INTEGRITY LIFE INSURANCE COMPANY SEPARATE ACCOUNT III
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
BEST OF FUNDS VARIABLE ANNUITY
OFFERED BY
INTEGRITY LIFE INSURANCE COMPANY
This Statement of Additional information expands upon subjects disclosed in the
current Prospectus for the Best of Funds Variable Annuity (the "Contract")
offered by Integrity Life Insurance Company (the "Company"). You may obtain a
copy of the Prospectus, dated May 19, 1995, by writing to our administrative
office at Post Office Box 182080, Columbus, Ohio 43218, or by calling the
following toll-free telephone number: 1-800-506-BEST. Terms defined and used in
the current Prospectus for the Contract are incorporated in this Statement of
Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND
SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS MAY 19, 1995.
TABLE OF CONTENTS
PAGE
THE CONTRACT ............................................................. B-3
Computation of Variable Annuity Income Payments ...................... B-3
GENERAL MATTERS .......................................................... B-3
Non-Participating .................................................... B-3
Misstatement of Age or Sex ........................................... B-4
Assignment ........................................................... B-4
Annuity Data ......................................................... B-4
Annual Report ........................................................ B-4
Incontestability ..................................................... B-4
Ownership ............................................................ B-4
DISTRIBUTION OF THE CONTRACT ............................................. B-4
PERFORMANCE INFORMATION .................................................. B-5
30-Day Yield for the Separate Account ................................ B-5
Average Annual Total Return for the Separate Account ................. B-5
SAFEKEEPING OF ACCOUNT ASSETS ............................................ B-6
THE COMPANY .............................................................. B-7
STATE REGULATION ......................................................... B-7
RECORDS AND REPORTS ...................................................... B-7
LEGAL PROCEEDINGS ........................................................ B-7
OTHER INFORMATION ........................................................ B-8
FINANCIAL STATEMENTS ..................................................... B-8
B-2
THE CONTRACT
In order to supplement the description in the Prospectus, the following provides
additional information about the Contract which may be of interest to Owners.
COMPUTATION OF VARIABLE ANNUITY INCOME PAYMENTS
Annuity Payments under the Variable Annuity Options are computed as follows.
First, the Account Value (or the portion of the Account Value used to provide
variable payments) is applied under the annuity rates contained in the Contract
corresponding to the Annuity Payment Option elected by the Owner and based on an
assumed interest rate of 3%. This will produce a dollar amount which is the
first monthly payment. The Company, at the time Annuity Payments are computed,
may offer more favorable rates in lieu of the guaranteed rates specified in the
Contract.
The amount of each Annuity Payment after the first monthly payment is determined
by means of Annuity Units. The number of Annuity Units is determined by dividing
the first Annuity Payment by the Annuity Unit value for the Portfolio ten
Business Days prior to the Endowment Date. The number of Annuity Units then
remains fixed. After the first Annuity Payment, the dollar amount of each
subsequent Annuity Payment is equal to the number of Annuity Units multiplied by
the Annuity Unit value for the Portfolio ten Business Days before the due date
of the Annuity Payment.
The Annuity Unit value for each Portfolio was initially established at $10.00 on
the day money was first deposited in that Portfolio. The Annuity Unit value for
any subsequent Business Day is equal to (a) times (b) times (c) where:
(a) is the Annuity Unit value for the immediately preceding Business Day;
(b) is the Net Investment Factor for the day; and
(c) is the investment result adjustment factor (.99991902 per day), which
recognizes an assumed interest rate of 3% per year used in determining
the Annuity Payment amounts.
The Net Investment Factor is a factor applied to the Portfolio that reflects any
increase or decrease in the value of the Portfolio due to investment results.
The annuity rates contained in the Contract are based on the 1983 Individual
Annuity Mortality Table and an interest rate of 3% a year.
GENERAL MATTERS
NON-PARTICIPATING
The Contracts are non-participating. No dividends are payable and the Contracts
will not share in the profits or surplus earnings of the Company.
B-3
MISSTATEMENT OF AGE OR SEX
The Company may require proof of age and sex before making Annuity Payments. If
the Annuitant's stated age, sex, or both in the Contract are incorrect, then the
Company will change the Annuity Payments payable to those which the
Contributions would have purchased for the correct age and sex. In the case of
correction of the stated age or sex after payments have commenced, the Company
either will: (i) in the case of underpayment, pay the full amount due with the
next payment; or (ii) in the case of overpayment, deduct the amount due from one
or more future payments.
ASSIGNMENT
Any Non-Qualified Contract may be assigned by the Owner prior to the Endowment
Date and during the Annuitant's lifetime. The Company is not responsible for the
validity of any assignment. No assignment will be recognized until the Company
receives written notice thereof. The interest of any Beneficiary which the
assignor has the right to change shall be subordinate to the interest of an
assignee. Any amount paid to the assignee shall be paid in one sum,
notwithstanding any settlement agreement in effect at the time assignment was
executed. The Company shall not be liable as to any payment or other settlement
made by the Company before receipt of written notice.
ANNUITY DATA
The Company will not be liable for obligations which depend on receiving
information from a payee under the Contract until such information is received
in a form satisfactory to the Company.
ANNUAL REPORT
Once each Contract Year, the Company will send the Owner an annual report of the
current Account Value allocated to the Portfolio and any Contributions, charges,
or withdrawals during the year. This report also will give the Owner any other
information required by law or regulation. The Owner may ask for a report
similar to the annual report from the Company at any time.
INCONTESTABILITY
This Contract is incontestable from the Contract Date, subject to the
"Misstatement of Age or Sex" provision.
OWNERSHIP
The Owner of the Contract is the Annuitant. During the Owner's lifetime, all
rights and privileges under this Contract may be exercised solely by the Owner.
From time to time, the Company may require proof that the Owner is still living.
DISTRIBUTION OF THE CONTRACT
Integrity Financial Services ("IFS") will be the principal underwriter of the
Contracts at no charge. The Contracts are offered to the public through brokers
licensed under applicable federal securities laws and state insurance laws. The
offering of the Contracts will be on a continuous basis. While IFS does not
anticipate discontinuing the offering of the Contracts, IFS does reserve the
right to do so. IFS is wholly-owned by ARM Financial Group, Inc., and,
therefore, is an affiliate of the Company, which is indirectly wholly-owned by
ARM Financial Group, Inc.
B-4
PERFORMANCE INFORMATION
Performance information for the Separate Account, including the yield and the
total return of the Separate Account, may appear in reports or promotional
literature to current or prospective Owners.
30-DAY YIELD FOR THE SEPARATE ACCOUNT
Quotations of yield for the Separate Account will be based on all investment
income per Accumulation Unit earned during a particular 30-day period, less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of an Accumulation Unit
on the last day of the period, according to the following formula:
6
YIELD = 2[( a-b +1) -1]
---
cd
Where: a = net investment income earned during the period by the Portfolio
company attributable to shares owned by the Separate Account;
b = the expenses accrued for the period (net of reimbursements);
c = the average daily number of Accumulation Units outstanding
during the period; and
d = the maximum offering price per Accumulation Unit on the last
day of the period.
Yield on the Separate Account is earned from dividends declared and paid by the
Portfolio, which dividends are automatically reinvested in shares of the
Portfolio.
AVERAGE ANNUAL TOTAL RETURN FOR THE SEPARATE ACCOUNT
Quotations of average annual total return for the Separate Account will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten years
(or, if less, up to the life of the Separate Account), calculated pursuant to
the following formula:
N
P(1+T) =ERV
Where: P = a hypothetical Initial Contribution of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV= ending redeemable value of a hypothetical $1,000 Contribution
made at the beginning of the 1, 5, or 10 year periods at the end
of the 1, 5, or 10 year periods (or fractional portion thereof).
All total return figures will reflect the deduction of the administrative charge
and the mortality and expense risk charge. The Commission requires that an
assumption be made that the Owner surrenders the entire Contract at the end of
the one, five, and ten year periods (or, if less, up to the life of the Separate
Account), for which
B-5
performance is required to be calculated.
Performance information for the Separate Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, or other indexes that measure
performance of a pertinent group of securities, so that investors may compare
the Separate Account's results with those of a group of securities widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc., a widely-used independent
research firm which ranks mutual funds and other investment companies by overall
performance, investment objective(s), and assets, or tracked by other services,
companies, publications, or persons who rank such investment companies on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Contract. Unmanaged indexes may assume the reinvestment of dividends, but
generally do not reflect deductions for administrative and management costs and
expenses.
Performance information for the Separate Account reflects only the performance
of a hypothetical Contract under which Account Value is allocated to the
Separate Account during a particular time period on which the calculations are
based. Performance information should be considered in light of the investment
objective(s) and policies, characteristics, and quality of the Portfolio of USIF
in which the Separate Account invests, and the market conditions during the
given time period, and should not be considered as a representation of what may
be achieved in the future.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity Life Insurance Company, as determined by A.M.
Best Company, Moody's Investors Service, Standard & Poor's Corporation, Duff &
Phelps Corporation, or other recognized rating services. The Company 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, and
"A+" (High) from Duff and Phelps Credit Rating Company. However, the Company
does not guarantee the investment performance of the Portfolio, and these
ratings do not reflect protection against investment risk. Reports and
promotional literature also may contain other information, including: (i) the
ranking of the Separate Account derived from rankings of variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services, Inc., or by other rating services, companies, publications, or other
persons who rank separate accounts or other investment products on overall
performance or other criteria; and (ii) the effect of tax-deferred compounding
on the Separate Account's investment returns, or returns in general, which may
be illustrated by graphs, charts, or otherwise, and which may include a
comparison, at various points in time, of the return from an investment in a
Contract (or returns in general) on a tax-deferred basis (assuming one or more
tax rates) with the return from an investment in a Contract on a taxable basis.
SAFEKEEPING OF ACCOUNT ASSETS
Title to the assets of the Separate Account (the "Assets") is held by the
Company. The Assets are kept physically segregated and held separate and apart
from the Company's general account assets. Records are maintained of all
purchases and redemptions of eligible Portfolio shares held by the Separate
Account.
B-6
THE COMPANY
The Company is an Ohio stock life insurance company. The Company's principal
executive office is at 239 South Fifth Street, Louisville, Kentucky 40202. The
Company is ultimately wholly-owned by ARM Financial Group, Inc., a publicly-held
insurance holding company. The Company is principally engaged in offering life
insurance policies and annuity contracts, and is authorized to sell life
insurance policies and annuity contracts in 44 states and the District of
Columbia. In addition to the Contracts, the Company also sells flexible payment
annuity contracts and certificates with an underlying investment medium other
than United Services Insurance Funds, and single-premium fixed annuity
contracts.
STATE REGULATION
The Company is a stock life insurance company organized under the laws of the
State of Ohio and is subject to regulation by the Ohio Department of Insurance.
An annual statement is filed with the Ohio Director of Insurance on or before
March 1 of each year covering the operations and reporting on the financial
condition of the Company as of December 31 of the preceding calendar year.
Periodically, the Ohio Director of Insurance examines the financial condition of
the Company, including the liabilities and reserves of the Separate Account.
In addition, the Company is subject to the insurance laws and regulations of all
the states in which the Company is licensed to operate. The availability of
certain Contract rights and provisions depends on state approval and/or filing
and review processes. Where required by state law or regulation, the Contracts
will be modified accordingly.
RECORDS AND REPORTS
All records, reports, and accounts relating to the Separate Account will be
maintained by the Company. As presently required by the Investment Company Act
of 1940, as amended (the "1940 Act"), and regulations promulgated thereunder,
the Company will mail to all Owners, at their last known address of record, at
least semi-annually, reports containing such information as may be required
under the 1940 Act or by any other applicable law or regulation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to the
Company's total assets or that relates to the Separate Account.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement and in the amendments and
exhibits thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information concerning the
content of the Contracts and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
B-7
FINANCIAL STATEMENTS
Ernst & Young LLP, 440 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 statutory basis financial statements of the Company as of and for the years
ended December 31, 1994 and 1993 included in this Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports included herein.
The statutory basis statements of operations, changes in surplus, and cash flows
of the Company for the year ended December 31, 1992 included in this Statement
of Additional Information have been audited by Deloitte & Touche LLP as stated
in their report included herein.
As of the date of this Statement of Additional Information, the Separate Account
has not commenced operations, and, therefore, no audited financial statements of
the Separate Account are included in this Statement of Additional Information.
The financial statements of the Company should be distinguished from the
financial statements of the Separate Account and should be considered only as
these financial statements relate to the ability of the Company to meet its
obligations under the Contract. These financial statements of the Company should
not be considered as relating to the investment performance of the assets held
in the Separate Account.
B-8
Financial Statements
(Statutory Basis)
Integrity Life Insurance Company
Years Ended December 31, 1994, 1993 and 1992
with Reports of Independent Auditors
Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1994, 1993 and 1992
CONTENTS
Reports of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets (Statutory Basis)...............................................4
Statements of Operations (Statutory Basis).....................................6
Statements of Changes in Surplus (Statutory Basis).............................7
Statements of Cash Flows (Statutory Basis).....................................8
Notes to Financial Statements.................................................10
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of Integrity
Life Insurance Company as of December 31, 1994 and 1993, and the related
statutory-basis statements of operations, changes in surplus, and changes in
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the Ohio 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 Integrity
Life Insurance Company at December 31, 1994 and 1993, 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, 1994 and 1993, and net
income for the years then ended in conformity with generally accepted accounting
principles.
1
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrity Life Insurance
Company at December 31, 1994 and 1993, 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 Ohio Insurance Department.
--------------------
/s/Ernst & Young LLP
Louisville, Kentucky
March 10, 1995
2
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory-basis statements of operations,
changes in surplus, and cash flows of Integrity Life Insurance Company for the
year ended December 31, 1992. 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 audit.
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.
As described more fully in Notes 1 and 2 to the financial statements, the
Company prepared the 1992 financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Arizona,
which practices differ from generally acceptable accounting principles. The
effects on the accompanying financial statements of the differences are
described in Note 1.
In our opinion, because of the effects of the matters discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the results of
operations or cash flows of Integrity Life Insurance Company for the year ended
December 31, 1992. However, in our opinion, the supplementary information
included in Note 1 presents fairly, in all material respects, shareholder's
equity and net income as of and for the year ended December 31, 1992 in
conformity with generally accepted accounting principles.
In our opinion, the statutory-basis financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Integrity Life Insurance Company for the year ended December 31, 1992,
on the basis of accounting described in Notes 1 and 2 to the financial
statements.
- ------------------------
/s/Deloitte & Touche LLP
March 25, 1993
Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
DECEMBER 31
1994 1993
---------------------------
(IN THOUSANDS)
ADMITTED ASSETS
Cash and invested assets (NOTE 3):
Bonds $1,131,068 $1,080,104
Preferred stocks 3,367 -
Subsidiaries 35,557 32,259
Mortgage loans 57,653 135,949
Policy loans 68,756 66,065
Cash and short-term investments 23,400 142,140
Other invested assets 6,835 129
---------------------------
Total cash and invested assets 1,326,636 1,456,646
Separate account assets 363,008 193,973
Accrued investment income 20,174 22,287
Broker balances receivable 1,132 1,612
Reinsurance balances receivable (NOTE 4) 2,140 1,091
Other admitted assets 1,553 6,264
---------------------------
Total admitted assets $1,714,643 $1,681,873
===========================
4
DECEMBER 31
1994 1993
---------------------------
(IN THOUSANDS)
Liabilities and Surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves (NOTE 9) $1,222,245 $1,331,283
Separate account liabilities 360,609 190,879
Policy and contract claims 1,907 1,770
Deposits on policies to be issued 916 1,050
---------------------------
Total policy and contract liabilities 1,585,677 1,524,982
Accounts payable and accrued expenses 1,883 4,293
Transfers to Separate Accounts due or accrued, net (23,242) (13,607)
Reinsurance balances payable 1,739 816
Asset valuation reserve 4,492 2,141
Interest maintenance reserve 33,151 62,810
Federal income taxes (NOTE 5) 744 -
Other liabilities 2,333 14,497
---------------------------
Total liabilities 1,606,777 1,595,932
Surplus (NOTE 6):
Common stock, $2.00 par value; 1,500,000
shares authorized, issued and outstanding 3,000 2,000
Additional paid-in capital 82,941 83,941
Unassigned surplus 21,925 -
---------------------------
Total surplus 107,866 85,941
---------------------------
Total liabilities and surplus $1,714,643 $1,681,873
===========================
SEE ACCOMPANYING NOTES.
5
Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 17,618 $ 38,695 $ 44,547
Deposit-type funds 207,686 156,229 24,880
Net investment income (NOTE 3) 102,002 107,142 108,851
Amortization of the interest maintenance reserve
4,232 549 (283)
Other income 9,832 3,856 1,902
--------------------------------------------
Total premiums and other revenues 341,370 306,471 179,897
Benefits paid or provided:
Death benefits 16,280 8,609 7,233
Annuity benefits 31,785 30,468 28,923
Surrender benefits 172,419 71,529 44,450
Interest on policy or contract funds 165 12,796 18,578
Payments on supplementary contracts 8,763 7,695 7,694
Increase (decrease) in insurance and annuity
reserves (108,213) (8,252) 22,626
Other, principally reinsurance transactions 3,026 28,849 27,756
--------------------------------------------
Total benefits paid or provided 124,225 151,694 157,260
Insurance expenses:
Commissions 17,053 15,016 4,256
General expenses 8,949 12,532 13,650
Taxes, licenses and fees 680 1,430 1,275
Net transfers to separate account (NOTE 10) 167,407 134,348 10,957
Other expenses 836 6,191 690
--------------------------------------------
Total insurance expenses 194,925 169,517 30,828
--------------------------------------------
Gain (loss) from operations before income taxes and
net realized capital gains (losses) 22,220 (14,740) (8,191)
Federal income taxes (NOTE 5) 992 57 -
-------------------------------------------
Gain (loss) from operations before net realized
capital gains (losses) 21,228 (14,797) (8,191)
Net realized capital gains (losses), net of income
taxes of $0 for 1994, 1993 and 1992, and
excluding net transfers to the interest
maintenance reserve(1994-($25,427,000);
1993-$63,106,000; 1992-($30,000)) (NOTE 3) (417) (13,737) 246
--------------------------------------------
Net income (loss) $ 20,811 $ (28,534) $ (7,945)
============================================
SEE ACCOMPANYING NOTES.
6
</TABLE>
Integrity Life Insurance Company
Statements of Changes in Surplus (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Surplus at beginning of year $ 85,941 $ 50,915 $ 63,953
Net income (loss) 20,811 (28,534) (7,945)
Net change in unrealized capital gains (losses)
3,298 1,131 (2,745)
Decrease in nonadmitted assets 84 2,393 3
Decrease from change in valuation basis - (4,571) (1,626)
(Increase) decrease in asset valuation reserve (2,351) 12,859 (11,135)
Capital contributions - 53,054 10,029
Increase (decrease) in separate account surplus (695) (1,894) 381
Surplus transferred from separate account 778 - -
Reimbursement of prior year expenses - 2,496 -
Adjustment to prior year investments - (1,908) -
--------------------------------------------
Surplus at end of year $107,866 $ 85,941 $ 50,915
============================================
SEE ACCOMPANYING NOTES.
7
</TABLE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, policy proceeds, and other considerations
received $225,304 $ 194,924 $ 69,427
Net investment income received 105,844 104,132 106,888
Commission and expense allowances returned on
reinsurance ceded (3,086) (21,421) (27,757)
Benefits paid (229,262) (130,766) (107,095)
Insurance expenses paid (29,847) (26,291) (20,435)
Other income received net of other expenses (paid) 7,134 (5,310) (7,368)
Net transfers to separate account (177,042) (134,446) (10,858)
Federal income taxes paid (247) (57) -
--------------------------------------------
Net cash provided by (used in) operations (101,202) (19,235) 2,802
Proceeds from sales, maturities, or repayments of investments:
Bonds 530,269 880,643 208,077
Preferred stocks 3,367 - 6,828
Common stocks - 17,874 53,110
Mortgage loans 78,297 14,905 5,382
Real estate - 28,852 -
Other invested assets - 92,897 5,610
Net losses on cash and short-term investments (16) - -
Miscellaneous proceeds 509 4,693 620
--------------------------------------------
Total investment proceeds 612,426 1,039,864 279,627
--------------------------------------------
Net proceeds from sales, maturities, or repayments
of investments 612,426 1,039,864 279,627
Other cash provided:
Capital and surplus paid-in - 53,054 10,029
Other sources 8,114 15,240 8,555
--------------------------------------------
Total other cash provided 8,114 68,294 18,584
--------------------------------------------
Total cash provided 519,338 1,088,923 301,013
8
</TABLE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of long-term investments acquired:
Bonds $608,125 $ 941,322 $ 265,269
Preferred stocks 6,734 - -
Common stocks - 3,802 50,581
Mortgage loans - 15,497 1,747
Real estate - (555) 345
Other invested assets 6,000 4,001 4,520
Miscellaneous applications 1,153 7,061 343
--------------------------------------------
Total investments acquired 622,012 971,128 322,805
Other cash applied:
Other applications, net 16,066 23,013 2,377
--------------------------------------------
Total other cash applied 16,066 23,013 2,377
--------------------------------------------
Total cash used 638,078 994,141 325,182
--------------------------------------------
Net increase (decrease) in cash and short-term
investments (118,740) 94,782 (24,169)
Cash and short-term investments at
beginning of year 142,140 47,358 71,527
--------------------------------------------
Cash and short-term investments at end of
year $ 23,400 $ 142,140 $ 47,358
============================================
SEE ACCOMPANYING NOTES.
9
</TABLE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1994
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Integrity Life Insurance Company ("Integrity" or the "Company") is an indirect
wholly owned subsidiary of ARM Financial Group, Inc. ("ARM"). ARM acquired the
Company and its subsidiaries from The National Mutual Life Association of
Australasia Limited ("National Mutual") for an adjusted purchase price of $121.0
million (the "Acquisition") on November 26, 1993. The Company, domiciled in the
state of Ohio, and its wholly owned insurance subsidiary, National Integrity
Life Insurance Company ("National Integrity") provide retail and institutional
investment-oriented insurance products (primarily annuities) to the long-term
savings and retirement market.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Ohio
Department of Insurance. Such practices vary from generally accepted accounting
principles ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Investments in bonds and mandatorily redeemable 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, market values of certain investments in
bonds and stocks are based on values specified by the NAIC, rather than on
values provided by outside broker confirmations or internally calculated
estimates. 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 rather than on a pretax basis. Changes between cost and
admitted investment asset amounts are credited and charged directly to
10
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than as a valuation allowance or an
appropriation of surplus. Under a formula prescribed by the NAIC, the
Company defers the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those
deferrals over the remaining period to maturity based on the individual
security sold. That net deferral is reported as the Interest Maintenance
Reserve in the accompanying balance sheets. Interest-related realized gains
and losses are not reported in income in the period sold but, instead are
transferred to the interest maintenance reserve and amortized into income
over the remaining lives of the securities sold. The "asset valuation
reserve" is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. 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.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company.
POLICY ACQUISITION COSTS
The 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 and furniture and equipment, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
11
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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, premiums received in excess of policy charges
are not recognized as premium revenue and benefits represent the excess of
benefits paid over the policy account value and interest credited to the
account values.
BENEFIT RESERVES
Certain policy reserves are calculated using prescribed interest and
mortality assumptions rather than on estimated expected experience and
actual account balances as is required under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between the
financial reporting taxable income.
12
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
The effects of the foregoing variances from GAAP on the accompanying
statutory-basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------
<S> <C> <C> <C>
Net income (loss) as reported in the
accompanying statutory-basis financial
statements $ 20,811 $ (28,534) $ (7,945)
Adjustments to policyholder deposits and separate
account liabilities (15,773) (20,205) (3,134)
Adjustments for net realized gains (losses) (35,510) 19,983 (6,226)
Surplus relief reinsurance - 10,223 3,375
Amortization of market value adjustments to fixed
maturities at acquisition date (3,727) 606 1,333
Amortization of interest maintenance reserve,
goodwill, and value of insurance in force (9,625) (7,574) (49,976)
Adjustment to mortgage loans, real estate
joint ventures and limited partnerships due
to depreciation, valuation reserves and
realized losses due to other-than-
temporary impairments - (30,399) (6,181)
Increase in deferred policy acquisition costs, net 23,976 19,107 6,939
Other 4,137 (1,496) (123)
Investment in subsidiary 3,953 (1,436) 6,225
--------------------------------------------
Net income (loss), GAAP basis $ (11,758) $ (39,725) $ (55,713)
============================================
13
</TABLE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993 1992
--------------------------------------------
<S> <C> <C> <C>
Capital and surplus as reported in the
accompanying statutory-basis financial
statements $ 107,866 $ 85,941 $ 50,915
Adjustments to policyholder deposits and separate
account liabilities (118,036) (104,266) 22,933
Surplus relief reinsurance - - (9,969)
Market value adjustments to fixed maturities
at acquisition date and related
amortization (23,085) 89,950 (16,956)
Asset valuation reserve and interest
maintenance reserve 83,189 16,574 18,595
Adjustment to mortgage loans, real estate
joint ventured and limited partnerships due
to depreciation, valuation reserves and
realized losses due to other-than-
temporary impairments - (1,611) (12,584)
Value of insurance in force 37,175 41,005 39,813
Deferred policy acquisition costs 26,667 2,691 38,412
Net unrealized gains (losses) on available-
for-sale investments (104,905) - -
Other 2,002 (2,735) 2,068
--------------------------------------------
Shareholder's equity, GAAP basis $ 10,873 $ 127,549 $ 133,227
============================================
</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,
14
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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
securities except for one residual security which is valued using the
prospective method.
Preferred stocks are reported at cost or amortized cost.
The Company's insurance subsidiary is reported at equity in the underlying
statutory basis of its net assets.
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. Changes in admitted asset carrying amounts of
investments in subsidiaries are credited or charged directly to unassigned
surplus.
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 Ohio Department of
15
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Insurance. 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.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
The liabilities related to policyholder funds left on deposit with the Company
generally are equal to fund balances less applicable surrender charges.
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
reasonable.
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 annuities. 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.
16
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation of the 1994 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 Ohio Department of
Insurance. Prior to the redomestication of the Company from Arizona to Ohio, the
Company's statutory-basis financial statements were prepared in accordance with
accounting practices prescribed or permitted by the Arizona Department of
Insurance. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC 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 1996, 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.
On December 30, 1994, the Company redomesticated from Arizona to Ohio. In
conjunction with the redomestication, written approval was received from the
Ohio Department of Insurance to offset the reported deficit in the Company's
unassigned funds account against its gross paid-in and contributed surplus
account as of December 31, 1993. The Company requested permission for that
accounting because prescribed statutory accounting practices did not address
that subject. The change did not affect the total capital and surplus of the
Company as of December 31, 1994.
Upon redomestication from Arizona to Ohio, the Company's investments in foreign
securities exceeded 5% of total assets, the maximum amount permitted by Ohio law
for statutory-basis accounting and reporting purposes. The Company's investments
in foreign securities were in compliance with Arizona law when they were
purchased. The Company has received a permitted accounting practice letter from
the Ohio Insurance
17
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Department permitting the excess foreign investments of approximately $30
million to be treated as admitted assets for statutory accounting practices
until December 31, 1996. The Company intends to be in compliance with the Ohio
law by December 31, 1996.
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, 1994:
U.S. treasury securities and
obligations of U.S.
government agencies $ 14,170 $ 5 $ 253 $ 13,922
States and political
subdivisions 50,964 47 5,255 45,756
Foreign governments 44,383 - 5,101 39,282
Public utilities 125,539 - 12,787 112,752
Other corporate securities 486,761 617 42,491 444,887
Mortgage-backed securities 409,251 - 830 408,421
----------------------------------------------------------------------
Total bonds $1,131,068 $ 669 $ 66,717 $1,065,020
======================================================================
At December 31, 1993:
U.S. treasury securities and
obligations of U.S.
government agencies $ 11,066 $ 382 $ 2 $ 11,446
States and political
subdivisions 48,590 129 527 48,192
Foreign governments 43,702 - 690 43,012
Public utilities 118,961 77 970 118,068
Other corporate securities 607,606 853 5,141 603,318
Mortgage-backed securities 250,179 - - 250,179
----------------------------------------------------------------------
Total bonds $1,080,104 $ 1,441 $ 7,330 $1,074,215
======================================================================
</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
18
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
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, 1994 and 1993, the fair value of
investments in bonds includes $560,877,000 and $535,214,000, respectively, of
bonds that were valued at amortized cost.
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1994, by contractual maturity, is as
follows:
COST OR
AMORTIZED FAIR
COST VALUE
-----------------------------------
(IN THOUSANDS)
Maturity:
In 1995 $ 13,323 $ 13,317
In 1996 - 1999 83,745 78,317
In 2000 - 2004 152,963 139,238
After 2004 471,786 425,727
Mortgage-backed securities 409,251 408,421
-----------------------------------
Total $ 1,131,068 $ 1,065,020
===================================
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
mortgage-backed securities (including floating-rate securities) provide for
periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1994, 1993 and 1992 were
$376,862,000, $748,844,000 and $103,149,000; gross gains of $1,927,000,
$66,120,000 and $4,314,000, and gross losses of $27,771,000, $14,120,000 and
$5,275,000 were realized on those sales, respectively.
At December 31, 1994 and 1993, bonds with an admitted asset value of $7,021,000
and $6,334,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
19
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
Unrealized gains and losses on investments in subsidiaries are reported directly
in surplus and do not affect operations. The gross unrealized gains and losses
on, and the cost and fair value of, those investments are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1994:
Subsidiaries $ 17,823 $ 17,734 $ - $ 35,557
======================================================================
At December 31, 1993:
Subsidiaries $ 17,823 $ 14,436 $ - $ 32,259
======================================================================
</TABLE>
The Company has made no new investments in commercial mortgages since 1988,
except to protect values in existing investments or to honor outstanding
commitments, and has no current intention of making any new investments in such
assets. The maximum percentage of any one loan to the value of the security at
the time of the loan, exclusive of any money purchase, is 75%. Fire insurance is
carried on every loan.
Pursuant to the terms of the Acquisition, National Mutual has indemnified
principal (up to 100% of the investments year-end 1992 statutory book value)
and interest with respect to all of these loans. In support of its
indemnification obligations, National Mutual has placed $23.0 million into
escrow in favor of the Company and National Integrity which will remain
available until the subject commercial and agricultural loans have been paid in
full.
20
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
--------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Income:
Bonds $ 88,969 $ 85,745 $ 85,816
Preferred stocks 205 175 335
Common stocks - 235 271
Mortgage loans 8,719 12,277 13,434
Real estate - 2,606 2,919
Policy loans 5,289 4,832 4,239
Short-term investments and cash 1,623 1,239 2,275
Other invested assets - 5,051 4,465
Other investment income (loss) (85) 138 207
--------------------------------------------
Total investment income 104,720 112,298 113,961
Investment expenses (2,718) (5,156) (5,110)
--------------------------------------------
Net investment income $ 102,002 $ 107,142 $ 108,851
============================================
</TABLE>
4. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, the Company 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. The Company reinsures
life insurance risks in excess of $250,000 per life. At December 31, 1994,
approximately 13.6% of total life insurance in force was reinsured with
non-affiliated insurance companies related to excess risks. 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 has reduced premiums by $3,886,000 in 1994, $2,427,000 in 1993
and $2,642,000 in 1992, benefits paid or provided by $585,000 in 1994,
$5,362,000 in 1993 and $12,077,000 in 1992, and policy and contract liabilities
by $305,000 at December 31, 1994 and $134,000 at December 31, 1993.
21
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
5. FEDERAL INCOME TAXES
The Company files a consolidated return with National 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
dividends-received tax deductions, policy acquisition costs, and differences in
policy and contract liabilities and investment income for tax and financial
reporting purposes.
The current year tax provision and prior year tax provision were calculated
including net operating loss carryover benefits of $1,757,000 and $12,321,000,
respectively.
The Company had a net operating loss carryforward of approximately $39.4 million
and $2.4 million at December 31, 1994 and December 31, 1993, respectively,
expiring in the year 2007.
6. SURPLUS
Dividends that ARM may receive from the Company in any year without prior
approval of the Ohio insurance commissioner are limited by statute to the
greater of (i) 10% of the Company's statutory capital and surplus as of the
preceding December 31, or (ii) the Company's statutory net income for the
preceding year. The maximum dividend payments that may be made by the Company to
ARM during 1995 are $20,811,000.
Under New York insurance laws, National Integrity may pay dividends to Integrity
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 National Integrity does not warrant such distribution.
The NAIC has 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.
22
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
6. SURPLUS (CONTINUED)
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, 1994 and 1993, the adjusted capital and surplus of the
Company is substantially in excess of the minimum level of RBC that would
require regulatory response.
7. LEASES
Prior to November 26, 1993, Integrity leased office space in New York, New York
under an operating lease having remaining non-cancelable lease terms in excess
of one year. The future minimum rental payments under this lease were
approximately $1.8 million over the next four years. Rental expense for the
years ended December 31, 1993 and 1992 was $2,755,000 and $2,935,000,
respectively. All obligations under this lease were assumed by National Mutual
in connection with the Acquisition.
8. CONCENTRATIONS OF CREDIT RISK
At December 31, 1994 and 1993, the Company held unrated or less-than investment
grade corporate bonds of $82,186,000 and $21,898,000, respectively, with an
aggregate fair value of $75,934,000 and $21,898,000, respectively. Those
holdings amounted to 7.2% and 2.0%, respectively, of the Company's investments
in bonds and less than 6.1% and 1.5%, respectively, of the Company's total
admitted assets (excluding separate accounts assets). The holdings of
less-than-investment grade bonds are widely diversified and of satisfactory
quality based on the Company's investment policies and credit standards.
23
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. ANNUITY RESERVES
At December 31, 1994 and 1993, 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, 1994:
Subject to discretionary withdrawal (with
adjustment):
With market value adjustment $ 49,122 4.1%
At book value less current surrender charge of
5% or more 39,579 3.3
At market value 268,099 22.4
------------------------------
Total with adjustment or at market value 356,800 29.8
Subject to discretionary withdrawal (without
adjustment) at book value with minimal or no
charge or adjustment 317,271 26.6
Not subject to discretionary withdrawal 520,201 43.6
------------------------------
Total annuity reserves and deposit fund
liabilities-before reinsurance 1,194,272 100.0%
==========
Less reinsurance ceded 1,043
-----------
Net annuity reserves and deposit fund liabilities $1,193,229
===========
24
</TABLE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. ANNUITY RESERVES (CONTINUED)
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1993:
Subject to discretionary withdrawal (with
adjustment):
With market value adjustment $ - -
At book value less current surrender charge of
5% or more 79,989 7.1%
At market value 155,981 13.8
------------------------------
Total with adjustment or at market value 235,970 20.9
Subject to discretionary withdrawal (without
adjustment)at book value with minimal or no
charge or adjustment 380,240 33.8
Not subject to discretionary withdrawal 510,453 45.3
------------------------------
Total annuity reserves and deposit fund
liabilities-before reinsurance 1,126,663 100.0%
==========
Less reinsurance ceded -
-----------
Net annuity reserves and deposit fund liabilities $1,126,663
===========
25
</TABLE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. SEPARATE ACCOUNTS
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1994, 1993 and 1992 is presented below:
<TABLE>
<CAPTION>
1994 1993 1992
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Transfers as reported in the Summary of
Operations of the Separate Accounts
Statement:
Transfers to Separate Accounts $ 195,591 $ 153,310 $ 15,428
Transfers from Separate Accounts (33,003) (20,009) (4,661)
-----------------------------------------
Net transfers to Separate Accounts 162,588 133,301 10,767
Reconciling adjustments:
Mortality and expense charges reported as
other income 3,432 1,047 190
Policy deductions reported as other
income 1,387 - -
-----------------------------------------
Transfers as reported in the Summary of
Operations of the Life, Accident and
Health Annual Statement $ 167,407 $ 134,348 $ 10,957
=========================================
26
</TABLE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about all financial instruments, including insurance liabilities
classified as investment contracts, unless specifically exempted. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of such instruments. For financial
instruments not separately disclosed below, the carrying amount is a reasonable
estimate of fair value.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $1,131,068 $1,037,399 $1,080,104 $1,074,215
Preferred stocks 3,367 3,331 - -
Mortgage loans 57,653 57,653 135,949 135,949
Liabilities:
Annuity reserves for
investment-type contracts $ 871,340 $ 839,767 $ 966,850 $1,031,568
Separate account reserves 316,178 315,177 156,229 155,770
</TABLE>
MORTGAGE LOANS
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.
27
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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
values of the underlying policies.
SEPARATE ACCOUNT RESERVES
The fair value of separate account reserves for investment-type products equals
the cash surrender values.
12. STOCK OPTIONS
In December 1993, ARM adopted the Equity Incentive Plan, a stock option plan for
key employees. The plan provides for granting of options to purchase up to 2,647
shares of Class A common stock of ARM. A total of 1,264 options were granted
through December 31, 1994, of which 221 were exercisable, and all of which were
outstanding at year end. Each option has an exercise price set initially at
$5,000, which will increase at the end of each of ARM's fiscal quarters at
various rates until exercise of the option. Such options will become exercisable
in equal installments on the first through fifth anniversary of the date of
grant.
13. RELATED PARTY TRANSACTIONS
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement with ARM. ARM performs certain administrative 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
1994, the Company was charged $11,261,000 for these services in accordance with
the requirements of applicable insurance law and regulations.
28
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1993, National Integrity reimbursed Integrity for its use of Integrity's
personnel, property, and facilities in carrying out certain of its corporate
functions. Reimbursement for intercompany services is made on the basis of the
cost of services provided.
Prior to the Acquisition, Integrity used investment advisory services provided
by CMB Investment Counselors, Inc. ("CMB"), previously an affiliated company.
CMB was paid an investment advisory fee of .2% per annum of the market value of
investments under management. During the years ended 1993 and 1992, Integrity
paid $2,488,000 and $1,992,000, respectively to CMB for such services.
Integrity received capital contributions of approximately $47,554,000 and
$10,029,000 for the years ended December 31, 1993 and 1992, respectively, from
National Mutual. Integrity also received capital contributions of approximately
$5,500,000 for the year ended December 31, 1993 from ARM.
In connection with the Acquisition, ARM obtained a Term Loan Facility Agreement
in the principal amount of $40.0 million. The loan amount is secured by a pledge
of the shares of common stock of Integrity.
14. RECONCILIATION OF CAPITAL AND SURPLUS TO 1992 ANNUAL STATEMENT
Capital and surplus of $50,915,000 at December 31, 1992 differs from the capital
and surplus of $57,920,000 as shown in the 1992 Annual Statement as filed with
the Arizona Insurance Department due to an additional charge of $7,004,000. This
amount relates to net voluntary contributions to the Asset Valuation Reserve.
29
INTEGRITY LIFE INSURANCE COMPANY SEPARATE ACCOUNT III
PROSPECTUS
FOR THE
BEST OF FUNDS VARIABLE ANNUITY
OFFERED BY
INTEGRITY LIFE INSURANCE COMPANY
The Best of Funds Variable Annuity (the "Contract"), offered through
Integrity Life Insurance Company (the "Company"), an indirect wholly-owned
subsidiary of ARM Financial Group, Inc., provides a vehicle for investing on a
tax-deferred basis in the Schabacker Select Fund, an investment portfolio
offered by the United Services Insurance Funds ("USIF"), an open-end,
diversified investment company. The Contract is a flexible-premium endowment
annuity, intended for retirement savings or other long-term investment purposes.
The minimum initial contribution ("Contribution") to the Contract is
$10,000 ($5,000 for ABC Investment Plan(R) Accounts). There are no sales loads
or surrender charges. You may cancel your Contract for any reason during a "free
look period" of 10 days (30 days or more in some instances as set forth in your
Contract) ("Free Look Period").
Your Contributions to the Contract will be allocated to the Company's
Separate Account III (the "Separate Account"). Assets of the Separate Account
are invested in the Schabacker Select Fund (the "Portfolio"), the sole
investment portfolio currently offered by USIF.
The Contract's Account Value varies with the investment performance of the
Portfolio, whose investment objective is to provide long-term growth without
regard to current income. You bear all investment risk, and investment results
for the Portfolio are not guaranteed.
The Contract offers a number of ways of withdrawing monies at a future
date, including a lump-sum payment and several Annuity Payment Options. Full or
partial withdrawals by the Owner may be made at any time before the Endowment
Date, although in many instances withdrawals prior to age 59 1/2 are subject to
a 10% penalty tax (and a portion of the withdrawn monies may be subject to
ordinary income taxes). If you elect an Annuity Payment Option, your payments
may be received on a fixed or variable basis. You also have significant
flexibility in choosing the Endowment Date on which Annuity Payments begin.
This Prospectus sets forth the information you should have before investing
in the Contract, and must be accompanied by the current USIF Prospectus. Please
read both the Contract Prospectus and the USIF Prospectus carefully and retain
the Prospectuses for future reference. A Statement of Additional Information
("SAI") for the Contract Prospectus, which has the same date as this Prospectus,
has also been filed with the Securities and Exchange Commission (the
"Commission"), and is incorporated herein by reference. A copy of the SAI is
available free of charge by writing to our administrative office at Post Office
Box 182080, Columbus, Ohio 43218, or by calling the following toll-free
telephone number: 1-800-506-BEST. The table of contents of the SAI is included
at the end of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE 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 CONTRACT IS NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
THE DATE OF THIS PROSPECTUS IS MAY 19, 1995.
TABLE OF CONTENTS
PAGE
GLOSSARY................................................................... 4
HIGHLIGHTS ................................................................ 6
Best of Funds Variable Annuity Contract .......................... 6
Who Should Invest................................................. 6
Free Look Period ................................................. 6
How to Invest .................................................... 6
Charges and Deductions ........................................... 6
Full and Partial Withdrawals ..................................... 6
Death Benefit .................................................... 7
Annuity Payment Options .......................................... 7
Policyholder Information ......................................... 7
FEE TABLE ................................................................. 8
EXAMPLE OF TOTAL CONTRACT FEES ............................................ 8
FINANCIAL INFORMATION ..................................................... 9
Financial Statements ............................................. 9
Yield and Total Return ........................................... 9
THE COMPANY, THE SEPARATE ACCOUNT, AND USIF................................ 9
Integrity Life Insurance Company ................................. 9
Integrity Life Insurance Company Separate Account III ............ 9
United Services Insurance Funds .................................. 10
CONTRACT FEATURES ............................................................10
Free Look Period ................................................. 10
Contract Purchase Form and Contributions ......................... 11
Charges and Deductions ........................................... 11
Mortality and Expense Risk Charge ....................... 11
Administrative Charge and Maintenance Fee ............... 12
Taxes ................................................... 12
United Services Insurance Funds Expenses ................ 12
Account Value .................................................... 12
Dividends and Capital Gains Treatment ............................ 13
Full and Partial Withdrawals ..................................... 13
Minimum Balance Requirements ..................................... 13
Designation of a Beneficiary ..................................... 14
Death Benefit .................................................... 14
Endowment Date ................................................... 14
Annuity Payment Options .......................................... 15
Life Annuity ............................................ 15
Life Annuity With Period Certain ........................ 15
Installment or Unit Refund Life Annuity ................. 15
Designated Period Annuity................................ 15
Deferment of Payment ............................................. 16
Rights Reserved .................................................. 16
FEDERAL TAX CONSIDERATIONS................................................ 16
Taxation of Annuities in General ................................. 17
The Company's Tax Status ......................................... 18
Distribution-at-Death Rules ...................................... 18
Transfers of Annuity Contracts ................................... 18
Contracts Owned by Non-Natural Persons ........................... 18
Assignments ...................................................... 19
2
Multiple Contracts Rule .......................................... 19
Diversification Standards ........................................ 19
Qualified Individual Retirement Accounts ......................... 19
GENERAL INFORMATION ....................................................... 20
Additions, Deletions, or Substitutions of Investments ............ 20
Distributor of the Contracts ..................................... 20
Voting Rights .................................................... 20
Experts .......................................................... 21
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION ................. 22
3
GLOSSARY
ABC INVESTMENT PLAN(R). An automatic, monthly Contribution plan. If you
wish to make regular monthly Contributions of at least $100 each, please
complete the enclosed ABC Investment Plan(R) Kit. This allows us automatically
to transfer each monthly Contribution directly into your Contract from any bank
account that you select. You can terminate this plan simply by sending us your
termination notice one month in advance.
ACCUMULATION UNIT. A measure of your ownership interest in the Contract
prior to the Endowment Date. An Accumulation Unit is analogous, though not
identical, to a share owned in a mutual fund account.
ACCUMULATION UNIT VALUE. The value of each Accumulation Unit which is
calculated each Valuation Period. An Accumulation Unit Value is analogous,
though not identical, to the share price (net asset value) of a mutual fund.
ACCOUNT VALUE. The value of all amounts accumulated under the Contract
prior to the Endowment Date, equivalent to the Accumulation Units multiplied by
the Accumulation Unit Value. Account Value is analogous to the current market
value of a mutual fund account.
ADDITIONAL CONTRIBUTION. Any Contribution you invest in the Contract
subsequent to the Initial Contribution.
ANNUITANT. The person whose life is used to determine the duration of any
Annuity Payments and, upon whose death, prior to the Endowment Date, benefits
under the Contract are paid. The Owner is automatically the Annuitant.
ANNUITY PAYMENT. One of a series of payments made under an Annuity Payment
Option.
ANNUITY PAYMENT OPTION. One of several ways in which a series of payments
are made after the Endowment Date. Under a FIXED ANNUITY OPTION, the dollar
amount of each Annuity Payment does not change over time. Annuity Payments are
based on the Contract's Account Value as of the Endowment Date. Under a VARIABLE
ANNUITY OPTION, the dollar amount of each Annuity Payment may change over time,
depending upon the investment experience of the Portfolio.
ANNUITY UNIT. Unit of measure used to calculate Variable Annuity Payments
under the Contract.
BENEFICIARY. The person to whom any benefits are due under the Contract
upon the Annuitant's death.
BUSINESS DAY. A day when the New York Stock Exchange is open for trading.
COMPANY. Integrity Life Insurance Company ("We," "Us," "Our").
CONTRACT ANNIVERSARY. Any anniversary of the Contract Date.
CONTRACT DATE. The effective date of your Contract.
CONTRACT YEAR. A period of 12 months starting with the Contract Date or any
Contract Anniversary.
CONTRIBUTION. Any premium payment or any amount you invest in the Contract.
The minimum Initial Contribution is $10,000 ($5,000 for ABC Investment Plan(R)
Accounts); each Additional Contribution must be at least $100. Contributions may
be made at any time prior to the Endowment Date.
ENDOWMENT DATE. The date on which Annuity Payments begin.
FREE LOOK PERIOD. The period during which the Contract can be canceled and
treated as void from the Contract Date.
INITIAL CONTRIBUTION. The first Contribution you invest in the Contract.
4
NON-QUALIFIED CONTRACT. A Contract other than a Qualified Contract.
Contributions to such a Contract are made with after-tax dollars.
OWNER. The person who purchases the Contract unless the purchaser
designates another person as the Owner in writing ("You," "Your"). Because the
Owner is automatically the Annuitant, your life is used to determine the
duration of any Annuity Payments and, upon your death prior to the Endowment
Date, we will pay the death benefit provided for under the Contract to your
Beneficiary.
PORTFOLIO. Schabacker Select Fund, the sole investment portfolio of the
United Services Insurance Funds.
PROOF OF DEATH. Either (a) a certified death certificate, (b) a certified
decree of a court of competent jurisdiction as to the finding of death, (c) a
written statement by a medical doctor who attended the deceased, or (d) any
other proof satisfactory to the Company.
QUALIFIED CONTRACT. A Contract that qualifies as an individual retirement
annuity under Section 408(b) of the Internal Revenue Code of 1986, as amended.
SEPARATE ACCOUNT. The Integrity Life Insurance Company Separate Account
III. The Separate Account consists of assets that are segregated by the
Integrity Life Insurance Company. The Separate Account will invest only in the
Schabacker Select Fund of the United Services Insurance Funds, and the
investment performance of the Separate Account, therefore, is linked directly to
the investment performance of the Portfolio. The Separate Account is independent
of the general assets of the Company.
USIF. United Services Insurance Funds, an open-end, diversified investment
company in which the Separate Account invests.
VALUATION PERIOD. A period between two successive Business Days commencing
at the close of business of the first Business Day and ending at the close of
business of the following Business Day.
5
HIGHLIGHTS
BEST OF FUNDS The Contract provides a vehicle for investing on a
VRIABLE ANNUNITY tax-deferred basis in the Portfolio, the sole investment
CONTRACT portfolio offered by USIF. You may subsequently withdraw
monies from the Contract either as a lump sum or in regular
installments (See Annuity Payment Options on page 15).
Because Account Values and certain Annuity Payment Options
depend on the investment experience of the Portfolio, you
bear all investment risk for monies invested under the
Contract. The investment performance of the Portfolio is not
guaranteed.
WHO SHOULD The Contract is designed for investors seeking long-term,
INVEST tax-deferred accumulation of funds, generally for retirement
but also for other long-term investment purposes. The
tax-deferred feature of the Contract is most attractive to
investors in high federal and state marginal tax brackets
who have exhausted other avenues of tax deferral, such as
"pre-tax" contributions to employer-sponsored retirement or
savings plans. The Contract is intended for long-term
investors.
FREE LOOK The Contract provides for a Free Look Period of 10 days
PERIOD after you receive the Contract (30 or more days in some
instances, as specified in your Contract), during which
period you may cancel your investment in the Contract. To
cancel your investment, please return your Contract to us.
When we receive the Contract, you will be reimbursed for all
Contributions, adjusted for any gain or loss for monies
invested in the Separate Account, unless applicable state
law requires the return of Contributions.
HOW TO INVEST To invest in the Contract, please complete the accompanying
purchase form and mail the completed purchase form to our
administrative office. The minimum Initial Contribution to
the Contract is $10,000 ($5,000 for ABC Investment Plan(R)
Accounts). Please note that the Owner is automatically the
Annuitant (certain exceptions may be allowed for tax-free
exchanges under Section 1035 of the Internal Revenue Code of
1986, as amended, for certain qualified plans and in other
special circumstances). Please further note that the Owner,
as the Annuitant, when purchasing a Contract, must be 79
years of age or less. You may make Additional Contributions
at any time before the Contract's Endowment Date, as long as
the Annuitant is living. Additional Contributions must be at
least $100.
CHARGES AND The Contract imposes no sales charges. The costs of the
DEDUCTIONS Contract include mortality and expense risk charges,
maintenance and administrative charges which cover the cost
of administering the Contract, and management, advisory, and
other fees and expenses which reflect the costs of USIF.
There are no charges under the Contract for withdrawals,
although withdrawals prior to age 59 1/2 may be subject to a
10% penalty tax. (See the Fee Table on page 8 and Charges
and Deductions on page 11.)
FULL AND PARTIAL You may withdraw all or part of your Account Value before
WITHDRAWALS the earlier of the Endowment Date or the Annuitant's death.
Withdrawals prior to age 59 1/2 may be subject to a 10%
penalty tax. (See Full and Partial Withdrawals on page 13.)
6
DEATH BENEFIT If the Owner/Annuitant dies prior to the Endowment Date, the
Beneficiary will receive the death benefit provided for
under the Contract (the "Death Benefit"). The Death Benefit
is the greater of the then-current Account Value of the
Contract or the sum of all Contributions (less any
withdrawals). Your Beneficiary may elect to receive these
proceeds as a lump sum or as Annuity Payments. If your
Beneficiary is your spouse, he or she will have the option
of continuing the Contract as the Owner/Annuitant. (See
Death Benefit on page 14.)
ANNUNITY PAYMENT Beginning on the Endowment Date, you may withdraw monies
OPTIONS from the Contract in the form of an annuity income. As the
Owner, you may elect one of several Annuity Payment Options.
These options provide a wide range of flexibility in
choosing an annuity payment schedule that meets your
particular needs. Annuity Payment Options may include
payments for a designated period or for life with or without
a guaranteed number of payments. You may elect a lump-sum
payment prior to the Endowment Date in lieu of Annuity
Payments. (See Annuity Payment Options on page 15.)
POLICYHOLDER If you have questions about your Best of Funds Variable
INFORMATION Annuity, please write to our administrative office at Post
Office Box 182080, Columbus, Ohio 43218. You may also call
the following toll-free telephone number: 1-800-506-BEST.
Please provide, when you write, and have ready, when you
call, the Contract number and the Owner's name. As the
Owner, you will receive periodic statements confirming any
transactions that take place, as well as a quarterly
statement, and Annual and Semi-Annual Fund Reports.
7
FEE TABLE
The following table illustrates all expenses that you will incur as an Owner,
except for premium taxes that may be assessed by your state (see "Charges and
Deductions" for further details). The expenses and fees shown are based on
estimates for USIF's first fiscal year of operation.
OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases ............................. None
Redemption Fees ............................................. None
Surrender Fees .............................................. None
Annual Account Maintenance Fee(1) ........................... $ 35.00
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average account value)
Mortality and Expense Risk Charge ............................ 0.50%
Administrative Expense Charge ................................ 0.15%
Other Account Fees ........................................... None
-----
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES ....................... 0.65%
=====
FUND ANNUAL EXPENSES AFTER EXPENSE REIMBURSEMENTS (as a percentage of average
net assets)
Management Fees ...................................................... 1.25%
Other Expenses ....................................................... 0.05%
-----
TOTAL ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE REIMBURSEMENTS(2) . 1.30%
=====
____________
(1) The Annual Account Maintenance Fee is deducted on the last day of each
Contract Year. The Annual Account Maintenance Fee will be waived in any year
that your Account Value is $50,000 or more on the last Business Day of the
Contract Year. A partial year's maintenance fee will be deducted on a pro
rata basis from any withdrawal, death benefit or annuity payout option.
(2) Total Annual Fund Operating Expenses will be capped by the investment
adviser and the sub-adviser to USIF at a maximum of 1.30% of average net
assets on an annualized basis through June 30, 1996 and until such later
date as the adviser and sub-adviser may determine. Without this
reimbursement, the Other Expenses and Total Expenses are estimated to be
.18% and 1.43%, respectively.
EXAMPLE OF TOTAL CONTRACT FEES
The following example illustrates the expenses that you would incur on a
$1,000 Contribution over various periods, assuming (i) a 5% annual rate of
return and (ii) redemption at the end of each period. As noted in the table
above, the Contract imposes no redemption fees of any kind. Your expenses are
identical whether you continue the Contract or withdraw the entire value of your
Contract at the end of the applicable period as a lump sum or under one of the
Contract's Annuity Payment Options.
1 Year 3 Years
------- -------
$21 $66
Included in this example are the pro rata portions of the Contract
maintenance fees, $1 and $3, respectively, for the periods shown based on an
average expected account size of $35,000. The fee is deducted on the last day of
the Contract Year.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE
SHOWN, SUBJECT TO THE GUARANTEES IN THE CONTRACT.
8
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The financial statements of the Company (as well as the auditors' reports
thereon) are contained in the SAI. As of the date of this Prospectus, the
Separate Account has not commenced operations, and, therefore, the Separate
Account has no assets and no financial statements are presented with respect to
the Separate Account.
YIELD AND TOTAL RETURN
From time-to-time, the Portfolio may advertise its yield and total return
investment performance. Advertised yields and total returns include all charges
and expenses attributable to the Contract. Including these fees has the effect
of decreasing the advertised performance of the Portfolio, so that the
Portfolio's investment performance will not be directly comparable to that of an
ordinary mutual fund.
Please refer to the SAI for a description of the method used to calculate
the Portfolio's yield and total return, and a list of the indexes and other
benchmarks used in evaluating the Portfolio's performance.
THE COMPANY, THE SEPARATE ACCOUNT, AND USIF
INTEGRITY LIFE INSURANCE COMPANY
The Company was organized in 1966 as an Arizona stock life insurance
company and redomesticated as an Ohio stock life insurance company in 1994. The
Company's principal executive office is at 239 South Fifth Street, Louisville,
Kentucky 40202. The Company is indirectly wholly-owned by ARM Financial Group,
Inc., an insurance holding company. ARM Financial Group, Inc. is a financial
services holding company that provides retail and institutional products and
services to the long-term savings and retirement market. At December 31, 1994,
ARM Financial Group, Inc. had approximately $2.6 billion of policyholder
deposits and funds under management. Approximately 86% of the common stock of
ARM Financial Group, Inc. is owned by The Morgan Stanley Leveraged Equity Fund
II, L.P.
The Company is principally engaged in offering life insurance policies and
annuity contracts, and is authorized to sell life insurance policies and annuity
contracts in 44 states and the District of Columbia. In addition to the
Contracts, the Company also sells flexible payment annuity contracts and
certificates with an underlying investment medium other than USIF, and
single-premium fixed annuity contracts. The Company also has entered into
agreements with other insurance companies to provide administrative and
investment support for products to be designed, underwritten, and sold by these
companies.
INTEGRITY LIFE INSURANCE COMPANY SEPARATE ACCOUNT III
The Separate Account was established by the Company as a separate account
under the laws of the State of Ohio pursuant to a resolution of the Company's
Board of Directors adopted on August 19, 1994. The Separate Account is a unit
investment trust registered with the Commission under the Investment Company Act
of 1940, as amended (the "1940 Act"). Such registration does not signify that
the Commission supervises the management or the investment practices or policies
of the Separate Account.
The assets of the Separate Account are owned by the Company and the
obligations under the Contract are obligations of the Company. These assets are
held separately from the other assets of the Company and are not chargeable with
liabilities incurred in any other business operation of the Company (except to
the extent that assets in the Separate Account exceed the reserves and other
liabilities of the Separate Account). The Company will always keep assets in the
Separate Account
9
with a value at least equal to the total Account Value under the Contracts.
Income, gains, and losses incurred on the assets in the Separate Account,
whether or not realized, are credited to or charged against the Separate Account
without regard to other income, gains, or losses of the Company. The investment
performance of the Separate Account, therefore, is entirely independent of the
investment performance of the Company's general account assets or any other
separate account maintained by the Company.
The Separate Account invests solely in the corresponding Portfolio of USIF.
Additional Separate Accounts may be established in the future at the discretion
of the Company. The Separate Account meets the definition of a "separate
account" under Rule O-1(e)(1) of the 1940 Act.
UNITED SERVICES INSURANCE FUNDS
United Services Insurance Funds is an open-end diversified investment
company intended exclusively as an investment vehicle for variable annuity or
variable life insurance contracts offered by insurance companies.
USIF currently is composed of one investment portfolio, the Portfolio,
though other separate investment portfolios may be added by USIF in the future.
The investment objective of the Portfolio is to provide long-term growth without
regard to current income. The Portfolio seeks to meet this objective by
investing primarily in a broad range of shares of other open-end investment
companies - commonly called "mutual funds," and closed-end funds. This policy
involves certain expenses in addition to those normally applicable to an
investment in a mutual fund that invests in other types of securities. There is
no assurance that the Portfolio will achieve its stated objective.
Additional information concerning the investment objective and policies of
the Portfolio and the investment advisory services, total expenses, and charges
for USIF can be found in the current Prospectus for USIF, which accompanies this
Contract Prospectus. The USIF Prospectus should be read carefully before any
decision is made concerning investment in the Contract.
The Portfolio may be made available to registered separate accounts
offering variable annuity and variable life insurance products of the Company as
well as other insurance companies. Although we believe it is unlikely, a
material conflict could arise between the interests of the Separate Account and
one or more of the other participating separate accounts. In the event of a
material conflict, the affected insurance companies agree to take any necessary
steps, including removing their separate account from USIF, if required by law,
to resolve the matter. See the USIF Prospectus for more information.
United Services Advisors, Inc. ("USAI"), a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"),
serves as the investment adviser to USIF. USIF pays USAI a monthly fee at the
annual rate of 1.30% of the Portfolio's average net assets. Schabacker
Investment Management ("Schabacker"), a registered investment adviser under the
Advisers Act, serves as the sub-adviser to USIF.
CONTRACT FEATURES
The rights and benefits under the Contract are described below and in the
Contract. The Company reserves the right to make any modification to conform the
Contract to, or give the Owner the benefit of, any federal or state statute or
any rule or regulation of the United States Treasury Department.
FREE LOOK PERIOD
A Free Look Period exists for 10 days after you receive the Contract (30 or
more days in some instances as set forth in your Contract). The Contract permits
you to cancel the Contract during the Free Look Period by returning the Contract
to our administrative office at Post Office Box 182080, Columbus, Ohio 43218.
Upon cancellation, the Contract is treated as void from the Contract Date and
you will receive all the Contributions made under the Contract, adjusted for any
gain or loss for
10
monies invested in the Separate Account, unless applicable state law requires
the return of Contributions.
CONTRACT PURCHASE FORM AND CONTRIBUTIONS
Individuals wishing to purchase a Non-Qualified Contract should send a
completed purchase form and their Initial Contribution to our administrative
office, at Post Office Box 182080, Columbus, Ohio 43218. Each Initial
Contribution must be equal to or greater than $10,000 ($5,000 minimum investment
requirement for ABC Investment Plan(R) Accounts). As the Owner, you are
automatically the Annuitant under the Contract and may not name any other person
as the Annuitant. Furthermore, you must be 79 years of age or less at the time
the Contract is initially purchased.
The Contract will be issued after acceptance of the purchase form and the
Initial Contribution. Acceptance by the Company is subject to the purchase form
being received in good order, and the Company reserves the right to reject any
purchase form or Initial Contribution. If accepted, Contributions ordinarily
will be credited not later than the second Business Day after the Contributions
are delivered to our administrative office. If the Initial Contribution cannot
be credited because the purchase form is incomplete, the Company will contact
the applicant in writing, explain the reason for the delay, and will refund the
Initial Contribution within five Business Days, unless otherwise instructed. If
not refunded, the Contribution will be credited as soon as these additional
requirements are fulfilled.
You may make Additional Contributions at any time prior to the Endowment
Date. Additional Contributions must be for at least $100.
The Contracts are available on a non-qualified basis and as individual
retirement annuities ("IRAs") that qualify for special federal income tax
treatment. Generally, Qualified Contracts may be purchased only in connection
with a "rollover" of funds from another qualified plan or IRA and must contain
certain other restrictive provisions limiting the timing and amount of payments
to and distributions from the Qualified Contract.
All Contributions will be allocated to the Schabacker Select Fund, the sole
investment portfolio of USIF. Total Contributions may not exceed $1,000,000
without prior approval of the Company.
You may exchange an existing annuity contract for the Best of Funds
Variable Annuity. Section 1035 of the Internal Revenue Code of 1986, as amended
(the "Code"), provides, in general, that no gain or loss shall be recognized on
the exchange of one annuity contract for another. To complete a "1035 Exchange"
simply provide all the requested information contained in the 1035 Exchange Kit
and mail the completed forms, along with the purchase form and your current
Contract, to our administrative office in the envelope provided. Special rules
and procedures apply to Code Section 1035 transactions, particularly if the
Contract being exchanged was issued prior to August 14, 1982. Prospective Owners
wishing to take advantage of Code Section 1035 should consult their tax
advisers.
CHARGES AND DEDUCTIONS
No sales load is deducted from the Initial Contribution or any Additional
Contributions. In addition, there are no sales charges imposed upon withdrawals.
MORTALITY AND EXPENSE RISK CHARGE. The Company imposes a charge as
compensation for bearing certain mortality and expense risks under the
Contracts. The Company assesses this charge daily at an effective annual rate of
0.50% of your Account Value.
The Company guarantees that this daily charge will never increase. If this
charge is insufficient to cover actual costs and assumed risks, the loss will
fall on the Company. Conversely, if the charge proves more than sufficient, any
excess will be added to the Company surplus and will be used for any lawful
purposes, including funding any shortfall in the costs of distributing the
Contracts.
11
The mortality risk borne by the Company under the Contracts, when one of
the life Annuity Payment Options is selected, is to make monthly annuity
payments (determined in accordance with the annuity tables and other provisions
contained in the Contract) regardless of how long all Annuitants may live. The
Company also assumes mortality risk as a result of the Company's guarantee of a
minimum payment in the event the Annuitant dies prior to the Endowment Date.
The expense risk borne by the Company under the Contracts is the risk that
the charges for administrative expenses, which are guaranteed for the life of
the Contract, may be insufficient to cover the actual costs of issuing and
administering the Contract.
ADMINISTRATIVE CHARGE AND MAINTENANCE FEE. An administrative charge equal
to 0.15% annually of your Account Value is assessed daily along with an annual
maintenance fee of $35. The maintenance fee is deducted on the last Business Day
of each Contract Year, but will be waived if your Account Value is $50,000 or
more on that day. A partial year's maintenance fee will be deducted on a pro
rata basis from any withdrawal, Death Benefit, or Annuity Payment Option. These
deductions represent reimbursement for the costs expected to be incurred by the
Company over the life of the Contract for issuing and maintaining each Contract
and the Separate Account.
TAXES. The Owner will pay premium taxes, where such taxes are imposed by
state law, and which taxes currently range up to 3.5%. These taxes will be
deducted from the Account Value or Contributions as incurred by the Company.
At the time of the filing of this Prospectus, the following states assess a
premium tax on all Initial and Additional Contributions:
Non-
Qualified Qualified
--------- ---------
Pennsylvania ............................ 0% 2.00%
South Dakota ............................ 0% 1.25%
Under present laws, the Company will incur state or local taxes (in
addition to the premium taxes described above) in several states. At present,
the Company does not charge you for these other taxes. If there is a change in
state or local tax laws, charges for such taxes may be made. The Company does
not expect to incur any federal income tax liability attributable to investment
income or capital gains retained as part of the Company's reserves under the
Contracts. (See "Federal Tax Considerations," page 16.) Based upon these
expectations, no charge currently is being made to the Separate Account for
corporate federal income taxes that may be attributable to the Separate Account.
The Company will periodically review the question of a charge to the
Separate Account for corporate federal income taxes related to the Separate
Account. Such a charge may be made in future years for any federal income taxes
incurred by the Company. This might become necessary if the tax treatment of the
Company is ultimately determined to be other than what the Company currently
believes this treatment to be, if there are changes made in the federal income
tax treatment of annuities at the corporate level, or if there is a change in
the Company's tax status. In the event that the Company should incur federal
income taxes attributable to investment income or capital gains retained as part
of the Company's reserves under the Contracts, the Account Value of the Contract
would be correspondingly adjusted by any provision or charge for such taxes.
UNITED SERVICES INSURANCE FUNDS EXPENSES. The value of the assets in the
Separate Account will reflect the fees and expenses paid by USIF. A complete
description of these expenses is found in the "Fee Table" section of this
Prospectus and in the "Summary of Fees and Expenses" section of the USIF
Prospectus and in the USIF Statement of Additional Information.
ACCOUNT VALUE
At the commencement of the Contract, the Account Value equals the Initial
Contribution. Thereafter, the Account Value equals the Account Value from the
previous Business Day (a) increased by (i) any Additional Contributions received
by the Company and (ii) any increase in
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the Account Value due to net investment results of the Portfolio that occur
during the Valuation Period and (b) reduced by (i) any decrease in the Account
Value due to net investment results of the Portfolio, (ii) a daily charge to
cover the mortality and expense risks assumed by the Company, (iii) any charges
to cover the cost of administering the Contract, (iv) any partial withdrawals,
and (v) premium taxes, if any, that occur during the Valuation Period.
The Account Value is expected to change from Valuation Period to Valuation
Period, reflecting the net investment experience of the Portfolio as well as the
daily deduction of charges. When your Contributions are allocated to the
Portfolio, the payments result in a particular number of Accumulation Units
being credited to your Contract. The number of Accumulation Units credited is
determined by dividing the dollar amount allocated to the Portfolio by the
Accumulation Unit Value for the Portfolio as of the end of the Valuation Period
in which the payment is received. The Accumulation Unit Value varies each
Valuation Period (i.e., each day that there is trading on the New York Stock
Exchange) with the net rate of return of the Portfolio. The net rate of return
of the Portfolio reflects the investment performance of the Portfolio for the
Valuation Period and is net of asset charges to the Portfolio.
DIVIDENDS AND CAPITAL GAINS TREATMENT
All dividends and capital gains earned will be reinvested and reflected in
the Accumulation Unit Value. Only in this way can these earnings remain tax
deferred.
FULL AND PARTIAL WITHDRAWALS
At any time before the Endowment Date, you may make a partial or full
withdrawal from the Contract to receive all or part of the Account Value by
sending a written request to our administrative office at Post Office Box
182080, Columbus, Ohio 43218. Full or partial withdrawals may only be made
before the Endowment Date and all partial withdrawal requests must be for at
least $500.
Proceeds for full and partial withdrawals normally will be distributed
within seven calendar days after receipt by our administrative office of the
written withdrawal request. (See "Deferment of Payment," at page 16.)
Payments under the Contract of any amounts derived from Contributions paid
by check may be delayed until such time as the check has cleared the Owner's
bank. If, at the time the Owner requests a full or partial withdrawal, the Owner
has not provided the Company with a written election not to have federal income
taxes withheld, the Company, by law, must withhold such taxes from the taxable
portion of any full or partial withdrawal and remit that amount to the federal
government. Moreover, the Code provides that a 10% penalty tax will be imposed
on certain early withdrawals, including withdrawals by Owners prior to age 59
1/2. (See "Federal Tax Considerations," at page 16.)
Since the Owner assumes the investment risk with respect to amounts
allocated to the Separate Account, the total amount paid upon withdrawal of the
Contract (taking into account any prior withdrawals) may be more or less than
the total Contributions made.
MINIMUM BALANCE REQUIREMENTS
Due to the relatively-high cost of maintaining smaller accounts, the
Company reserves the right to terminate any Contract if either: (i) no
Contributions have been made under the Contract for at least two full Contract
Years and your Account Value is less than $1,000; or (ii) the Contract has been
in-force for three years and your Account Value is less than $1,000. In the
event that the Company becomes entitled to exercise this termination right, you
will be notified by the Company that your Account Value is below the Contract's
minimum requirement and you would then be allowed at least 60 days to make an
additional contribution before the account is liquidated. Proceeds payable to
the Owner as a result of termination of the Owner's account by the Company would
be promptly paid to the Owner. The full proceeds of such payment would be
taxable as a withdrawal.
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DESIGNATION OF A BENEFICIARY
You may name one or more Beneficiaries in the purchase form, which
Beneficiary(ies) would receive benefits upon your death. Thereafter, you may
change the Beneficiary(ies) by written notice to the Company. Such change will
take effect on the date you sign the notice, but will not affect any payment
made or any other action taken before the Company acknowledges the notice. You
also may make the designation of Beneficiary(ies) irrevocable by sending written
notice to, and obtaining approval from, the Company. Changes in the Beneficiary
may then be made only with the consent of the designated irrevocable
Beneficiary.
If the Annuitant dies prior to the Endowment Date, then the following will
apply unless you have made other provisions:
(a) If there is more than one Beneficiary designated, then each
Beneficiary will share in the Death Benefit provided for under the Contract
equally.
(b) If one of two or more Beneficiaries has already died, then that
deceased Beneficiary's share of the Death Benefit will be paid equally to
the surviving Beneficiaries.
(c) if no Beneficiary is living, then the proceeds under the Death
Benefit will be paid to the estate of the Owner.
(d) If a Beneficiary dies at the same time as the Annuitant, then the
proceeds under the Death Benefit will be paid as though the Beneficiary had
died first; if a Beneficiary dies within 15 days after the Annuitant's
death and before the Company receives due proof of the Annuitant's death,
then the proceeds under the Death Benefit will be paid as though the
Beneficiary had died first.
If the Owner has elected a "Life Annuity With Period Certain" Annuity
Payment Option (see "Annuity Payment Options," at page 15), and if the Annuitant
dies on or after the Endowment Date, then any unpaid Payments Certain will be
paid to the Beneficiary. If a Beneficiary who is receiving Annuity Payments
dies, then any remaining Annuity Payments Certain ("Payments Certain") will be
paid to that Beneficiary's named beneficiary(ies) when due.
DEATH BENEFIT
Subject to the provisions described in this Prospectus and under the
Contract, if the Annuitant dies prior to the Endowment Date, then an amount will
be paid as proceeds to the Beneficiary. The Death Benefit is calculated and is
payable upon receipt by the Company of due Proof of Death of the Annuitant, as
well as proof that the Annuitant died prior to the Endowment Date. Upon receipt
by the Company of this proof, the Death Benefit will be paid to the Beneficiary
within seven days, or as soon thereafter as the Company has sufficient
information about the Beneficiary to make the payment. The Beneficiary may
receive the amount payable in a lump sum cash benefit or under one of the
Annuity Payment Options.
The Death Benefit will equal the greater of (a) the Account Value as of the
date of due Proof of Death and proof that the Annuitant died prior to the
Endowment Date or (b) the sum of Contributions less the sum of all partial
withdrawals and premium taxes. The Owner may elect an Annuity Payment Option for
the Beneficiary or, if no such election was made by the Owner and a cash benefit
has not been paid, the Beneficiary may make this election after the Annuitant's
death.
ENDOWMENT DATE
You may specify an Endowment Date in the Contract purchase form, which date
can be no later than the first day of the month after your 85th birthday. If no
Endowment Date is specified in the Contract purchase form, then the Endowment
Date will be the first day of the month after your 85th birthday. If your
Contract has been in effect for less than ten years on your 85th birthday, we
will allow you to extend the Endowment Date to a later date which is no later
than the first day of the month after ten full Contract Years. The Endowment
Date is the date that Annuity Payments are
14
scheduled to commence under the Contract, unless the Contract has been
surrendered or an amount has been paid under the Contract as proceeds to the
designated Beneficiary prior to that date. For IRA Rollovers, the Endowment Date
can be no later than the Contract Anniversary after the Owner/Annuitant reaches
age 70 1/2.
You may advance or defer the Endowment Date by providing a written request
to the Company; however, the Endowment Date may not be advanced to a date prior
to 30 days after the date of receipt by the Company of your written request, and
the Endowment Date may not be deferred, without the Company's prior approval, to
a date beyond your 85th birthday. An Endowment Date may be changed only by
written request during your lifetime. The Endowment Date and Annuity Payment
Options available for Qualified Contracts also may be controlled by
endorsements, the plan, or applicable law.
ANNUITY PAYMENT OPTIONS
All Annuity Payment Options are offered as "Fixed Annuity Options." This
means that the amount of each Annuity Payment will be set on the Endowment Date
and will not change. All Annuity Payment Options (except the Designated Period
Annuity Option, described below) are also offered as "Variable Annuity Options."
This means that Annuity Payments, after the initial payment, will reflect the
investment experience of the Portfolio. If the Owner chooses a Fixed Annuity
Option, the Owner's investment under the Contract will be moved out of the
underlying Portfolio and into the general account of the Company. If the Owner
does not wish to receive the Annuity Payments on an annuity basis, the Owner may
take a lump sum payment at anytime before the Endowment Date, which lump sum
value is equal to the Account Value. The following Annuity Payment Options are
available under the Contract:
LIFE ANNUITY. Available as either a Fixed or Variable Annuity Option.
Monthly Annuity Payments are paid for your life, ceasing with the last Annuity
Payment due prior to your death.
LIFE ANNUITY WITH PERIOD CERTAIN. Available as either a Fixed or Variable
Annuity Option. Monthly Annuity Payments are paid for your life, with a Period
Certain of not less than 60, 120, 180, or 240 months, as elected.
INSTALLMENT OR UNIT REFUND LIFE ANNUITY. Available as either a Fixed
(Installment Refund) or Variable (Unit Refund) Annuity Option. Monthly Annuity
Payments are paid for your life, with a Period Certain determined by dividing
the Account Value by the First Annuity Payment.
DESIGNATED PERIOD ANNUITY. Available only as a Fixed Annuity Option.
Monthly Annuity Payments are paid for a Period Certain as elected, which may be
from 5 to 30 years.
In the event that an Annuity Payment Option is not selected, the Company
will make monthly Annuity Payments that will continue for as long as you live
(with 120 payments guaranteed) in accordance with the Life Annuity With Period
Certain Variable Option and the annuity benefit sections of the Contract.
Subject to approval by the Company, the Owner may select any other Annuity
Payment Option then being offered by the Company. The first payment under a
Variable Annuity Option and each payment under a Fixed Annuity Option shall be
based upon 3% interest and the 1983 Individual Annuity Mortality Table or more
favorable rates as offered by the Company. The minimum initial Annuity Payment,
however, is $20. If the Account Value is less than $2,000, then the Company has
the right to pay that amount in a lump sum. From time-to-time, the Company may
require proof that the Annuitant is living. Annuity Payment Options are not
available to either: (i) an assignee; or (ii) any other than a natural person,
except with the consent of the Company.
The Company, at the time of election of an Annuity Payment Option, may
offer more favorable rates in lieu of the guaranteed rates specified in the
Annuity Tables.
The value of Variable Annuity Payments will reflect the investment
experience of the Portfolio. On or after the Endowment Date, the Annuity Payment
Option is irrevocable. Only one Annuity Payment Option may be chosen from among
those made available by the Company for the Portfolio.
15
If the actual net investment experience of the Portfolio exactly equals the
assumed interest rate upon which Annuity Payments are based (guaranteed minimum
3%), then the Variable Annuity Payments will remain the same (equal to the first
Annuity Payment). If, however, actual investment experience of the Portfolio
exceeds the assumed interest rate, then the Variable Annuity Payments will
increase; conversely, the Variable Annuity Payments will decrease if the actual
investment experience of the Portfolio is lower.
If an Annuity Payment Option is chosen that depends on the continuation of
the life of the Annuitant, proof of the birth date of the Annuitant may be
required before Annuity Payments begin. For Annuity Payment Options involving
life income, the actual age of the Annuitant will affect the amount of each
Annuity Payment. Since Annuity Payments to older Annuitants are expected to be
fewer in number, the amount of each such Annuity Payment shall be greater.
If, at the time of any Annuity Payment, the Owner has not provided the
Company with a written election not to have federal income taxes withheld, then
the Company by law must withhold such taxes from the taxable portion of such
Annuity Payment and remit that amount to the federal government.
The value of all Annuity Payments, both fixed and variable, will be greater
for shorter guaranteed periods than for longer guaranteed periods because such
payments are expected to be made for a shorter period.
The method of computation of Variable Annuity Payments is described in more
detail in the SAI.
DEFERMENT OF PAYMENT
Payment of any cash withdrawal or lump-sum death benefit due from the
Separate Account will occur within seven days from the date the election becomes
effective, except that the Company may be permitted to defer such payment if:
(i) the New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the New York Stock Exchange is otherwise restricted; or
(2) an emergency exists as defined by the Commission, or the Commission requires
that trading be restricted; or (3) the Commission permits a delay for the
protection of Owners.
RIGHTS RESERVED
Subject to required approvals by federal and state authorities and to all
Company administrative rules which are lawful, nondiscriminatory and consistent
with this Contract, the Company reserves the right to: require reasonable
documentation prior to administering any transaction or benefit; waive or reduce
restrictions or charges; increase benefits; refuse any Contribution; declare
prospectively any rules regarding maximum or minimum Contributions, Account
Value balances, Annuity Benefit amounts, or any other administrative rules.
FEDERAL TAX CONSIDERATIONS
The ultimate effect of federal income taxes on the amounts paid for the
Contract, on the investment returns on assets held under a Contract, on Annuity
Payments, and on the economic benefits to you or your Beneficiary, depends on
the Company's tax status and upon the tax status of the individuals concerned.
The following discussion is general in nature and is not intended as tax advice.
You should consult a tax adviser regarding the tax consequences of purchasing a
Contract. No attempt is made to consider any applicable state or other tax laws.
Moreover, this discussion is based upon the Company's understanding of the
federal income tax laws as such laws are currently interpreted. No
representation is made regarding the likelihood of the continuation of the
federal income tax laws, the U.S. Treasury Regulations, or the current
interpretations by the Internal Revenue Service. In the past, various proposals
have been submitted to the U.S. Congress regarding the tax treatment of
annuities. Should any such a proposal be resubmitted and passed in the future,
the Company reserves the right to make uniform changes to the Contract to the
extent necessary to
16
continue to qualify the Contract as an annuity. For a discussion of federal
income taxes as these taxes relate to USIF and the Portfolio, please see the
accompanying Prospectus for USIF.
TAXATION OF ANNUITIES IN GENERAL
Section 72 of the Code governs the taxation of annuities. In general, an
Owner is not taxed on increases in value under a Contract until some form of
withdrawal or distribution is made under the Contract. Under certain
circumstances, however, the increase in value under a Contract may be subject to
current federal income tax. (See "Contracts Owned by Non-Natural Persons" and
"Diversification Standards," at pages 18 and 19.)
Section 72 provides that the proceeds of a full or partial withdrawal from
a Contract prior to the Endowment Date will be treated as taxable income to the
extent that the amounts held under the Contract exceed the "investment in the
Contract," as that term is defined in the Code. The "investment in the Contract"
can generally be described as the cost of the Contract, and generally
constitutes all Contributions paid for the Contract less any amounts received
under the Contract that are excluded from the individual's gross income. The
taxable portion is taxed at ordinary income tax rates. For purposes of this
rule, a pledge or assignment of a Contract is treated as a payment received on
account of a partial withdrawal of a Contract.
Upon receipt of a full or partial withdrawal or an Annuity Payment under
the Contract, the recipient is taxed if the value of the Contract exceeds the
investment in the Contract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates.
For Fixed Annuity Payments, in general, the taxable portion of each such
payment is determined by using a formula known as the "exclusion ratio," which
ratio establishes the ratio that the investment in the Contract bears to the
total expected amount of Annuity Payments for the term of the Contract. That
ratio is then applied to each Annuity Payment to determine the non-taxable
portion of the payment. The remaining portion of each Annuity Payment is taxed
at ordinary income tax rates. For Variable Annuity Payments, in general, the
taxable portion is determined by a formula that establishes a specific dollar
amount of each Annuity Payment that is not taxed. This dollar amount is
determined by dividing the investment in the Contract by the total number of
expected periodic payments. The remaining portion of each payment is taxed at
ordinary income tax rates. Once the excludible portion of Annuity Payments to
date equals the investment in the Contracts, the balance of the Annuity Payments
will be fully taxable.
Withholding of federal income taxes on all distributions may be required
unless the recipient elects not to have any amounts withheld and properly
notifies the Company of that election.
With respect to amounts withdrawn or distributed before the taxpayer
reaches age 59 1/2, a penalty tax is imposed equal to 10% of the taxable portion
of amounts withdrawn or distributed. The penalty tax, however, will not apply to
withdrawals: (i) made on or after the death of the Owner; (ii) attributable to
the taxpayer's becoming totally disabled within the meaning of Code Section
72(m)(7); (iii) that are part of a series of substantially-equal periodic
payments made at least annually for the life (or life expectancy) of the
taxpayer, or joint lives (or joint life expectancies) of the taxpayer and his
Beneficiary; (iv) from a qualified plan; (v) allocable to investment in the
Contract before August 14, 1982; (vi) under a qualified funding asset (as
defined in Code Section 130(d)); (vii) under an immediate annuity contract as
defined in Section 72(u)(4); or (viii) that are purchased by an employer on
termination of certain types of qualified plans and that are held by the
employer until the employee separates from service. Other tax penalties may
apply to certain distributions as well as to certain contributions and other
transactions under a qualified contract.
If the penalty tax does not apply to a withdrawal as a result of the
application of item (iii) above, and the series of payments are subsequently
modified (other than by reason of death or disability), the tax for the year in
which the modification occurs will be increased by an amount (as determined
under U.S. Treasury Regulations) equal to the tax that would have been imposed
but for item (iii) above, plus interest for the deferral period. The foregoing
rule applies if the modification takes place
17
(a) before the close of the period that is five years from the date of the first
payment and after the taxpayer attains age 59 1/2, or (b) before the taxpayer
reaches age 59 1/2.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Part I of Subchapter
L of the Code. Since the Separate Account is not a separate entity from the
Company and its operations form a part of the Company, the Separate Account will
not be taxed separately as a "regulated investment company" under Subchapter M
of the Code. Investment income and realized capital gains on the assets of the
Separate Account are reinvested and taken into account in determining the
Account Value. Under existing federal income tax law, the Separate Account's
investment income, including realized net capital gains, is not taxed to the
Company. The Company reserves the right to make a deduction for taxes should
taxes be imposed with respect to such items in the future.
DISTRIBUTION-AT-DEATH RULES
In order to be treated as an annuity contract, a contract, generally, must
provide the following two distribution rules: (a) if any Owner dies on or after
the Endowment 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 Endowment Date, the entire interest must
generally be distributed within five years after the date of the Owner's death.
To the extent such interest is payable to a Designated Beneficiary, however,
such interest may be annuitized over the life of that Designated 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
Designated Beneficiary is the spouse of the Owner, the Contract (together with
the deferred tax on the accrued and future income thereunder) may be continued
unchanged in the name of the spouse as the Owner. The term "Designated
Beneficiary" means the natural person named by the Owner as a beneficiary and to
whom ownership of the Contract passes by reason of the Owner's death.
If the Owner is not an individual, the "primary Annuitant" (as defined
under the Code) is considered the Owner. The primary Annuitant is the individual
who is of primary importance in affecting the timing or 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.
TRANSFERS OF ANNUITY CONTRACTS
Any transfer of a non-qualified annuity contract prior to the Endowment
Date for less than full and adequate consideration will generally trigger tax on
the gain in the Contract to the Owner at the time of such transfer. The
investment in the Contract of the transferee will be increased by any amount
included in the Owner's income. This provision, however, does not apply to those
transfers between spouses or incident to a divorce which are governed by Code
Section 1041(a).
CONTRACTS OWNED BY NON-NATURAL PERSONS
When the Contract is held by a non-natural person (for example, a
corporation), the Contract generally is not treated as an annuity contract for
federal income tax purposes, and the income on that Contract (generally the
increase in the net Account Value less the payments) is includible in taxable
income each year. This rule does not apply when the non-natural person is only a
nominal owner such as a trust or other entity acting as an agent for a natural
person. If an employer is the nominal owner of a Contract, and the beneficial
owners are employees of the employer, then the Contract also is not treated as
being held by a non-natural person. This rule also does not apply when the
Contract is acquired by the estate of a decedent, when the Contract is a
qualified funding asset for structured settlements, when the Contract is
purchased on behalf of an employee upon termination of a qualified plan, and in
the case of an immediate annuity.
18
ASSIGNMENTS
A transfer of ownership of a Contract, a collateral assignment, or the
designation of another Beneficiary who is not also the Owner may result in tax
consequences to the Owner, Annuitant, or Beneficiary that are not discussed
herein. An Owner contemplating such a transfer or assignment of a Contract
should contact a tax adviser with respect to the potential tax effects of such a
transaction.
MULTIPLE CONTRACTS RULE
All non-qualified annuity contracts issued by the same company (or
affiliate) to the same Owner during any calendar year are to be aggregated and
treated as one contract for purposes of determining the amount includible in the
taxpayer's gross income. Thus, any amount received under any Contract prior to
the Contract's Endowment Date, such as a partial withdrawal, will be taxable
(and possibly subject to the 10% penalty tax) to the extent of the combined
income in all such contracts. The U.S. Treasury Department has specific
authority to issue regulations that prevent the avoidance of the purposes of
Code Section 72(e) through the serial purchase of annuity contracts or
otherwise. In addition, there may be other situations in which the U.S. Treasury
may conclude that it would be appropriate to aggregate two or more contracts
purchased by the same Owner. Accordingly, an Owner should consult a tax adviser
before purchasing more than one Contract or other annuity contracts.
DIVERSIFICATION STANDARDS
To comply with certain diversification regulations promulgated by the
Internal Revenue Service (the "Regulations"), which were issued in final form on
March 2, 1989, under Code Section 817(h), the Separate Account, after a start up
period, will be required to diversify its investments. The Regulations generally
require that on the last day of each quarter of a calendar year, no more than
55% of the value of the Separate Account is represented by any one investment,
no more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by any
four investments. A "look through" rule applies that suggests that the Separate
Account will be tested for compliance with the percentage limitations of the
Regulations by looking through to the assets of the investment portfolio in
which the Separate Account invests. All securities of the same issuer are
treated as a single investment. Each government agency or instrumentality will
be treated as a separate issuer for purposes of those limitations.
In connection with the issuance of temporary diversification regulations in
1986, the U.S. Treasury announced that such regulations did not provide guidance
concerning the extent to which Owners may direct their investments to particular
divisions of a separate account. It is possible that regulations or revenue
rulings may be issued in this area at some time in the future. It is not clear,
at this time, what these regulations or rulings would provide. It is possible
that when the regulations or rulings are issued, the Contracts may need to be
modified in order to remain in compliance. For these reasons, the Company
reserves the right to modify the Contracts, as necessary, to prevent the Owner
from being considered the owner of assets of the Separate Account.
We intend to comply with the Regulations to assure that the Contracts
continue to be treated as annuity contracts for federal income tax purposes.
QUALIFIED INDIVIDUAL RETIREMENT ACCOUNTS
Qualified Contracts to provide for retirement generally may be purchased
only in connection with a "rollover" of funds from another individual retirement
annuity ("IRA") or qualified plan. IRA Contracts must contain special provisions
and are subject to limitations on contributions and the timing of when
distributions can be made. Tax penalties may apply to contributions in excess of
specified limits, loans or reassignments, distributions that do not meet
specified requirements, or in other circumstances. Anyone desiring to purchase a
Qualified Contract should consult a personal tax adviser.
19
GENERAL INFORMATION
ADDITIONS, DELETIONS, OR SUBSTITUTIONS OF INVESTMENTS
The Company retains the right, subject to any applicable law, to make
certain changes. The Company reserves the right to eliminate the shares of the
Portfolio and to substitute shares of another investment portfolio of USIF, or
of another registered open-end management investment company, if the shares of
the Portfolio no longer are available for investment, or if, in the Company's
judgment, investment in the Portfolio would be inappropriate in view of the
purposes of the Separate Account. To the extent required by the 1940 Act,
substitutions of shares attributable to an Owner's interest in the Portfolio
will not be made until Commission approval has been obtained and the Owner has
been notified of the change.
New investment portfolios for the Separate Account may be established when
marketing, tax, investment, or other conditions so warrant. Any new investment
portfolios will be made available to existing Owners on a basis to be determined
by the Company. The Company also may eliminate the Portfolio if marketing, tax,
investment, or other conditions so warrant.
In the event of any such substitution or change, the Company, by
appropriate endorsement, may make such changes in the Contracts as may be
necessary or appropriate to reflect such substitution or change. Furthermore, if
deemed to be in the best interests of persons having voting rights under the
Contracts, the Separate Account may be operated as a management company under
the 1940 Act or as any other form permitted by law, may be deregistered under
the 1940 Act in the event such registration no longer is required, or may be
combined with one or more other separate accounts.
DISTRIBUTOR OF THE CONTRACTS
Integrity Financial Services ("IFS") serves as the principal underwriter of
the Contracts at no charge. IFS is registered with the Commission as a
broker-dealer and is a member in good standing of the National Association of
Securities Dealers, Inc.
VOTING RIGHTS
USIF does not hold regular meetings of shareholders. The Directors of USIF
may call special meetings of USIF shareholders as may be required by the 1940
Act or other applicable law. To the extent required by law, the Portfolio shares
held in the Separate Account will be voted by the Company at USIF shareholder
meetings in accordance with instructions received from persons having voting
interests in the Portfolio. USIF shares as to which no timely instructions are
received or USIF shares held by the Company as to which Owners have no
beneficial interest will be voted in proportion to the voting instructions that
are received with respect to all Contracts participating in the Portfolio.
Voting instructions to abstain on any item to be voted upon will be applied on a
pro rata basis to reduce the votes eligible to be cast.
The number of votes that are available to an Owner will be calculated on
the basis of the number of shares in the Portfolio held by the Separate Account.
That number will be determined by applying the percentage interest of the Owner
in the Portfolio to the total number of votes attributable to the Portfolio.
Prior to the Endowment Date, the Owner holds a voting interest in each
Portfolio to which the Account Value is allocated. The number of votes which are
available to an Owner will be determined by dividing the Account Value
attributable to the Portfolio by the net asset value per share of the Portfolio.
After the Endowment Date, the person receiving Annuity Payments has the voting
interest. The number of votes after the Endowment Date will be determined by
dividing the reserve for such Contract allocated to the Portfolio by the net
asset value per share of the Portfolio. After the Endowment Date, the votes
attributable to a Contract decrease as the reserves allocated to the Portfolio
decrease. In determining the number of votes, fractional shares will be
recognized.
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The number of votes of the Portfolio that are available will be determined
as of the date coincident with the date established by the Portfolio for
determining shareholders eligible to vote at the meeting of USIF shareholders.
Voting instructions will be solicited by written communication prior to such
meeting in accordance with procedures established by USIF.
EXPERTS
Jorden Burt & Berenson, 1025 Thomas Jefferson Street, N.W., Suite 400 East,
Washington, D.C. 20007-0805, has provided legal advice relating to the federal
securities laws applicable to the issue and sale of the Contracts. All matters
of Ohio law pertaining to the validity of the Contract and the Company's right
to issue such Contracts have been passed upon by John R. McGeeney, Esquire, of
the Company.
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TABLE OF CONTENTS
FOR THE
BEST OF FUNDS VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
PAGE
THE CONTRACT ............................................................. B-3
Computation of Variable Annuity Income Payments ................... B-3
GENERAL MATTERS .......................................................... B-3
Non-Participating ................................................. B-3
Misstatement of Age or Sex ........................................ B-4
Assignment ........................................................ B-4
Annuity Data ...................................................... B-4
Annual Report ..................................................... B-4
Incontestability .................................................. B-4
Ownership ......................................................... B-4
DISTRIBUTION OF THE CONTRACT ............................................. B-4
PERFORMANCE INFORMATION .................................................. B-5
30-Day Yield for the Separate Account ............................. B-5
Average Annual Total Return for the Separate Account .............. B-5
SAFEKEEPING OF ACCOUNT ASSETS ............................................ B-6
THE COMPANY .............................................................. B-7
STATE REGULATION ......................................................... B-7
RECORDS AND REPORTS ...................................................... B-7
LEGAL PROCEEDINGS ........................................................ B-7
OTHER INFORMATION ........................................................ B-8
FINANCIAL STATEMENTS ..................................................... B-8
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