premiums shall be based on the age of the younger annuitant. NATIONAL
INTEGRITY shall determine the annuitant's age at the time it prepares
the quarterly exposure data submission for the variable annuity
guaranteed death benefit, as set forth in Schedule E, attached hereto.
2. The Age Adjusted Aggregate Contract Value is the sum of the contract
values in all of NATIONAL INTEGRITY's variable annuities subject to this
Agreement, minus contract values for certificate holders who are
ATTAINED AGE 85 OR OLDER and minus contract values attributable to
amounts in excess of the maximum purchase amounts listed in Schedule A.
The Age Adjusted Aggregate Contract Values times one fourth (1/4) of the
minimum premium rate will be remitted to Connecticut General in advance
for the current quarter, at the time of settlement for the prior
quarter.
3. For attained ages less than 65, the premium over each calendar year will
be at least equivalent to the Age Adjusted Aggregate Contract Values
times 3.0 BASIS POINTS (.0003), subject to the funds set forth in
Schedule B.
4. For attained ages less than 65, the maximum premium over each calendar
year will be no more than the Age Adjusted Aggregate Contract Values
times 9.2 BASIS POINTS (.00092), subject to the funds set forth in
Schedule B.
5. For attained ages 65 and over, the annual premium rate is 15.2 BASIS
POINTS (.00152) times the Age Adjusted Aggregate Contract Values,
subject to the funds set forth in Schedule B.
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<PAGE>
ARTICLE VI PREMIUM ACCOUNTING
-------------------------------
A. NATIONAL INTEGRITY shall forward to Connecticut General on or before the
last calendar day of April, July, October, and January a quarterly
statement as set forth in Schedule E. NATIONAL INTEGRITY shall also remit
any premium due for the prior quarter along with an advance minimum premium
for the current quarter, in accordance with Section (2) of Article V.
B. The payment of the reinsurance premium by NATIONAL INTEGRITY shall be a
condition precedent to any liability by Connecticut General under the terms
and conditions of this Agreement. If the reinsurance premium payment is not
paid by NATIONAL INTEGRITY in accordance with the preceding paragraph,
Connecticut General shall have the right to terminate reinsurance under
this Agreement. If Connecticut General elects to exercise its right of
termination, Connecticut General shall provide written notice to NATIONAL
INTEGRITY not less than thirty (30) calendar days prior to termination. If
all reinsurance premiums in arrears, including any which may fall due
within the thirty (30) day period, are not received by Connecticut General
prior to the expiration date of such period, Connecticut General shall be
relieved of all liability incurred after the termination date. Connecticut
General shall be relieved of all liability incurred after the termination
date. Connecticut General may, at its option, reinstate the reinsurance at
any time within sixty (60) calendar days following such termination if
NATIONAL INTEGRITY makes payment of all reinsurance premiums due and
payable up to the date of reinstatement and provides full disclosure of all
claims incurred between the date of termination and the reinstatement date.
If Connecticut General agrees to such reinstatement, it shall be liable for
reinsurance on only those claims incurred by NATIONAL INTEGRITY between the
termination date and reinstatement date that NATIONAL INTEGRITY discloses
to Connecticut General. In the event that NATIONAL INTEGRITY is unaware of
such claim, Connecticut General will nevertheless be liable for claims that
are reported to NATIONAL INTEGRITY in the ninety day period following
reinstatement.
C. Connecticut General's right to terminate reinsurance pursuant to this
ARTICLE shall be without prejudice to its right to collect reinsurance
premiums for the period that reinsurance was in force prior to the
expiration of the thirty (30) calendar day notice. Pursuant to Article X of
this Agreement, Connecticut General may set off against amounts due
NATIONAL INTEGRITY the amount of reinsurance premium in arrears, up to and
including the termination date.
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<PAGE>
ARTICLE VII CLAIMS
--------------------
A. NATIONAL INTEGRITY is solely responsible for payment of its claims under
the policies, master contracts or certificates identified on Schedule B.
For all policies reinsured hereunder, NATIONAL INTEGRITY shall provide
Connecticut General with proof of claim, proof of claim payment and any
other claim documentation reasonably requested by Connecticut General.
Payment of reinsurance shall made by Connecticut General in one sum
regardless of the method of payment by NATIONAL INTEGRITY and within thirty
(30) calendar days following receipt of required claim documentation.
B. NATIONAL INTEGRITY shall notify Connecticut General of its intentions to
contest, compromise, or litigate a claim involving reinsurance. Connecticut
General's liability shall then be determined under the provision of
Articles VIII and IX.
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<PAGE>
ARTICLE VIII EXTRA CONTRACTUAL OBLIGATIONS
--------------------------------------------
A. In no event shall Connecticut General participate in punitive, exemplary or
compensatory damages or statutory penalties (hereinafter referred to as
"extra contractual obligations") which are awarded against NATIONAL
INTEGRITY as a result of an act, omission or course of conduct committed by
NATIONAL INTEGRITY in connection with the reinsurance under this Agreement,
unless Connecticut General shall have been made aware of and shall have
concurred in written notice to NATIONAL INTEGRITY pursuant to the
provisions of the following paragraph, with the actions taken, or not
taken, by NATIONAL INTEGRITY which lead to the awarding of extra
contractual obligations.
B. NATIONAL INTEGRITY shall provide written notice to Connecticut General of
any act, omission, course of conduct or impending claim which potentially
may involve extra contractual obligations within ten (10) days after
becoming aware of such act, omission, course of conduct or claim and such
notification shall include a suggested course of action or inaction for
Connecticut General's review. Connecticut General then has the obligation
to provide NATIONAL INTEGRITY with written notice of its decision to concur
or not concur with NATIONAL INTEGRITY's suggested course of action or
inaction. If Connecticut General concurs, payment of any extra contractual
obligations, including attorney's fees, legal or arbitration costs, special
investigations and similar expenses, but excluding the salaries of
employees of NATIONAL INTEGRITY, will be shared by Connecticut General and
NATIONAL INTEGRITY based on the proportionate share of contractual
liability of each party under this Agreement. If Connecticut General does
not concur, Connecticut General shall then be liable only to the extent of
its liability under this Agreement pursuant to the limitations set forth in
Schedule A.
The following definitions shall apply:
(1) "Punitive damages" are those damages awarded as a penalty, the amount
of which is not governed, nor fixed by statute.
(2) "Statutory penalties" are those amounts which are awarded as a penalty
but fixed in amount by statute.
(3) "Compensatory damages" are those amounts awarded to compensate for the
actual damages sustained, and are not awarded as a penalty nor fixed
in amount by statute.
(4) "Proportionate share" is the amount of liability that each party to
the Agreement bears related to total claim. For example, if total
claim is $100,000 and the account value is $50,000, and Connecticut
General is liable for reinsurance coverage for the remaining $50,000,
the proportionate share of each party is 50%.
The language of the article shall be deemed effective only as and to the
extent permitted by the law of any applicable jurisdiction.
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<PAGE>
C. Notwithstanding anything stated herein, this Agreement shall not apply to
any extra contractual obligations incurred by NATIONAL INTEGRITY as a result
of any fraudulent and/or criminal act by any employee, officer, agent, or
director of NATIONAL INTEGRITY acting individually or collectively or in
collusion with any person or corporation or any other entity or organization
or party involved in the representation, defense or settlement of any claim
covered hereunder.
D. Recoveries under any form of insurance or reinsurance which protects
NATIONAL INTEGRITY against extra contractual obligations under this article
or claims under Article 8 shall inure to the benefit of this Agreement and
will be shared by Connecticut General and NATIONAL INTEGRITY based on the
proportionate share of contractual liability of each party.
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<PAGE>
ARTICLE IX LITIGATION
-----------------------
A. In the event of any action brought against NATIONAL INTEGRITY under any
policy that is subject to the terms and conditions of this Agreement,
NATIONAL INTEGRITY shall provide a copy of such action and written notice of
such action within a reasonable time, not to exceed five (10) business days
of notification to Connecticut General. NATIONAL INTEGRITY and Connecticut
General shall mutually agree on the selection and appointment of local
counsel to represent NATIONAL INTEGRITY in such action. If Connecticut
General is a party to action brought against NATIONAL INTEGRITY, NATIONAL
INTEGRITY shall counsel with Connecticut General on the selection and
appointment of local counsel to represent NATIONAL INTEGRITY in such action.
B. Connecticut General shall have primary responsibility for managing any
litigation or any response made to any action brought against NATIONAL
INTEGRITY and for all decisions to be made concerning the representation,
defense and/or settlement of such actions. Connecticut General's
responsibility includes a duty to be reasonable and consult in good faith.
C. NATIONAL INTEGRITY and Connecticut General agree that all litigation costs,
excluding the salaries of employees of NATIONAL INTEGRITY and Connecticut
General, shall be shared by Connecticut General and NATIONAL INTEGRITY based
on the proportionate share of liability of NATIONAL INTEGRITY and
Connecticut General as defined in Section (d) of Article VIII.
ARTICLE X OFFSET
------------------
Either party shall have, and may exercise at any time and from time to time, the
right to offset any balance or balances whether on account of premiums or on
account of losses or otherwise, due from one party to the other under the terms
of this Agreement. However, in the event of insolvency of NATIONAL INTEGRITY
subject to the provisions of Article XV, offset shall only be allowed in
accordance with the statutes and/or regulations of the state having jurisdiction
over the insolvency.
ARTICLE XI ACCESS TO RECORDS
------------------------------
Connecticut General, or its duly authorized representative, shall have
reasonable access, upon reasonable notice, to the books and records of NATIONAL
INTEGRITY as far as they relate to insurance or reinsurance falling within the
terms and conditions of this Agreement, and in the event of any claim for loss
being made hereunder shall have reasonable access to all claims records at any
time until the final settlement of all claims.
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<PAGE>
ARTICLE XII DELAYS, ERRORS OR OMISSIONS
-----------------------------------------
No accidental delay, errors or omissions on the part of NATIONAL INTEGRITY shall
relieve Connecticut General of liability provided such delay, errors or
omissions are rectified as soon as reasonably possible after discovery.
However, Connecticut General shall not be liable with respect to any reinsurance
which may have been inadvertently included in the premium computation but which
ought not to have been included by reason of the terms and conditions of this
Agreement. It is expressly understood and agreed that if failure to comply with
any terms of this Agreement is hereby shown to be unintentional or the result of
misunderstanding or oversight on the part of either party, both parties shall be
restored to the position they would have occupied had no such error or oversight
occurred, subject always to the correction of the error or oversight.
ARTICLE XIII CURRENCY
-----------------------
All retentions and limits hereunder are expressed in United States dollars and
all premium and loss payments shall be made in United States currency. For the
purposes of this Agreement, amounts paid or received by Connecticut General in
any other currency shall be converted into United States dollars at the rates of
exchange on the date such transactions are entered on the books of Connecticut
General.
ARTICLE XIV HOLD HARMLESS
---------------------------
A. Connecticut General shall indemnify and hold NATIONAL INTEGRITY harmless
from any and all liability, loss, damage, fines, punitive damages, penalties
and costs, including expenses and attorney's fees, which results from any
negligence or willful misconduct of Connecticut General in fulfilling its
duties and obligations under this Agreement or which results from any action
which exceeds its authority under this Agreement.
B. NATIONAL INTEGRITY shall indemnify and hold Connecticut General harmless
from any and all liability, loss, damage, fines, punitive damages, penalties
and costs, including expenses and attorney's fees, which results from any
negligence or willful misconduct of NATIONAL INTEGRITY in fulfilling its
duties and obligations under this Agreement or which results from any action
which exceeds its authority under this Agreement.
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<PAGE>
ARTICLE XV INSOLVENCY
-----------------------
In the event of insolvency of NATIONAL INTEGRITY, the reinsurance under this
Agreement shall be payable directly by Connecticut General to NATIONAL INTEGRITY
or to its liquidator, receiver, conservator or statutory successor on the basis
of Connecticut General's liability to NATIONAL INTEGRITY without diminution
because of the insolvency of NATIONAL INTEGRITY or because the liquidator,
receiver, conservator or statutory successor of NATIONAL INTEGRITY has failed to
pay all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of NATIONAL INTEGRITY has failed to
pay all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of NATIONAL INTEGRITY shall give
written notice to Connecticut General of the pendency of a claim against
NATIONAL INTEGRITY within a reasonable time after such claim is filed in the
receivership, conservation, insolvency or liquidation proceeding and that during
the pendency of such claim, Connecticut General may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to NATIONAL
INTEGRITY or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by Connecticut General shall be chargeable, subject to the
approval of the Court, against NATIONAL INTEGRITY as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to NATIONAL INTEGRITY solely as a result of the defense
undertaken by Connecticut General.
Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by NATIONAL INTEGRITY.
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<PAGE>
ARTICLE XVI ARBITRATION
-------------------------
In the event of any dispute or difference of opinion between the parties
hereafter arising with respect to the rights or liabilities of either party,
NATIONAL INTEGRITY and Connecticut General mutually agree that such dispute or
difference of opinion shall be submitted to arbitration. One arbiter shall be
chosen by NATIONAL INTEGRITY, the other arbiter by Connecticut General, and the
third arbiter chosen by the two arbiters before they enter arbitration. All
arbiters shall be active or retired disinterested executive officers of
insurance or reinsurance companies other than those companies named in this
contract or active or retired members of the Society of Actuaries. If either
NATIONAL INTEGRITY or Connecticut General fail to choose an arbiter within
thirty (30) calendar days following the written request by the other party to do
so, the requesting party shall have the right to choose the two arbiters who
shall, in turn, choose the third arbiter before entering into arbitration. If
the two arbiters fail to agree upon the selection of the third arbiter with
thirty (30) calendar days following the last to be chosen, the two arbiters
shall each recommend one name within ten (10) calendar days thereafter and one
name shall be drawn by lots to determine the third arbiter. The arbiters shall
interpret this Agreement as an honorable engagement and not merely as a legal
obligation, and a majority decision of these arbiters shall be final and binding
on both parties and there shall be no appeal from the decision. The arbiters
shall interpret this Agreement liberally rather than according to the rules of
law.
The arbiters are released from judicial formalities and may abstain from
following the strict rules of law. The meeting of the arbiters shall be in a
neutral location mutually agreed upon by the arbiters. The cost of arbitration
shall be borne equally by both parties unless the arbiters decide otherwise. It
is specifically the intent of both parties that this arbitration provision shall
replace and be in lieu of any Federal or State statutory arbitration provision.
Judgement upon the final decision of the arbiters may be entered in any court of
competent jurisdiction.
This article shall survive the termination of this Agreement.
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<PAGE>
ARTICLE XVII DAC TAX REGULATION ELECTION
------------------------------------------
Connecticut General and NATIONAL INTEGRITY hereby agree to make an election
pursuant to Internal Revenue Code Regulation Section 1.842-2(g)(8). This
election shall be effective for all taxable years for which the Reinsurance
Agreement remains in effect.
The terms used in this article are defined by reference to Regulation Section
1.848-2 promulgated on December 28, 1992. The term "Net Consideration" will
refer to net consideration as defined in the treasury regulation section
1.848-2F.
Connecticut General and NATIONAL INTEGRITY agree that the entity with net
positive consideration for the reinsurance agreement for each taxable year will
capitalize specified policy acquisition expenses with respect to the reinsurance
agreement without regard to the general deductions limitation of Section
848(c)(1) of the Internal Revenue Code of 1986, as amended.
Connecticut General and NATIONAL INTEGRITY agree to exchange information
pertaining to the amount of net consideration under the reinsurance agreement
each year to ensure consistency. To achieve this, NATIONAL INTEGRITY shall
provide Connecticut General with a schedule of its calculation of the net
consideration for all reinsurance agreements in force between them for a taxable
year by no later than June 1 of the succeeding year. Connecticut General shall
advise NATIONAL INTEGRITY if it disagrees with the amounts provided by no later
than July 1, otherwise the amounts will be presumed correct and shall be
reported by both parties in their respective tax returns for such tax year. If
Connecticut General contests NATIONAL INTEGRITY's calculation of the net
consideration, the Parties agree to act in good faith to resolve any differences
within thirty (30) days of the date Connecticut General submits its alternative
calculation and report the amounts agreed upon in their respective tax returns
for such tax year.
Connecticut General represents and warrants that it is subject to U.S. taxation
under either Subchapter L or Subpart F of Part III of Subchapter N of the
Internal Revenue Code of 1986, as amended.
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<PAGE>
ARTICLE XVIII EFFECTIVE DATE; TERMS AND TERMINATION
-----------------------------------------------------
A. The effective date of this Agreement is JANUARY 1, 1995. This Agreement
remains effective for all business written by NATIONAL INTEGRITY through
DECEMBER 31, 1999, unless terminated pursuant to the paragraphs listed
below.
B. ONCE EACH CALENDAR YEAR, NATIONAL INTEGRITY shall have the option to
recapture existing contracts beginning with the twentieth (20) anniversary
of their reinsurance hereunder. Recapture must be made on an issue year
basis, and no contracts can be recaptured unless all contracts with earlier
issue years are recaptured.
C. Connecticut General shall have the option of terminating this Agreement for
new business or for new and existing business, upon delivery of thirty (30)
calendar days written notice to NATIONAL INTEGRITY, within thirty (30) days
of the happening of any of the following events:
(1) NATIONAL INTEGRITY's A. M. Best rating is reduced to a "C" or lower.
(2) An order appointing a receiver, conservator or trustee for management
of NATIONAL INTEGRITY is entered or a proceeding is commenced for
rehabilitation, liquidation, supervision or conservation of NATIONAL
INTEGRITY.
(3) The Securities and Exchange Commission revokes the licenses of
NATIONAL INTEGRITY to conduct business.
D. Connecticut General shall have the option of terminating this Agreement for
new business only, upon delivery of thirty (30) calendar days written
notice to NATIONAL INTEGRITY, within thirty (30) days of the happening of
the following event:
(1) NATIONAL INTEGRITY is merged, purchased or there is any other change
(in whole or in part) in ownership of NATIONAL INTEGRITY.
E. NATIONAL INTEGRITY shall have the option of terminating this Agreement for
new business or for new and existing business, upon delivery of thirty (30)
calendar days written notice to Connecticut General, within 30 days of the
happening of any of the following events:
(1) Connecticut General' A. M. Best rating is reduced to a "C" or lower.
(2) An order appointing a receiver, conservator or trustee for management
of Connecticut General is entered or a proceeding is commenced for
rehabilitation, liquidation, supervision or conservation of
Connecticut General.
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
-15-
<PAGE>
F. NATIONAL INTEGRITY shall have the option of terminating this Agreement for
new business only, upon delivery of thirty (30) calendar days written
notice to Connecticut General, within 30 days of the happening of the
following event:
(1) Connecticut General is merged, purchased or there is any other change
in its ownership.
G. If this Agreement is terminated, Connecticut General shall be relieved of
all liability to NATIONAL INTEGRITY:
(1) for claims incurred following the termination date of this Agreement
under such certificates issued by NATIONAL INTEGRITY on or after the
termination date; and
(2) for claims incurred prior to the termination date of this Agreement,
but proof of claim approved by NATIONAL INTEGRITY and proof of claim
payment made by NATIONAL INTEGRITY is not provided to Connecticut
General within eighteen (18) calendar months following the end of the
month in which termination of the Agreement is effective.
H. Both parties shall continue to be entitled to all offset credits provided
by Article X for the entire amount of premiums due and payable by the other
party up to the effective date of termination.
I. NATIONAL INTEGRITY shall not have the right to assign or transfer any
portion of the rights, duties and obligations of NATIONAL INTEGRITY under
the terms and conditions of this Agreement, except to affiliates under
common control, without the written approval of Connecticut General.
Connecticut General shall not have the right to assign or transfer any
portion of the rights, duties and obligations of Connecticut General under
the terms and conditions of this Agreement without the written approval of
NATIONAL INTEGRITY.
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
-16-
<PAGE>
ARTICLE XIX NOTICES
---------------------
All notices required to be given hereunder shall be in writing and shall be
deemed delivered if personally delivered, sent via facsimile, or dispatched by
certified or registered mail, return receipt requested, postage prepaid,
addressed to the parties as follows:
Dennis L. Carr, FSA
Executive Vice President
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
239 South 5th Street, 12th Floor
Louisville, KY 40202
Phone No. (502) 582-7948 Fax No. (502) 582-7903
Timothy J. Ruark, FSA
Assistant Vice President and Actuary
CIGNA Reinsurance, R-26
900 Cottage Grove Road
Hartford, CT 06152-4026
Phone No. (860) 726-4053 Fax No. (860) 726-3153
Notice shall be deemed given on the date it is deposited in the mail or sent via
facsimile in accordance with the foregoing. Any party may change the address to
which to send notices by notifying the other party of such change of address in
writing in accordance with the foregoing.
This Agreement constitutes the entire contract between the parties and shall be
deemed to have been made under and governed by the laws of the State of
Connecticut. Any amendment or modification hereto shall be in writing, endorsed
upon or attached hereto and signed by both NATIONAL INTEGRITY and Connecticut
General.
In witness whereof, the parties hereto have caused this Agreement to be signed
in duplicate on the dates indicated to be effective as of the date specified
above.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
Date: December 28, 1995 By: /s/ Dennis L. Carr
---------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
Date: January 3, 1996 By: /s/ Timothy J. Ruark
----------------------
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
-17-
<PAGE>
SCHEDULE A
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Maximum Limits of Reinsurance in Connecticut General
The maximum Purchase Amount issued on the life of each insured without prior
approval:
$3,500,000
The maximum purchase amount is the sum of all premium contributions less
withdrawals in the contract.
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
SCHEDULE A
<PAGE>
SCHEDULE B
----------
Contracts and Funds Subject to this Reinsurance Agreement
Form
Number* Policy Description Date
- ------- ------------------ ----
GrandMaster II Flexible Payment Variable Annuity
"*includes all state variations
Fund Date Fund Description
- --------- ----------------
Third Quarter 1987 Money Market Portfolio
February 19, 1993 High Income Portfolio
Third Quarter 1987 Equity Income Portfolio
Third Quarter 1987 Growth Portfolio
Third Quarter 1987 Overseas Portfolio
Third Quarter 1987 Investment Grade Bond Portfolio
Third Quarter 1987 Asset Manager Portfolio
March 4, 1993 Index 500 Portfolio
February 6, 1995 Contrafund Portfolio
February 6, 1995 Asset Manager: Growth Portfolio
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
SCHEDULE B
<PAGE>
SCHEDULE C
----------
Limits and Rules of NATIONAL INTEGRITY
1) NATIONAL INTEGRITY will determine the Minimum Guaranteed Death Benefit for
each deceased within seven (7) working days of written notice of death.
2) NATIONAL INTEGRITY has the right to refuse annuity contributions of
$1,000,000 for attained ages under 76, $250,000 for attained ages 76 to 79,
and any amount for attained ages 80 or over.
3) The minimum initial purchase payment, other than salary allotment programs,
is $1,000. The minimum initial contribution to a spousal IRS is $250.
MINIMUM GUARANTEED DEATH BENEFIT
A death benefit is available to a beneficiary if a participant dies prior to his
or her retirement date. The amount of the death benefit is the greatest of (1)
the participant's contract value, or (2) the minimum death benefit, which equals
total contributions less the sum of withdrawals.
NATIONAL INTEGRITY will offer an administrative program which has the effect of
locking in the increase IF ANY in the contract value on each contract
anniversary for purposes of calculation of the minimum death benefit. Under
this program an option is offered to "step up" the minimum death benefit to the
contract value on each contract anniversary if the contract value on such
contract anniversary is greater than the minimum death benefit described in (2)
above (total contributions) and is greater than the contract value on any
previous contract anniversary. This will be effected as a tax-free exchange
into an identical contract, but without new surrender charges. Once this option
is elected, "total contributions" for purposes of calculation of the minimum
death benefit described in (2) above will equal the highest contract value
(which is greater than total contributions less withdrawals) as of any contract
anniversary, less withdrawals made subsequent to such contract anniversary.
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
SCHEDULE C
<PAGE>
SCHEDULE D
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Quarterly Reinsurance Premium Rates
Exposure Based
Per $1,000 Exposed
Ages Male Female
---- ---- ------
(Less Than) 35 0.20 0.10
35 - 39 0.26 0.14
40 - 44 0.40 0.20
45 - 49 0.67 0.33
50 - 54 1.25 0.56
55 - 59 2.23 0.92
60 - 64 3.55 1.44
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
SCHEDULE D
<PAGE>
SCHEDULE E
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Quarterly Report Format
1. Following the end of each calendar quarter, the Quarterly Detail Page,
Fund/Exposure-Based exhibit (attached) must be prepared for each Qualified
plan and Non-Qualified plan separately.
2. The tabulation should be on an Adjusted Basis, which requires omission of
excess contract values due to an issue amount in excess of $3.5 million and
annuity account values for attained ages of 85 or older.
3. The tabulation is on a seriatim basis, with each contract contributing
toward the totals for both exposure and aggregate contract value.
4. The tabulation is necessary to assess the correct amount at risk for
accurate calculation of reinsurance premium. The ceding company can choose
to report values a) as weighted averages during the quarter, or b) as of the
end of the quarter. This election must be denoted on the submission.
5. At year end reporting, a tabulation of exposures by age and sex based on a
percentage decrease in account value by fund type as specified by the NAIC
must be submitted for reserve purposes.
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National Integrity CIGNA Reinsurance
GrandMaster II December 20, 1995
SCHEDULE E
<PAGE>
Exhibit 9 to
National Integrity
Separate Account II
April 24, 1996
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
Re: Separate Account II of National Integrity Life Insurance Company (the
"Separate Account")
Dear Sirs:
This opinion is furnished in connection with the Registration Statement on Form
N-4 for the Separate Account and National Integrity Life Insurance Company
("National Integrity"), filed under the Securities Act of 1933 and the
Investment Company Act of 1940.
The Registration Statement covers an indefinite number of units of interest in
the Separate Account. Contributions to be received under individual variable
annuity contracts ("Contracts") and group variable annuity certificates
("Certificates") offered by National Integrity may be allocated to the Separate
Account to support reserves for such Contracts and Certificates.
I have examined all such corporate records of National Integrity and such other
documents and such laws as I consider appropriate as a basis for the opinion
hereinafter expressed. On the basis of such examination, it is my opinion that:
1. National Integrity is a corporation duly organized and validly existing
under the laws of the State of New York.
2. The Separate Account was established and is maintained pursuant to the laws
of the State of New York, under which income, gains and losses, whether or
not realized, from assets allocated to such Separate Account are, in
accordance with the contracts and certificates, credited to or charged
against the Separate Account without regard to other income, gains or losses
of National Integrity. Although contractual obligations with respect to the
funds of the Separate Account constitute corporate obligations of National
Integrity, the specific amounts payable from accumulations in the Separate
Account in accordance with the Contracts and Certificates depend upon the
investment experience of the Separate Account.
3. Assets allocated to the Separate Account will be owned by National
Integrity; National Integrity will not be a trustee with respect thereto.
The Contracts and Certificates provide that the portion of the assets of the
Separate Account equal to the reserves and other Contract and Certificate
liabilities with respect to the Separate Account will not be chargeable with
liabilities arising out of any other business National Integrity may
conduct,
<PAGE>
and that National Integrity reserves the right to transfer assets of the
Separate Account in excess of such reserves and other Contract and
Certificate liabilities to the General Account of National Integrity.
4. When issued and sold as described above, the Contracts and Certificates will
be duly authorized and will constitute validly issued and binding
obligations of National Integrity in accordance with their terms. Purchasers
of the Contracts and Certificates will be subject only to the deductions,
charges and fees set forth in the Prospectus.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/John R. McGeeney
John R. McGeeney
<PAGE>
Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
and to the use of our report dated April 19, 1996, with respect to the financial
statements of Separate Account II of National Integrity Life Insurance Company
in Post-Effective Amendment No. 5 to the Registration Statement (Form N-4 No.
33-51126) and Amendment No. 6 to the Registration Statement (Form N-4 No. 811-
7132) and related Prospectus of National Integrity Life Insurance Company.
/s/Ernst & Young LLP
Louisville, Kentucky
April 25, 1996
<PAGE>
Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
and to the use of our report dated February 23, 1996, with respect to the
statutory basis financial statements of National Integrity Life Insurance
Company in Post-Effective Amendment No. 5 to the Registration Statement (Form N-
4 No. 33-51126) and Amendment No. 6 to the Registration Statement (Form N-4 No.
811-7132) and related Prospectus of National Integrity Life Insurance Company.
/s/Ernst & Young LLP
Louisville, Kentucky
April 25, 1996
<PAGE>
EXHIBIT 13
Average Annual Total Returns were calculated as follows:
T = the nth root of (the applicable ERVs divided by $1,000) - 1, where:
n is the number of years in the applicable period;
ERV without surrenders = ending account value of $1,000 contribution
over the applicable period (net of administrative, mortality and
expense fees);
ERV (ending redeemable value) with surrenders = ending account value of
$1,000 contribution over the applicable period (net of administrative,
mortality and expense fees) - the applicable surrender charge.
Cumulative total returns are unaveraged and reflect the simple percentage change
in the value of a hypothetical investment over a stated period of time.
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.
