485BPOS 1 d485bpos.txt KILICO VARIABLE ANNUITY SEPARATE ACCOUNT As filed with the Securities and Exchange Commission on April 30, 2002 Commission File Nos. 333-32840 811-3199 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 5 [X] And REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 77 [X] KILICO Variable Annuity Separate Account (Exact Name of Registrant) Kemper Investors Life Insurance Company (Name of Insurance Company) 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 (Address of Insurance Company's Principal Executive Offices) (Zip Code) Insurance Company's Telephone Number, including Area Code: (847) 874-4000 Debra P. Rezabek, Esq. 1600 McConnor Parkway Schaumburg, Illinois 60196-6801 (Name and Address of Agent for Service) Copies To: Frank J. Julian, Esq. Joan E. Boros, Esq. Kemper Investors Life Insurance Company Jorden Burt LLP 1600 McConnor Parkway 1025 Thomas Jefferson Street, N.W. Schaumburg, Illinois 60196-6801 Suite 400E Washington, D.C. 20007 Approximate Date of Proposed Public Offering: Continuous It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on May 1, 2002 pursuant to paragraph (b) of Rule 485 [ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485 [ ] on (date) pursuant to paragraph (a)(i) of Rule 485 [ ] 75 days after filing pursuant to paragraph (a)(ii) [ ] on (date) pursuant to paragraph (a)(ii) of Rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Title of Securities being Registered: Units of interest in Separate Account under variable annuity contracts No filing fee is due because an indefinite number of shares is deemed to have been registered in reliance on Section 24(f) of the Investment Company Act of 1940. CROSS-REFERENCE SHEET KILICO VARIABLE ANNUITY SEPARATE ACCOUNT Registration Statement on Form N-4 N-4 Item No. Location in Prospectus ------------ ---------------------- Part A Item 1. Cover Page ............................... Cover Page Item 2. Definitions .............................. Definitions Item 3. Synopsis ................................. Summary; Summary of Expenses; Example Item 4. Condensed Financial Information .......... Condensed Financial Information Item 5. General Description of Registrant, Depositor and Portfolio Companies ....... KILICO, the MVA Option, the Separate Account and the Fund; Voting Rights Item 6. Deductions and Expenses ................ Contract Charges and Expenses Item 7. General Description of Variable Annuity Contracts ..................... The Contracts; The Accumulation Period Item 8. Annuity Period ......................... The Annuity Period Item 9. Death Benefit .......................... The Annuity Period; The Accumulation Period Item 10. Purchases and Contract Value ........... KILICO, the MVA Option, the Separate Account and the Fund; The Contracts; The Accumulation Period Item 11. Redemptions ............................ The Accumulation Period Item 12. Taxes .................................. Federal Income Taxes Item 13. Legal Proceedings ...................... Legal Proceedings Item 14. Table of Contents of the Statement of Additional Information ................ Table of Contents Part B Item 15. Cover Page ............................. Cover Page Item 16. Table of Contents ...................... Table of Contents Item 17. General Information and History ........ Not Applicable Item 18. Services ............................... Services to the Separate Account Item 19. Purchase of Securities Being Offered ... Not Applicable Item 20. Underwriters ........................... Services to the Separate Account Item 21. Calculation of Performance Data ........ Performance Information of Subaccounts Item 22. Annuity Payments ....................... Not Applicable Item 23. Financial Statements ................... Financial Statements Part C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement. PROSPECTUS FOR KEMPER INVESTORS LIFE INSURANCE COMPANY -------------------------------------------------------------------------------- INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS -------------------------------------------------------------------------------- ZURICH PREFERRED Issued By KILICO VARIABLE ANNUITY SEPARATE ACCOUNT and KEMPER INVESTORS LIFE INSURANCE COMPANY This Prospectus describes Variable and Market Value Adjusted Deferred Annuity Contracts (the "Contract") offered by Kemper Investors Life Insurance Company ("we" or "KILICO"). The Contract is designed to provide annuity benefits for retirement which may or may not qualify for certain federal tax advantages or as nonqualified annuities. Depending on particular state requirements, the Contracts may be issued on a group or individual basis. Contracts issued on a group basis are represented by a certificate. Contracts issued on an individual basis are represented by an individual annuity contract. For purposes of this Prospectus, the term "Contract" refers both to certificates and to individual annuity contracts. You may allocate purchase payments to one or more of the variable options or the market value adjustment ("MVA") option, in states where an MVA is authorized. The MVA option may not be available in all states. The Contract currently offers twenty-seven variable investment options, each of which is a Subaccount of KILICO Variable Annuity Separate Account. Currently, you may choose among the following Portfolios: The Alger American Fund .. Alger American Growth .. Alger American MidCap Growth .. Alger American Small Capitalization American Century Variable Portfolios, Inc. ("VP") .. American Century VP Income & Growth .. American Century VP Value Credit Suisse Trust (formerly Credit Suisse Warburg Pincus Trust) .. Credit Suisse Trust-Emerging Markets (formerly Credit Suisse Warburg Pincus Trust-Emerging Markets) The Dreyfus Socially Responsible Growth Fund, Inc. (Initial Share Class) Fidelity Variable Insurance Products Fund ("VIP") .. Fidelity VIP Equity-Income (Initial Class Shares) .. Fidelity VIP Growth (Initial Class Shares) Fidelity Variable Insurance Products Fund II ("VIP II") .. Fidelity VIP II Contrafund(R) (Initial Class Shares) .. Fidelity VIP II Index 500 (Service Class 2 Shares) J.P. Morgan Series Trust II . J.P. Morgan Small Company Janus Aspen Series . Janus Aspen Aggressive Growth . Janus Aspen Balanced . Janus Aspen Growth . Janus Aspen Worldwide Growth Scudder Variable Series I* . Scudder Bond . Scudder Capital Growth . Scudder International Scudder Variable Series II* . Scudder Government Securities . Scudder Growth . Scudder High Yield . Scudder Investment Grade Bond . Scudder Money Market . Scudder Small Cap Growth . Scudder Technology Growth . Scudder Total Return The Contracts are not insured by the FDIC. They are obligations of the issuing insurance company and not a deposit of, or guaranteed by, any bank or savings institution and are subject to risks, including possible loss of principal. This Prospectus contains important information about the Contracts that you should know before investing. You should read it before investing and keep it for future reference. We have filed a Statement of Additional Information ("SAI") with the Securities and Exchange Commission. The current SAI has the same date as this Prospectus and is incorporated by reference in this Prospectus. You may obtain a free copy by writing us or calling (888) 477-9700. A table of contents for the SAI appears on page 42. You may also find this prospectus and other information about the separate account required to be filed with the Securities and Exchange Commission ("SEC") at the SEC's web site at http://www.sec.gov. The date of this prospectus is May 1, 2002. The Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. TABLE OF CONTENTS ================================================================================
Page ---- DEFINITIONS.......................................................... 1 SUMMARY.............................................................. 3 SUMMARY OF EXPENSES.................................................. 5 CONDENSED FINANCIAL INFORMATION...................................... 11 KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS........... 14 THE CONTRACTS........................................................ 19 THE ACCUMULATION PERIOD.............................................. 19 CONTRACT CHARGES AND EXPENSES........................................ 26 THE ANNUITY PERIOD................................................... 29 FEDERAL INCOME TAXES................................................. 31 DISTRIBUTION OF CONTRACTS............................................ 38 VOTING RIGHTS........................................................ 38 REPORTS TO CONTRACT OWNERS AND INQUIRIES............................. 39 DOLLAR COST AVERAGING................................................ 39 SYSTEMATIC WITHDRAWAL PLAN........................................... 39 ASSET ALLLOCATION SERVICE............................................ 40 EXPERTS.............................................................. 41 LEGAL MATTERS........................................................ 41 SPECIAL CONSIDERATIONS............................................... 41 AVAILABLE INFORMATION................................................ 42 LEGAL PROCEEDINGS.................................................... 42 TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION............... 42 FINANCIAL STATEMENTS................................................. 42 CONTRACTS ISSUED MAY 1, 2001 THROUGH FEBRUARY 19, 2002............... 42 ANNUAL REPORTS AND OTHER DOCUMENTS................................... 45 APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT................. 46 APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT. 47
1 DEFINITIONS The following terms as used in this Prospectus have the indicated meanings: Accumulated Guarantee Period Value--The sum of your Guarantee Period Values. Accumulation Period--The period between the Date of Issue of a Contract and the Annuity Date when you make premium payments to us. Accumulation Unit--A unit of measurement used to determine the value of each Subaccount during the Accumulation Period. Allocation Option--The twenty-seven (27) Subaccounts and the MVA Option available under the Contract for allocation of Purchase Payments, or transfers of Contract Value during the Accumulation Period. Annuitant--The person designated to receive or who is actually receiving annuity payments. Life annuity payments involving life contingencies depend upon the annuitant. Annuity Date--The date on which annuity payments from us to the annuitant start. Annuity Option--One of several forms in which annuity payments can be made. Annuity Period--The period starting on the Annuity Date when we make annuity payments to the annuitant. Annuity Unit--A unit of measurement used to determine the amount of Variable Annuity payments. Beneficiary--The person you designate to receive any benefits under a Contract upon your death or upon the Annuitant's death prior to the Annuity Period. Company ("we", "us", "our", "KILICO")--Kemper Investors Life Insurance Company. Our home office is located at 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801. Contract--A Variable and Market Value Adjusted Deferred Annuity Contract offered on an individual or group basis. Contracts issued on a group basis are represented by a certificate. Contracts issued on an individual basis are represented by an individual annuity contract. Contract Value--The sum of the values of your Accumulated Guarantee Period Value and Separate Account Value during the Accumulation Period. Contract Year--Period between anniversaries of the Date of Issue of a Contract. Date of Issue--The date on which the first Contract Year commences. Debt--The principal of any outstanding loan plus any accrued interest. Requests for loans must be made in writing to us. Fixed Annuity--An annuity where we guarantee the amount of each annuity payment. Fund or Funds--The Alger American Fund, American Century Variable Portfolios, Inc., Credit Suisse Trust (formerly Credit Suisse Warburg Pincus Trust), The Dreyfus Socially Responsible Growth Fund, Inc., Fidelity Variable Insurance Products Funds (which includes Fidelity Variable Insurance Product Fund and Fidelity Variable Insurance Products Fund II), J.P. Morgan Series Trust II, Janus Aspen Series, Scudder Variable Series I and Scudder Variable Series II, including any Portfolios thereunder. General Account--All our assets other than those allocated to any legally segregated separate account. Guaranteed Interest Rate--The rate of interest we set for a given Guarantee Period. 1 Guarantee Period--The period of time for which a Guaranteed Interest Rate of an MVA Option is guaranteed. You may elect MVA Options having Guarantee Periods of from one to ten years. Guarantee Period Value--The sum of: . your Purchase Payments allocated to an MVA Option or amounts you transfer to an MVA Option, plus . interest credited, minus . your withdrawals and transfers, plus or minus . any applicable Market Value Adjustment previously made. Market Adjusted Value--A Guarantee Period Value adjusted by the market value adjustment formula. Market Value Adjustment--An adjustment of values under a Guarantee Period in accordance with the market value adjustment formula. The adjustment reflects the change in the value of the Guarantee Period Value due to changes in interest rates since the date the Guarantee Period commenced. The adjustment is computed using the market value adjustment formula stated in the Contract. MVA Option--A fixed account accumulation option to which payments may be allocated or contract value transferred. Non-Qualified Contract--A Contract which does not receive favorable tax treatment under Section 401, 403, 408, 408A or 457 of the Internal Revenue Code. Owner ("you, your, yours")--The person designated in the Contract as having the privileges of ownership defined in the Contract. Portfolio(s)--The underlying portfolios in which the Subaccounts invest. Each Portfolio is an investment company registered with the SEC or a separate investment series of a registered investment company. Purchase Payments--Amounts paid to us by you or on your behalf. Qualified Contract--A Contract issued in connection with a retirement plan which receives favorable tax treatment under Section 401, 403, 408, 408A or 457 of the Internal Revenue Code. Separate Account--The KILICO Variable Annuity Separate Account. Separate Account Value--The sum of your Subaccount Values. Subaccounts--The twenty-seven subdivisions of the Separate Account, the assets of which consist solely of shares of the corresponding Portfolios. Subaccount Value--The value of your allocations to a Subaccount. Valuation Date--Each day when a Subaccount is valued. Subaccounts are normally valued every day the New York Stock Exchange is open for trading. Valuation Period--The interval of time between two consecutive Valuation Dates. Variable Annuity--An annuity with payments varying in amount in accordance with the investment experience of the Subaccount(s) you specify. 2 SUMMARY Because this is a summary; it does not contain all of the information that may be important. Read the entire Prospectus, Statement of Additional Information and the Contract before deciding to invest. The Contracts provide for investment on a tax-deferred basis and annuity benefits. Both Non-Qualified and Qualified Contracts are described in this Prospectus. The minimum initial Purchase Payment is $10,000 and, subject to certain exceptions, the minimum subsequent payment is $100. Variable accumulations and benefits are provided by crediting Purchase Payments to one or more Subaccounts that you select. Each Subaccount invests in a corresponding Portfolio. (See "The Funds," page 15.) Contract Value allocated to the Separate Account varies with the investment experience of the selected Subaccount(s). The MVA Options provide fixed-rate accumulations, each for a specified Guarantee Period. MVA Options are only available during the Accumulation Period. You may allocate amounts to one or more MVA Options. We may offer additional MVA Options with different Guarantee Periods at our discretion. For new Contracts, we may limit to 3 the number of MVA Options available. We credit a Guaranteed Interest Rate daily to amounts allocated to an MVA Option. Each Guaranteed Interest Rate is set at our discretion, but once set is guaranteed not to change for the duration of the Guarantee Period. At the end of a Guarantee Period, your money will be transferred to the money market subaccount unless you timely elect another MVA Option. Transfers between Subaccounts are permitted before and after annuitization, subject to limitations. A transfer from a Guarantee Period is subject to a Market Value Adjustment. The minimum withdrawal amount is $500 for the Subaccounts and $5,000 for the MVA Options. A minimum $5,000 plus the value of outstanding Contract loans must remain after a withdrawal. If less than $5,000 remains after partial withdrawal, we will terminate the Contract. If a partial withdrawal is made in connection with a 1035 exchange, direct transfer, or direct rollover, a $5,000 Contract Value must also remain in the Contract after the transfer. If this withdrawal request would reduce the Contract Value to less than $5,000, and you have not terminated your Contract, your partial withdrawal request will be limited so that the Contract Value remaining will be $5,000. No transfer, rollover, or 1035 exchange is permitted if there is an outstanding loan on your Contract. Withdrawals will have tax consequences, including income tax and in some circumstances an additional 10% penalty tax. Withdrawals are permitted from Contracts issued with Section 403(b) Qualified Plans only under limited circumstances. (See "Federal Income Taxes," page 31.) A Market Value Adjustment also applies to any withdrawal (except during the "free look" period), transfer, purchase of an annuity option. The Market Value Adjustment does not apply to the death benefit. The Market Value Adjustment is applied to the amount being withdrawn. (See "The Contracts," page 19.) Contract charges include: . mortality and expense risk charges, . administrative expenses, . records maintenance charge, . applicable premium taxes, . optional death benefit charges, and . optional MIAA expense charge (See "Asset Allocation Service.") (See "Contract Charges and Expenses," page 26.) In addition, the Funds pay their investment advisers varying fees for investment advice and also incur other operational expenses. (See the Funds' prospectuses for such information.) 3 Dollar Cost Averaging and Automatic Asset Rebalancing are available to you. (See "Dollar Cost Averaging," page 39 and "The Accumulation Period--Automatic Asset Rebalancing," page 26.) You may elect, where available, to enter into a separate investment advisory agreement with our affiliate, PMG Asset Management, Inc. ("PMG"). PMG provides asset allocation services under PMG's Managed Investment Advisory Account ("MIAA"). MIAA allocates Contract Value among certain Subaccounts. (See "Asset Allocation Service.") The MIAA and applicable fees are described more fully in a separate disclosure statement provided by PMG. MIAA is not available in all states or through all distributors. The Contract may be purchased as an Individual Retirement Annuity, Simplified Employee Pension--IRA, Traditional and Roth Individual Retirement Annuity, tax sheltered annuity, and as a nonqualified annuity. (See "Taxation of Annuities in General," page 32 and "Qualified Plans," page 35.) You may examine a Contract and return it for a refund during the "free look" period. If you decide to return your Contract for a refund during the "free look" period, please also include a letter of instruction. Upon receipt by us, the Contract will be canceled and amounts refunded. The length of the free look period will depend on the state in which the Contract is issued. However, it will be at least ten days from the date you receive the Contract. (See "The Contracts," page 19.) In addition, a special free look period applies in some circumstances to Contracts issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual Retirement Annuities. 4 SUMMARY OF EXPENSES -------------------------------------------------------------------------------- Contract Owner Transaction Expenses Sales Load Imposed on Purchases (as a percentage of purchase payments).................... None Contingent Deferred Sales Load (as a percentage of amount surrendered).................... None Surrender Fees (in addition to Withdrawal Charge)......................................... None Surrenders and other withdrawals from the MVA Option are subject to a Market Value Adjustment.............................................................................. The Market Value Adjustment may increase or reduce the Guarantee Period Value............. Transfer Fees (voluntary transfers in excess of 12 per year).............................. $25 Maximum Quarterly Records Maintenance Charge.............................................. $30 Under certain circumstances the annual Records Maintenance Charge may be reduced or waived. The annual Records Maintenance Charge will be $15 for Contracts with a Contract Value between $25,000 and $50,000 and will be Waived for Contracts with a Contract Value exceeding $50,000 on the date of assessment............................................. Optional MIAA Expenses MIAA Initial Set Up Fee).................................................................. $30 MIAA Annual Expense Current................................................................................ 0.50%* Maximum................................................................................ 1.00%**
------- * Charged quarterly in arrears at the rate of .125% per quarter of Contract Value subject to the MIAA Expense, using an average daily weighted balance methodology. (See "Asset Allocation Service.") **We reserve the right for new Contracts to increase the MIAA Expense charge up to a maximum of 1.00%. We currently do not charge the maximum. Separate Account Annual Expenses (as a percentage of average daily account value) Mortality and Expense Risk...................... 1.00% Administration Current.......................... 0.25% Maximum...................................... 0.45%*** Account Fees and Expenses....................... 0.00% ----- Total Current Separate Account Annual Expenses.. 1.25% ===== Total Maximum Separate Account Annual Expenses.. 1.45%*** =====
------- ***We reserve the right for new Contracts to increase the administration charge up to a maximum of 0.45%. We currently do not charge the maximum. Optional Benefit Annual Expenses (as a percentage of average daily account value) Guaranteed Minimum Death Benefit Charge......... 0.15% Earnings Based Death Benefit Charge............. 0.20% Total Maximum Optional Benefit Annual Expenses.. 0.35%
Fund Annual Expenses (After Any Fee Waivers and Expense Reductions) (as percentage of each Portfolio's average net assets for the period ended December 31, 2001)
Management Other Rule 12b-1 Total Annual Portfolio Fees Expenses Fees Portfolio Expenses --------- ---------- -------- ---------- ------------------ Alger American Growth Portfolio...................... 0.75% 0.06% 0.00% 0.81% Alger American MidCap Growth Portfolio............... 0.80% 0.08% 0.00% 0.88% Alger American Small Capitalization Portfolio........ 0.85% 0.07% 0.00% 0.92% American Century VP Income & Growth.................. 0.70% 0.00% 0.00% 0.70% American Century VP Value (7)........................ 0.97% 0.00% 0.00% 0.97% Credit Suisse Trust-Emerging Markets (5)............. 1.25% 0.64% 0.00% 1.89% Dreyfus Socially Responsible Growth (6).............. 0.75% 0.03% 0.00% 0.78% Fidelity VIP Equity-Income (Initial Class Shares) (3) 0.48% 0.10% 0.00% 0.58%
5
Management Other Rule 12b-1 Total Annual Portfolio Fees Expenses Fees Portfolio Expenses --------- ---------- -------- ---------- ------------------ Fidelity VIP Growth (Initial Class Shares) (3)..... 0.58% 0.10% 0.00% 0.68% Fidelity VIP Contrafund (Initial Class Shares) (3). 0.58% 0.10% 0.00% 0.68% Fidelity VIP Index 500 (Service Class 2 Shares) (4) 0.24% 0.12% 0.25% 0.61% JPMorgan Small Company............................. 0.60% 0.55% 0.00% 1.15% Janus Aspen Aggressive Growth (2).................. 0.65% 0.02% 0.00% 0.67% Janus Aspen Balanced (2)........................... 0.65% 0.01% 0.00% 0.66% Janus Aspen Growth (2)............................. 0.65% 0.01% 0.00% 0.66% Janus Aspen Worldwide Growth (2)................... 0.65% 0.04% 0.00% 0.69% Scudder Bond....................................... 0.48% 0.09% 0.00% 0.57% Scudder Capital Growth............................. 0.46% 0.04% 0.00% 0.50% Scudder Government Securities...................... 0.55% 0.05% 0.00% 0.60% Scudder Growth..................................... 0.60% 0.03% 0.00% 0.63% Scudder High Yield................................. 0.60% 0.10% 0.00% 0.70% Scudder International.............................. 0.84% 0.16% 0.00% 1.00% Scudder Investment Grade Bond (1).................. 0.60% 0.04% 0.00% 0.64% Scudder Money Market............................... 0.50% 0.05% 0.00% 0.55% Scudder Small Cap Growth........................... 0.65% 0.03% 0.00% 0.68% Scudder Technology Growth (1)...................... 0.74% 0.07% 0.00% 0.81% Scudder Total Return............................... 0.55% 0.03% 0.00% 0.58%
(1)Pursuant to their respective agreements with Scudder Variable Series II, the investment manager, the underwriter and the accounting agent have agreed, for the one year period commencing on May 1, 2001, to limit their respective fees and to reimburse other expenses to the extent necessary to limit total operating expenses of the following described Portfolios to the amounts set forth after the Portfolio names: Scudder Technology Growth (0.95%) and Scudder Investment Grade Bond (0.80%). (2)All expenses are shown without the effect of any expense offset arrangements. (3)Actual annual class operating expenses were lower because a portion of the brokerage commissions that the Portfolio paid was used to reduce the Portfolio's expenses. Through arrangements with the Portfolio's custodian, credits realized as a result of uninvested cash balances were used to reduce a portion of the Portfolio's custodian expenses. These offsets may be discontinued at any time. With these offsets, Management Fees, Other Expenses and Total Portfolio Annual Expenses would have been 0.48%, 0.09% and 0.57%, respectively, for the Fidelity VIP Equity-Income Portfolio; 0.58%, 0.07% and 0.65%, respectively, for the Fidelity VIP Growth Portfolio; and 0.58%, 0.06% and 0.64%, respectively, for the Fidelity VIP Contrafund Portfolio. (4)The Portfolio's manager has voluntary agreed to reimburse the class to the extent that total operating expenses (excluding interest, taxes, certain securities lending costs, brokerage commissions and extraordinary expenses) exceed 0.53%. This arrangement can be discontinued by the Portfolio's manager at any time. Including this reimbursement, Management Fees, Other Expenses and Total Portfolio Annual Expenses were 0.24%, 0.04% and 0.53%, respectively. (5)The expense figures shown are before certain fee waivers or reductions from the Portfolio's investment adviser and/or its affiliates. With such waivers, Management Fees, Other Expenses and Total Portfolio Annual Expenses for the Credit Suisse Trust-Emerging Markets Portfolio were 0.76%, 0.64% and 1.40%, respectively. Fee waivers and expense reimbursements may be discontinued at any time. (6)Current or future expenses may be greater or less than those presented. Please consult the underlying mutual fund prospectus for more complete information. (7)The fund has a stepped fee schedule. As a result, the Fund's management fee generally decreases as the Fund's assets increase. 6 If you surrender your Contract, you would pay the following expenses on a $1,000 investment, assuming: . 5% annual return on assets, . the current 0.25% administration charge, . no optional benefits or MIAA program, and . the current level of fund expenses for all years shown. The example assumes that any fund expense caps, waivers or reimbursement arrangements described in the footnotes above are in effect for the time periods presented below. The example does not include any taxes or tax penalties you may be required to pay if you surrender your Contract. EXAMPLE 1 --------------------------------------------------------------------- Subaccount 1 year 3 years 5 years 10 years ---------- ------ ------- ------- -------- Alger American Growth $21 $66 $113 $242 Alger American MidCap Growth 22 68 116 250 Alger American Small Capitalization 22 69 118 254 American Century VP Income & Growth 20 62 107 231 American Century VP Value 23 71 121 259 Credit Suisse Trust-Emerging Markets 27 84 143 303 Dreyfus Socially Responsible Growth 21 65 111 239 Fidelity VIP Equity-Income 19 59 101 218 Fidelity VIP Growth 20 62 106 229 Fidelity VIP Contrafund 20 62 106 229 Fidelity VIP Index 500 19 59 102 221 JPMorgan Small Company 25 76 130 278 Janus Aspen Aggressive Growth 20 61 105 228 Janus Aspen Balanced 20 61 105 227 Janus Aspen Growth 20 61 105 227 Janus Aspen Worldwide Growth 20 62 106 230 Scudder Bond 19 58 100 217 Scudder Capital Growth 18 56 96 209 Scudder International 23 72 123 262 Scudder Government Securities 19 59 102 220 Scudder Growth 19 60 103 223 Scudder High Yield 20 62 107 231 Scudder Investment Grade Bond 20 60 104 224 Scudder Money Market #1 19 58 99 215 Scudder Small Cap Growth 20 62 106 229 Scudder Technology Growth 21 66 113 242 Scudder Total Return 19 59 101 218
7 Same assumptions as Example 1 above, except that you decide not to surrender your Contract at the end of each period. EXAMPLE 2 --------------------------------------------------------------------- Subaccount 1 year 3 years 5 years 10 years ---------- ------ ------- ------- -------- Alger American Growth $21 $66 $113 $242 Alger American MidCap Growth 22 68 116 250 Alger American Small Capitalization 22 69 118 254 American Century VP Income & Growth 20 62 107 231 American Century VP Value 23 71 121 259 Credit Suisse Trust-Emerging Markets 27 84 143 303 Dreyfus Socially Responsible Growth 21 65 111 239 Fidelity VIP Equity-Income 19 59 101 218 Fidelity VIP Growth 20 62 106 229 Fidelity VIP Contrafund 20 62 106 229 Fidelity VIP Index 500 19 59 102 221 JPMorgan Small Company 25 76 130 278 Janus Aspen Aggressive Growth 20 61 105 228 Janus Aspen Balanced 20 61 105 227 Janus Aspen Growth 20 61 105 227 Janus Aspen Worldwide Growth 20 62 106 230 Scudder Bond 19 58 100 217 Scudder Capital Growth 18 56 96 209 Scudder International 23 72 123 262 Scudder Government Securities 19 59 102 220 Scudder Growth 19 60 103 223 Scudder High Yield 20 62 107 231 Scudder Investment Grade Bond 20 60 104 224 Scudder Money Market #1 19 58 99 215 Scudder Small Cap Growth 20 62 106 229 Scudder Technology Growth 21 66 113 242 Scudder Total Return 19 59 101 218
The purpose of the preceding tables is to assist you in understanding the various costs and expenses that an Owner in a Subaccount will bear directly or indirectly. The tables reflect expenses of the Separate Account and the Funds or Portfolios but not the MVA Option. This table is limited to disclosure with regard to the variable portion of the Contract. See "Contract Charges and Expenses" and "The MVA Option" for more information regarding the various costs and expenses. The Examples should not be considered to be representations of past or future expenses and do not include the deduction of state premium taxes, which may be assessed before or upon annuitization. Actual expenses may be greater or less than those shown. "Management Fees" and "Other Expenses" in the "SUMMARY OF EXPENSES" for the Portfolios or Funds have been provided by the investment managers or advisers of the Portfolios or Funds, and have not been independently verified. The examples assume a 5% annual rate of return pursuant to requirements of the Securities and Exchange Commission. This hypothetical rate of return is not intended to be representative of past or future performance of any Subaccount. The Records Maintenance Charge is a single charge; it is not a separate charge for each Subaccount. In addition, the effect of the Records Maintenance Charge has been reflected by applying the percentage derived by dividing the total amount of annual Records Maintenance Charge collected by the total net assets of all the Subaccounts in the Separate Account. See "Contract Charges and Expenses" for more information regarding the various costs and expenses. 8 If you surrender your Contract, you would pay the following expenses on a $1,000 investment, assuming: . 5% annual return on assets, . the maximum 0.45% administration charge, . you participate in the optional MIAA program, with a 1.00% MIAA expense, . you elect the optional Guaranteed Minimum Death Benefit, . you elect the optional Earnings Based Death Benefit, and . the current level of fund expenses for all years shown. The example assumes that any portfolio expense caps, waivers or reimbursement arrangements described in the footnotes above are in effect for the time periods presented below. The example does not include any taxes or tax penalties you may be required to pay if you surrender your Contract. EXAMPLE 3 --------------------------------------------------------------------- Subaccount 1 year 3 years 5 years 10 years ---------- ------ ------- ------- -------- Alger American Growth $42 $118 $195 $397 Alger American MidCap Growth 43 120 198 403 Alger American Small Capitalization 43 121 200 407 American Century VP Income & Growth 41 114 190 387 American Century VP Value 44 122 203 411 Credit Suisse Trust-Emerging Markets 48 135 223 449 Dreyfus Socially Responsible Growth 42 117 193 394 Fidelity VIP Equity-Income 40 111 184 376 Fidelity VIP Growth 41 114 189 385 Fidelity VIP Contrafund 41 114 189 385 Fidelity VIP Index 500 40 112 185 379 JPMorgan Small Company 46 128 211 427 Janus Aspen Aggressive Growth 41 113 188 384 Janus Aspen Balanced 41 113 188 384 Janus Aspen Growth 41 113 188 384 Janus Aspen Worldwide Growth 41 114 189 386 Scudder Bond 40 110 183 375 Scudder Capital Growth 39 108 180 369 Scudder International 44 123 204 414 Scudder Government Securities 40 111 185 378 Scudder Growth 40 112 186 381 Scudder High Yield 41 114 190 387 Scudder Investment Grade Bond 40 112 187 382 Scudder Money Market #1 39 110 182 373 Scudder Small Cap Growth 41 114 189 385 Scudder Technology Growth 42 118 195 397 Scudder Total Return 40 111 184 376
9 Same assumptions as Example 3 above, except that you decide not to surrender your Contract at the end of each period. EXAMPLE 4 --------------------------------------------------------------------- Subaccount 1 year 3 years 5 years 10 years ---------- ------ ------- ------- -------- AlgerAmerican Growth $42 $118 $195 $397 Alger American MidCap Growth 43 120 198 403 Alger American Small Capitalization 43 121 200 407 American Century VP Income & Growth 41 114 190 387 American Century VP Value 44 122 203 411 Credit Suisse Trust-Emerging Markets 48 135 223 449 Dreyfus Socially Responsible Growth 42 117 193 394 Fidelity VIP Equity-Income 40 111 184 376 Fidelity VIP Growth 41 114 189 385 Fidelity VIP Contrafund 41 114 189 385 Fidelity VIP Index 500 40 112 185 379 JPMorgan Small Company 46 128 211 427 Janus Aspen Aggressive Growth 41 113 188 384 Janus Aspen Balanced 41 113 188 384 Janus Aspen Growth 41 113 188 384 Janus Aspen Worldwide Growth 41 114 189 386 Scudder Bond 40 110 183 375 Scudder Capital Growth 39 108 180 369 Scudder International 44 123 204 414 Scudder Government Securities 40 111 185 378 Scudder Growth 40 112 186 381 Scudder High Yield 41 114 190 387 Scudder Investment Grade Bond 40 112 187 382 Scudder Money Market #1 39 110 182 373 Scudder Small Cap Growth 41 114 189 385 Scudder Technology Growth 42 118 195 397 Scudder Total Return 40 111 184 376
The purpose of the preceding tables is to assist you in understanding the various costs and expenses that an Owner in a Subaccount will bear directly or indirectly. The tables reflect expenses of the Separate Account and the Funds, as well as expenses you will incur under the optional MIAA program, the optional Guaranteed Minimum Death Benefit and the optional Earnings Based Death Benefit. If one or more of these features were not elected, the expense figures shown above would be lower. These tables do not reflect the expenses of the MVA Option. This table is limited to disclosure with regard to the variable portion of the Contract. See "Contract Charges and Expenses" and "The MVA Option" for more information regarding the various costs and expenses. The Examples should not be considered to be representations of past or future expenses and do not include the deduction of state premium taxes, which may be assessed before or upon annuitization. Actual expenses may be greater or less than those shown. "Management Fees" and "Other Expenses" in the "SUMMARY OF EXPENSES" for the Portfolios or Funds have been provided by the investment managers or advisers of the Portfolios or Funds, and have not been independently verified. The Examples assume a 5% annual rate of return pursuant to requirements of the Securities and Exchange Commission. This hypothetical rate of return is not intended to be representative of past or future performance of any Subaccount. The Records Maintenance Charge is a single charge; it is not a separate charge for each Subaccount. In addition, the effect of the Records Maintenance Charge has been reflected by applying the percentage derived by dividing the total amount of annual Records Maintenance Charge collected by the total net assets of all the Subaccounts in the Separate Account. These tables also assume that all the Contract Value in a particular Subaccount is in the MIAA program. See "Contract Charges and Expenses" for more information regarding the various costs and expenses. 10 CONDENSED FINANCIAL INFORMATION The following tables list the Condensed Financial Information (the accumulation unit values for accumulation units outstanding) for contracts without optional benefits yielding the lowest Separate Account charges possible under the Contract (1.25%) and contracts with optional benefits yielding the highest Separate Account charges possible under the Contract as of December 31, 2001 (2.65%). Should the Separate Account charges applicable to your contract fall between the maximum and minimum charges, AND you wish to see a copy of the Condensed Financial Information applicable to your Contract, such information can be obtained in the Statement of Additional Information free of charge. No Additional Contract Options Elected (Total 1.25%) (Separate Account Charges of 1.25% of the Daily Net Assets of the Separate Account)
Subaccount 2001 2000 ---------- -------- -------- Alger American Growth Subaccount Accumulation unit value at beginning of period*........................... $ 46.978 $ 57.684 Accumulation unit value at end of period.................................. $ 40.912 $ 46.978 Number of accumulation units outstanding at end of period (000's omitted). 2 1 Alger American MidCap Growth Subaccount Accumulation unit value at beginning of period*........................... 30.431 32.447 Accumulation unit value at end of period.................................. 28.092 30.431 Number of accumulation units outstanding at end of period (000's omitted). 4 0 Alger American Small Capitalization Subaccount Accumulation unit value at beginning of period*........................... 23.344 32.317 Accumulation unit value at end of period.................................. 16.250 23.344 Number of accumulation units outstanding at end of period (000's omitted). 1 0 American Century VP Income & Growth Subaccount Accumulation unit value at beginning of period*........................... 7.066 7.779 Accumulation unit value at end of period.................................. 6.395 7.066 Number of accumulation units outstanding at end of period (000's omitted). 8 2 American Century VP Value Subaccount Accumulation unit value at beginning of period*........................... 6.629 5.539 Accumulation unit value at end of period.................................. 7.386 6.629 Number of accumulation units outstanding at end of period (000's omitted). 82 5 Credit Suisse Trust-Emerging Markets Subaccount Accumulation unit value at beginning of period*........................... 9.647 13.16 Accumulation unit value at end of period.................................. 8.611 9.647 Number of accumulation units outstanding at end of period (000's omitted). 1 0 Dreyfus Socially Responsible Growth Subaccount Accumulation unit value at beginning of period*........................... 34.539 40.426 Accumulation unit value at end of period.................................. 26.410 34.539 Number of accumulation units outstanding at end of period (000's omitted). 1 0 Fidelity VIP Equity-Income Subaccount Accumulation unit value at beginning of period*........................... 25.363 23.318 Accumulation unit value at end of period.................................. 23.806 25.363 Number of accumulation units outstanding at end of period (000's omitted). 23 4 Fidelity VIP Growth Subaccount Accumulation unit value at beginning of period*........................... 43.380 51.935 Accumulation unit value at end of period.................................. 35.279 43.380 Number of accumulation units outstanding at end of period (000's omitted). 23 4 Fidelity VIP II Contrafund Subaccount Accumulation unit value at beginning of period*........................... 23.593 25.267 Accumulation unit value at end of period.................................. 20.447 23.593 Number of accumulation units outstanding at end of period (000's omitted). 4 1 Fidelity VIP II Index 500 Subaccount Accumulation unit value at beginning of period*........................... 148.249 165.363 Accumulation unit value at end of period.................................. 128.376 148.249 Number of accumulation units outstanding at end of period (000's omitted). 1 1
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Subaccount 2001 2000 ---------- -------- -------- J.P. Morgan Small Company Subaccount Accumulation unit value at beginning of period*........................... $ 14.315 $ 16.058 Accumulation unit value at end of period.................................. $ 12.996 $ 14.315 Number of accumulation units outstanding at end of period (000's omitted). 126 0 Janus Aspen Aggressive Growth Subaccount Accumulation unit value at beginning of period*........................... 37.224 56.434 Accumulation unit value at end of period.................................. 22.258 37.224 Number of accumulation units outstanding at end of period (000's omitted). 7 2 Janus Aspen Balanced Subaccount Accumulation unit value at beginning of period*........................... 25.381 26.447 Accumulation unit value at end of period.................................. 23.897 25.381 Number of accumulation units outstanding at end of period (000's omitted). 10 3 Janus Aspen Growth Subaccount Accumulation unit value at beginning of period*........................... 27.457 33.237 Accumulation unit value at end of period.................................. 20.408 27.457 Number of accumulation units outstanding at end of period (000's omitted). 8 3 Janus Aspen Worldwide Growth Subaccount Accumulation unit value at beginning of period*........................... 39.439 48.945 Accumulation unit value at end of period.................................. 30.210 39.439 Number of accumulation units outstanding at end of period (000's omitted). 12 6 Scudder Bond Subaccount Accumulation unit value at beginning of period*........................... 6.748 6.359 Accumulation unit value at end of period.................................. 7.047 6.748 Number of accumulation units outstanding at end of period (000's omitted). 117 4 Scudder Capital Growth Subaccount Accumulation unit value at beginning of period*........................... 22.927 26.577 Accumulation unit value at end of period.................................. 18.260 22.927 Number of accumulation units outstanding at end of period (000's omitted). 1 0 Scudder International Subaccount Accumulation unit value at beginning of period*........................... 14.172 16.428 Accumulation unit value at end of period.................................. 9.677 14.172 Number of accumulation units outstanding at end of period (000's omitted). 70 1 Scudder Government Securities Subaccount Accumulation unit value at beginning of period*........................... 1.189 1.123 Accumulation unit value at end of period.................................. 1.262 1.189 Number of accumulation units outstanding at end of period (000's omitted). 131 -- Scudder Growth Subaccount Accumulation unit value at beginning of period*........................... 2.993 3.890 Accumulation unit value at end of period.................................. 2.296 2.993 Number of accumulation units outstanding at end of period (000's omitted). 15 7 Scudder High Yield Subaccount Accumulation unit value at beginning of period*........................... 0.911 0.985 Accumulation unit value at end of period.................................. 0.923 0.911 Number of accumulation units outstanding at end of period (000's omitted). 53 26 Scudder Investment Grade Bond Subaccount Accumulation unit value at beginning of period*........................... 1.138 1.074 Accumulation unit value at end of period.................................. 1.188 1.138 Number of accumulation units outstanding at end of period (000's omitted). 265 10 Scudder Money Market Subaccount #1 Accumulation unit value at beginning of period*........................... 1.025 1.000 Accumulation unit value at end of period.................................. 1.050 1.025 Number of accumulation units outstanding at end of period (000's omitted). 70,520 15,033 Scudder Small Cap Growth Subaccount Accumulation unit value at beginning of period*........................... 2.151 2.643 Accumulation unit value at end of period.................................. 1.512 2.151 Number of accumulation units outstanding at end of period (000's omitted). 107 35
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Subaccount 2001 2000 ---------- -------- -------- Scudder Technology Growth Subaccount* Accumulation unit value at beginning of period*........................... $ 1.379 $ 2.034 Accumulation unit value at end of period.................................. $ 0.920 $ 1.379 Number of accumulation units outstanding at end of period (000's omitted). 78 19 Scudder Total Return Subaccount Accumulation unit value at beginning of period*........................... 2.575 2.684 Accumulation unit value at end of period.................................. 2.388 2.575 Number of accumulation units outstanding at end of period (000's omitted). 38 7
Additional Contract Options Elected (Total 2.65%) (Separate Account Charges of 2.65% of the Daily Net Assets of the Separate Account)
Subaccount 2001 ---------- -------- American Century VP Value Subaccount Accumulation unit value at beginning of period**.......................... $ 6.473 Accumulation unit value at end of period.................................. $ 7.372 Number of accumulation units outstanding at end of period (000's omitted). 1 Fidelity VIP Equity-Income Subaccount........................................ Accumulation unit value at beginning of period**.......................... 21.717 Accumulation unit value at end of period.................................. 23.761 Number of accumulation units outstanding at end of period (000's omitted). 0 Fidelity VIP Growth Subaccount............................................... Accumulation unit value at beginning of period**.......................... 30.186 Accumulation unit value at end of period.................................. 35.213 Number of accumulation units outstanding at end of period (000's omitted). 0 J.P. Morgan Small Company Subaccount......................................... Accumulation unit value at beginning of period**.......................... 10.738 Accumulation unit value at end of period.................................. 12.972 Number of accumulation units outstanding at end of period (000's omitted). 1 Scudder Bond Subaccount...................................................... Accumulation unit value at beginning of period**.......................... 7.100 Accumulation unit value at end of period.................................. 7.034 Number of accumulation units outstanding at end of period (000's omitted). 1 Scudder International Subaccount............................................. Accumulation unit value at beginning of period**.......................... 9.610 Accumulation unit value at end of period.................................. 9.659 Number of accumulation units outstanding at end of period (000's omitted). 2
-------- *Commencement of Offering on July 3, 2000. **Commencement of Offering on October 1, 2001. ***Condensed Financial Information reflecting the highest Separate Account charges possible under the Contract is not shown for certain Subaccounts available under the Contract because those Subaccounts did not have investments under Contracts reflecting such charges as of December 31, 2001. 13 KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS Kemper Investors Life Insurance Company We were organized under the laws of the State of Illinois in 1947 as a stock life insurance company. Our offices are located at 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801. We offer annuity and life insurance products and are admitted to do business in the District of Columbia and all states except New York. We are a wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company. Kemper Corporation is a wholly-owned subsidiary of Zurich Group Holding ("ZGH"), a Swiss holding company. ZGH is owned by Zurich Financial Services ("ZFS"), a Swiss holding company. The MVA Option You may allocate amounts in the Market Value Adjustment ("MVA") Option to one or more Guarantee Periods with durations of one to ten years during the Accumulation Period. For new Contracts, we may limit to 3 the number of MVA Options available. You may choose a different Guarantee Period by preauthorized telephone instructions or by giving us written notice (see "Guarantee Periods of the MVA Option" below). The MVA Option is not available in all states. At our discretion, we may offer additional Guarantee Periods. The amounts allocated to the MVA Option under the Contracts are invested under the state insurance laws regulating our General Account. Assets supporting the amounts allocated to Guarantee Periods are held in a "non-unitized" separate account. However, our General Account assets are available to fund benefits under the Contracts. A non-unitized separate account is a separate account in which you do not participate in the performance of the assets through unit values. There are no discrete units for this separate account. The assets of the non-unitized separate account are held as reserves for our guaranteed obligations under the Contracts and other contracts we may issue. The assets of the separate account are not chargeable with liabilities arising out of the business conducted by any other separate account or out of any other business we may conduct. State insurance laws concerning the nature and quality of investments regulate our General Account investments and any non-unitized separate account investments. These laws generally permit investment in federal, state and municipal obligations, preferred and common stocks, corporate bonds, real estate mortgages, real estate and certain other investments. Deutsche Investment Management Americas Inc. manages our General Account. We consider many factors in establishing Guaranteed Interest Rates, including the return available on the instruments in which General Account assets are invested when establishing Guaranteed Interest Rates. We may also consider, among other factors, the duration of a Guarantee Period, regulatory and tax requirements, sales commissions and administrative expenses we bear, and general economic trends. (See "The Accumulation Period--Establishment of Guaranteed Interest Rates.") Our investment strategy is generally to match Guarantee Period liabilities with assets, such as debt instruments. We expect to invest in debt instruments such as: . securities issued by the United States Government or its agencies or instrumentalities, which issues may or may not be guaranteed by the United States Government; . debt securities which have an investment grade, at the time of purchase, within the four (4) highest grades assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other nationally recognized rating service; . other debt instruments including issues of or guaranteed by banks or bank holding companies and corporations, which obligations, although not rated by Moody's or Standard & Poor's, are deemed by our management to have an investment quality comparable to securities which may be otherwise purchased; and . options and futures transactions on fixed income securities. Our General Account at December 31, 2001 included approximately 83.5 percent in cash, short-term investments and investment grade fixed maturities, 3.3 percent in below investment grade (high risk) bonds, 4.6 percent in mortgage loans and other real estate-related investments and 8.6 percent in all other investments. 14 We are not obligated to invest the amounts allocated to the MVA Option according to any particular strategy, except as state insurance laws may require. For more information concerning our General Account assets, consult our Annual Report For the Fiscal Year ended December 31, 2001. (See "Annual Reports and Other Documents.") The Separate Account We established the KILICO Variable Annuity Separate Account on May 29, 1981 pursuant to Illinois law as the KILICO Money Market Separate Account. The SEC does not supervise the management, investment practices or policies of the Separate Account or KILICO. Benefits provided under the Contracts are our obligations. Although the assets in the Separate Account are our property, they are held separately from our other assets and are not chargeable with liabilities arising out of any other business we may conduct. Income, capital gains and capital losses, whether or not realized, from the assets allocated to the Separate Account are credited to or charged against the Separate Account without regard to the income, capital gains and capital losses arising out of any other business we may conduct. Twenty-seven Subaccounts of the Separate Account are currently available. Each Subaccount invests exclusively in shares of one of the corresponding Portfolios. We may add or delete Subaccounts in the future. The Separate Account purchases and redeems shares from the Funds at net asset value. We redeem shares of the Funds as necessary to provide benefits, to deduct Contract charges and to transfer assets from one Subaccount to another as you request. All dividends and capital gains distributions received by the Separate Account from a Portfolio are reinvested in that Portfolio at net asset value and retained as assets of the corresponding Subaccount. The Separate Account's financial statements appear in the Statement of Additional Information. The Funds The Separate Account invests in shares of the following Funds: . The Alger American Fund . American Century Variable Portfolios, Inc. . Credit Suisse Trust (formerly Credit Suisse Warburg Pincus Trust) . The Dreyfus Socially Responsible Growth Fund, Inc. . Fidelity Variable Insurance Products Funds . J.P. Morgan Series Trust II . Janus Aspen Series . Scudder Variable Series I . Scudder Variable Series II The Funds provide investment vehicles for variable life insurance and variable annuity contracts. Shares of the Funds are sold only to insurance company separate accounts and qualified retirement plans. Shares of the Funds may be sold to separate accounts of other insurance companies, whether or not affiliated with us. It is conceivable that in the future it may be disadvantageous for variable life insurance separate accounts and variable annuity separate accounts of companies unaffiliated with us, or for variable life insurance separate accounts, variable annuity separate accounts and qualified retirement plans to invest simultaneously in the Funds. Currently, we do not foresee disadvantages to variable life insurance owners, variable annuity owners or qualified retirement plans. The Funds monitor events for material conflicts between owners and determine what action, if any, should be taken. In addition, if we believe that the Funds' responses to any of those events insufficiently protects Owners, we will take appropriate action. The Funds consist of separate Portfolios. The assets of each Portfolio are held separate from the assets of the other Portfolios, and each Portfolio has its own distinct investment objective and policies. Each Portfolio operates as a separate investment fund, and the investment performance of one Portfolio has no effect on the investment performance of any other Portfolio. 15 The twenty-seven Portfolios are summarized below: The Alger American Fund Alger American Growth Portfolio seeks long-term capital appreciation. Alger American MidCap Growth Portfolio seeks long-term capital appreciation. Alger American Small Capitalization Portfolio seeks long-term capital appreciation. American Century Variable Portfolios, Inc. American Century VP Income & Growth Portfolio seeks capital growth by investing in common stocks. Income is a secondary objective. American Century VP Value Portfolio seeks long-term capital growth. Income is a secondary objective. Credit Suisse Trust (formerly Credit Suisse Warburg Pincus Trust) Credit Suisse Trust-Emerging Markets (formerly Credit Suisse Warburg Pincus Trust-Emerging Markets) Portfolio seeks long-term growth of capital by investing in equity securities of emerging markets. The Dreyfus Socially Responsible Growth Fund, Inc. (Initial Share Class) The Fund's primary goal is to provide capital growth with current income as a secondary goal by investing in common stocks of companies that, in the opinion of the Fund's management, not only meet traditional investment standards, but also conduct their business in a manner that contributes to the enhancement of the quality of life in America. Fidelity Variable Insurance Products Funds Fidelity VIP Equity-Income Portfolio (Initial Class Shares) seeks reasonable income. The fund will also consider the potential for capital appreciation. The fund seeks a yield which exceeds the composite yield on the securities comprising the S&P 500. Fidelity VIP Contrafund Portfolio (Initial Class Shares) seeks long-term capital appreciation. Fidelity VIP Growth Portfolio (Initial Class Shares) seeks capital appreciation. Fidelity VIP Index 500 Portfolio (Service Class 2 Shares) seeks investment results that correspond to the total return of common stocks publicly traded in the United States, as represented by the S&P 500. J.P. Morgan Series Trust II J.P. Morgan Small Company Portfolio seeks to provide a high total return from a portfolio of small company stocks. Janus Aspen Series Janus Aspen Aggressive Growth Portfolio seeks long-term growth of capital. Janus Aspen Balanced Portfolio seeks long-term capital growth, consistent with preservation of capital and balanced by current income. Janus Aspen Growth Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital. Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital. 16 Scudder Variable Series I (Class A Shares) Scudder Bond Portfolio seeks to provide a high level of income consistent with a high quality portfolio of debt securities. Scudder Capital Growth Portfolio seeks to maximize long-term capital growth through a broad and flexible investment program. Scudder International Portfolio seeks long-term growth of capital primarily through diversified holdings of marketable foreign equity investments. Scudder Variable Series II Scudder Government Securities Portfolio seeks high current income consistent with preservation of capital. Scudder Growth Portfolio seeks maximum appreciation of capital. Scudder High Yield Portfolio seeks to provide a high level of current income. Scudder Investment Grade Bond Portfolio seeks high current income. Scudder Money Market Portfolio seeks maximum current income to the extent consistent with stability of principal. Scudder Small Cap Growth Portfolio seeks maximum appreciation of investors' capital. Scudder Technology Growth Portfolio seeks growth of capital. Scudder Total Return Portfolio seeks a high total return, a combination of income and capital appreciation. The Portfolios may not achieve their stated objectives. More detailed information, including a description of risks involved in investing in the Portfolios, is found in the Funds' prospectuses accompanying this Prospectus, and Statements of Additional Information available from us upon request. Fred Alger Management, Inc. serves as the investment adviser for the available Portfolios of The Alger American Fund. American Century Investment Management, Inc. serves as the investment adviser for the two available Portfolios of the American Century Variable Portfolios, Inc. Credit Suisse Asset Management, LLC is the investment adviser for the Credit Suisse Trust-Emerging Markets Portfolio (formerly Credit Suisse, Warburg Pincus Trust-Emerging Markets Portfolio). The Dreyfus Corporation serves as the investment adviser, and NCM Capital Management Group, Inc. is the sub-adviser, for The Dreyfus Socially Responsible Growth Fund, Inc. Fidelity Management & Research Company is the investment adviser for the available Portfolios of the Fidelity Variable Insurance Products Funds. Bankers Trust Company, a wholly-owned subsidiary of Bankers Trust New York Corporation, serves as the sub-adviser to the Fidelity VIP Index 500 Portfolio. J.P. Morgan Investment Management, Inc. is the investment adviser for the J.P. Morgan Small Company Portfolio. Janus Capital Corporation is the investment adviser for the four available Portfolios of the Janus Aspen Series. Deutsche Investment Management Americas Inc. serves as investment manager for each of the available Portfolios of Scudder Variable Series I and Scudder Variable Series II. The investment advisers are paid fees for their services by the Funds they manage. We may receive compensation from the investment advisers of the Funds for services related to the Funds. Such compensation will be consistent with the services rendered or the cost savings resulting from the arrangement. Change of Investments We reserve the right to make additions to, deletions from, or substitutions for the shares held by the Separate Account or that the Separate Account may purchase. We reserve the right to eliminate the shares of any of the Portfolios and to substitute shares of another Portfolio or of another investment company, if the shares of a Portfolio are no longer available for investment, or if in our judgment further investment in any Portfolio becomes inappropriate. We will not substitute any shares attributable to any shares held by a 17 Subaccount without prior notice and the SEC's prior approval, if required. The Separate Account may purchase other securities for other series or classes of policies, or may permit a conversion between series or classes of policies on the basis of requests made by Owners. We may establish additional subaccounts of the Separate Account, each of which would invest in a new portfolio of the Funds, or in shares of another investment company. New subaccounts may be established when marketing needs or investment conditions warrant. New subaccounts may be made available to existing Owners as we determine. We may also eliminate or combine one or more subaccounts, transfer assets, or substitute one subaccount for another subaccount if marketing, tax, or investment conditions warrant. We will notify all Owners of these changes. If we deem it to be in the best interests of persons having voting rights under the Contract, the Separate Account may be: . operated as a management company under the Investment Company Act of 1940 ("1940 Act"); . deregistered under that Act in the event such registration is no longer required; or . combined with our other separate accounts. To the extent permitted by law, we may transfer the assets of the Separate Account to another separate account or to the General Account. Performance Information The Separate Account may advertise several types of performance information for the Subaccounts. All Subaccounts may advertise standardized "average annual total return" and nonstandardized "total return." The Scudder High Yield Subaccount, Scudder Government Securities Subaccount, Scudder Investment Grade Bond Subaccount and Scudder Bond Subaccount may also advertise "yield". The Scudder Money Market Subaccount may advertise "yield" and "effective yield." Each of these figures is based upon historical earnings and is not necessarily representative of Subaccount's future performance. Standardized average annual total return and nonstandardized total return calculations measure a Subaccount's net income plus the effect of any realized or unrealized appreciation or depreciation of the Subaccount's underlying investments. Standardized average annual total return will be quoted for periods of at least one year, five years and ten years, if applicable. Nonstandardized total return will be quoted for periods of at least one year, three years, five years and ten years, if applicable. In addition, we will show standardized average annual total return and nonstandardized total return for the life of the Portfolio, meaning the time the underlying Portfolio has been in existence. Standardized average annual total return will be current to the most recent calendar quarter. Nonstandardized total return will be current to most recent calendar month. Standardized average annual total return figures are annualized and, therefore, represent the average annual percentage change in the value of a Subaccount investment over the applicable period. Nonstandardized total return may include annualized and nonannualized (cumulative) figures. Nonannualized figures represent the actual percentage change over the applicable period. Yield is a measure of the net dividend and interest income earned over a specific one month or 30-day period (seven-day period for the Scudder Money Market Subaccount) expressed as a percentage of the value of the Subaccount's Accumulation Units. Yield is an annualized figure, which means that it is assumed that the Subaccount generates the same level of net income over a one year period, compounded on a semi-annual basis. The effective yield for the Scudder Money Market Subaccount is calculated similarly, but includes the effect of assumed compounding calculated under rules prescribed by the SEC. The Scudder Money Market Subaccount's effective yield will be slightly higher than its yield due to this compounding effect. The Subaccounts' performance figures and Accumulation Unit values fluctuate. The standardized performance figures reflect the deduction of all expenses and fees, including a prorated portion of the Records Maintenance Charge, and the maximum charge for the MIAA program. Standardized performance may include the Guaranteed Minimum Death Benefit rider, and the Earnings Based Death Benefit rider. The nonstandardized performance figures reflect the deduction of all expenses and fees, excluding a prorated portion of the Records Maintenance Charge. The nonstandardized performance figures may also include the current charge for the MIAA program, the Guaranteed Minimum Death Benefit rider, and the Earnings Based Death Benefit rider. 18 The Subaccounts may be compared to relevant indices and performance data from independent sources, including the Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate 1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ Composite Index, the Russell 2000 Index and the Morgan Stanley Capital International Europe, Australia, Far East Index. Please note the differences and similarities between the investments which a Subaccount may purchase and the investments measured by the indexes. In particular, the comparative information with regard to the indexes will not reflect the deduction of any Contract charges or portfolio expenses. In addition, certificates of deposit may offer fixed or variable yields and principal is guaranteed and may be insured. The Subaccounts are not insured and the value of their units will fluctuate. From time to time, the Separate Account may quote information from publications such as Morningstar, Inc., The Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune, USA Today, Institutional Investor, National Underwriter, Selling Life Insurance, Broker World, Registered Representative, Investment Advisor and VARDS. Additional information concerning a Subaccount's performance is provided in the Statement of Additional Information. THE CONTRACTS A. General Information. The minimum initial Purchase Payment is $10,000 and the minimum subsequent payment is $100. Total Purchase Payments in excess of $1,000,000 per Contract Year require our prior approval. We may, at any time, amend the Contract in accordance with changes in the law, including applicable tax laws, regulations or rulings, and for other purposes. You may examine a Contract and return it for a refund during the "free look" period. The length of the free look period depends upon the state in which the Contract is issued. However, it will be at least 10 days from the date you receive the Contract. The amount of the refund depends on the state in which the Contract is issued. Generally, it will be an amount at least equal to the Separate Account Contract Value plus the amounts of purchase payments in the Guarantee Periods on the date we receive the returned Contract, without any deduction for Records Maintenance Charges. Some states require the return of the Purchase Payment. In addition, a special free look period applies in some circumstances to Contracts issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual Retirement Annuities. You designate the Beneficiary. If you or the Annuitant dies, and no designated Beneficiary or contingent beneficiary is alive at that time, we will pay you or the Annuitant's estate. Under a Qualified Contract, the provisions of the applicable plan may prohibit a change of Beneficiary. Generally, an interest in a Qualified Contract may not be assigned. During the Accumulation Period, you may change a Beneficiary at any time by signing our form. No Beneficiary change is binding on us until we receive it. We assume no responsibility for the validity of a Beneficiary change. Amounts payable during the Annuity Period may not be assigned. In addition, to the extent permitted by law, annuity payments are not subject to levy, attachment or other judicial process for the payment of the payee's debts or obligations. THE ACCUMULATION PERIOD A. Application of Purchase Payments. You allocate your Purchase Payments to the Subaccount(s) or MVA Option(s). The amount of each Purchase Payment allocated to a Subaccount is based on the value of an Accumulation Unit, as computed after we receive the Purchase Payment. Generally, we determine the value of an Accumulation Unit by 3:00 p.m. Central time on each day that the New York Stock Exchange is open for trading. Purchase Payments allocated 19 to an MVA Option begin earning interest one day after we receive them. However, with respect to initial Purchase Payments, the amount is credited no later than 2 business days after the application for the Contract is complete. After the initial purchase, we determine the number of Accumulation Units credited by dividing the Purchase Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value, as computed after we receive the Purchase Payment. The number of Accumulation Units will not change due to investment experience. Accumulation Unit value varies to reflect the investment experience of the Subaccount and the assessment of charges against the Subaccount, other than the Records Maintenance Charge. The number of Accumulation Units and Accumulated Guarantee Period Value is reduced when the Records Maintenance Charge is assessed (see "Records Maintenance Charge" below). If we are not provided with information sufficient to establish a Contract or to properly credit the initial Purchase Payment, we will promptly request the necessary information. If the requested information is not furnished within 5 business days after we receive the initial Purchase Payment, or if we determine that we cannot issue the Contract within the five 5 day period, we will return the initial Purchase Payment to you, unless you consent to our retaining the Purchase Payment until the application is completed. B. Accumulation Unit Value. Each Subaccount has Accumulation Unit values. When Purchase Payments or other amounts are allocated to a Subaccount, the number of units credited is based on the Subaccount's applicable Accumulation Unit value at the end of the current Valuation Period. When amounts are transferred out of or deducted from a Subaccount, units are canceled in a similar manner. The Accumulation Unit value for each subsequent Valuation Period is the investment experience factor for that Valuation Period times the Accumulation Unit value for the preceding Valuation Period. Each Valuation Period has a single Accumulation Unit value which applies to each day in the Valuation Period. Each Subaccount has its own investment experience factor. The investment experience of the Separate Account is calculated by applying the investment experience factor to the Accumulation Unit value in each Subaccount during a Valuation Period. The investment experience factor of a Subaccount for any Valuation Period is determined by the following formula: (a / b) - c, where: (a) is the net result of: . the net asset value per share of the investment held in the Subaccount determined at the end of the current Valuation Period; plus . the per share amount of any dividend or capital gain distributions made by the investments held in the Subaccount, if the "ex-dividend" date occurs during the current Valuation Period; plus or minus . a charge or credit for any taxes reserved for the current Valuation Period which we determine have resulted from the investment operations of the Subaccount; (b) is the net asset value per share of the investment held in the Subaccount determined at the end of the preceding Valuation Period; (c) is the factor representing asset based charges (the mortality and expense risk and administration charges plus any applicable charges optional death or income benefits). C. Guarantee Periods of the MVA Option. You may allocate Purchase Payments or transfer Contract Value to one or more Guarantee Periods then offered with durations of one to ten years. Each MVA Option has a Guaranteed Interest Rate which will not change during the Guarantee Period. Interest is credited daily at the effective annual rate. The minimum Purchase Payment is $5,000 per MVA Option per allocation. 20 The following example illustrates how we credit Guarantee Period interest. EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION Purchase Payment........ $40,000 Guarantee Period........ 5 Years Guaranteed Interest Rate 4.0% Effective Annual Rate
Interest Cumulative Credited Interest Year During Year Credited ---- ----------- ---------- 1.. $1,600.00 $1,600.00 2.. 1,664.00 3,264.00 3.. 1,730.56 4,994.56 4.. 1,799.78 6,794.34 5.. 1,871.77 8,666.11
Accumulated Value at the end of 5 years is: $40,000 + $8,666.11 = $48,666.11 Note: This example assumes that no withdrawals are made during the five-year period. If you make withdrawals or transfers during this period, Market Value Adjustments apply. The hypothetical interest rate is not intended to predict future Guaranteed Interest Rates. Actual Guaranteed Interest Rates for any Guarantee Period may be more or less than those shown. We send written notice 30 days before the beginning of a new Guarantee Period. If you do not elect a new Guarantee Period, the MVA assets will be transferred automatically to the Kemper Money Market Subaccount on the Guarantee Period maturity date. You may choose a different Guarantee Period by preauthorized telephone instructions or by giving us written notice. (See "Market Value Adjustment" below.) The amount reinvested at the beginning of a new Guarantee Period is the Guarantee Period Value for the Guarantee Period just ended. The Guaranteed Interest Rate in effect when the new Guarantee Period begins applies for the duration of the new Guarantee Period. You may call us at 1-888-477-9700 or write to Kemper Investors Life Insurance Company, Customer Service, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 for the new Guaranteed Interest Rates. D. Establishment of Guaranteed Interest Rates. We declare the Guaranteed Interest Rates for each of the ten durations of Guarantee Periods from time to time as market conditions and other factors dictate. Once established, rates are guaranteed for the respective Guarantee Periods. We advise you of the Guaranteed Interest Rate for a chosen Guarantee Period when we receive a Purchase Payment, when a transfer is made or when a Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are subject to a Market Value Adjustment. (See "Market Value Adjustment" below.) We have no specific formula for establishing the Guaranteed Interest Rates. The determination may be influenced by, but not necessarily correspond to, the current interest rate environment. (See "The MVA Option".) We may also consider, among other factors, the duration of a Guarantee Period, regulatory and tax requirements, sales commissions and administrative expenses we bear, and general economic trends. We make the final determination of the Guaranteed Interest Rates to be declared. We cannot predict or guarantee the level of future Guaranteed Interest Rates. E. Contract Value. On any Valuation Date, Contract Value equals the total of: . the number of Accumulation Units credited to each Subaccount, times . the value of a corresponding Accumulation Unit for each Subaccount, plus . Accumulated Guarantee Period Value. 21 F. Transfer During Accumulation Period. During the Accumulation Period, you may transfer your Contract Value among the Subaccounts and the Guarantee Periods, subject to the following provisions: . the Contract Value transferred into or out of the Guarantee Periods must be at least $5,000, unless the entire Guarantee Period Value is transferred; . we reserve the right to charge $25 for each transfer (that is not part of the Automatic Asset Rebalancing, see p. 22) when there are more than 12 transfers in a Contract Year. In addition, transfers of Guarantee Period Value before the Guarantee Period end date are subject to a Market Value Adjustment. Because a transfer before the end of a Guarantee Period is subject to a Market Value Adjustment, the amount transferred from the Guarantee Period may be more or less than the requested dollar amount. If you authorize an unaffiliated third party outside the MIAA program (See "Asset Allocation Service") to transact transfers on your behalf, we will reallocate the Contract Value pursuant to the third party's instructions. However, we take no responsibility for any unaffiliated third party asset allocation or investment advisory service or program. We may suspend or cancel acceptance of an unaffiliated third party's instructions at any time and may restrict the investment options available for transfer under third party authorizations. We make transfers pursuant to written or telephone instructions specifying in detail the requested changes. Transfers involving a Subaccount are based upon the Accumulation Unit values, as calculated after we receive transfer instructions. We may suspend, modify or terminate the transfer provision. We disclaim all liability if we follow good faith instructions given in accordance with our procedures, including requests for personal identifying information, that are designed to limit unauthorized use of the privilege. Therefore, you bear the risk of loss in the event of a fraudulent telephone transfer. Effective April 1, 2002, requests for transfers among the Subaccounts, in excess of $250,000, per Contract, per day, must be transacted through standard United States mail. These administrative procedures have been adopted under the Contract to protect the interests of the remaining Contract Owners from the adverse effects of frequent and large transfers into and out of variable annuity Subaccounts that can adversely affect the investment management of the underlying Portfolios. We reserve the right to further amend the transfer procedures in the interest of protecting remaining Contract Owners. G. Market Timing This Contract is not designed for professional market timing organizations, or other organizations or individuals engaged in market timing strategies in response to short-term fluctuations in the market, involving frequent transfers, or transfers representing a substantial percentage of the assets of any Subaccount. You should not purchase the Contract if you intend to engage in such market timing strategies. Market timing strategies may be disruptive to the Subaccounts and may be detrimental to Owners. Further, these short-term strategies are particularly inappropriate for attaining long-term retirement goals or for the protection of heirs. Consequently, we reserve the right, at our sole discretion and without prior notice, to take action when we identify market-timing strategies detrimental to Owners. H. Partial Withdrawals During Accumulation Period. You may redeem some or all of the Contract Value minus previous withdrawals, plus or minus any applicable Market Value Adjustment. Withdrawals will have tax consequences. (See "Federal Income Taxes.") A withdrawal of the entire Contract Value is called a surrender. Your ability to surrender may be limited by the terms of a qualified plan. (See "Federal Income Taxes.") Partial withdrawals are subject to the following: In any Contract Year, you may make a partial withdrawal, subject to the following: . the partial withdrawal from the Subaccounts must be at least $500, . the minimum withdrawal from the MVA Options must be at least $5,000 (before any Market Value Adjustment), 22 . at least $5,000 of Contract Value less Debt must remain in the Contract after the withdrawal, . if there is an outstanding loan the greater of $5,000 or 20% of Contract Value must be retained in the contract . transfers, rollovers, and exchanges are not permitted if there is an outstanding loan. If Contract Value is allocated to more than one investment option, you must specify the source of the partial withdrawal. If you do not specify the source, we (1) cancel Accumulation Units on a pro rata basis from all Subaccounts in which you have an interest and (2) redeem ratably from the MVA Options. Election to withdraw shall be made in writing to Kemper Investors Life Insurance Company, Customer Service, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 and should be accompanied by the Contract if surrender is requested. Withdrawal requests are processed only on days when the New York Stock Exchange is open. The Withdrawal Value attributable to the Subaccounts is determined on the basis on the Accumulation Unit values, as calculated after we receive the request. The Withdrawal Value attributable to the Subaccounts is paid within 7 days after we receive the request. However, we may suspend withdrawals or delay payment: . during any period when the New York Stock Exchange is closed, . when trading in a Portfolio is restricted or the SEC determines that an emergency exists, or . as the SEC by order may permit. For withdrawal requests from the MVA Option, we may defer any payment for up to six months, as permitted by state law. During the deferral period, we will continue to credit interest at the current Guaranteed Interest Rate for the same Guarantee Period. I. Market Value Adjustment. Any withdrawal, transfer or annuitization of Guarantee Period Values, unless effected on the Guarantee Period end date or during the "free look" period, may be adjusted up or down by a Market Value Adjustment. The Market Value Adjustment reflects the relationship between . the currently established interest rate ("Current Interest Rate") for a Guarantee Period equal to the remaining length of the Guarantee Period, rounded to the next higher number of complete years, and . the Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same or lower than the applicable Current Interest Rate, the Market Value Adjustment reduces Market Adjusted Value and results in a lower payment. Thus, if interest rates increase, the withdrawal could be less than the original Purchase Payment or the original amount allocated to a Guarantee Period. Conversely, if the Guaranteed Interest Rate is higher than the applicable Current Interest Rate, the Market Value Adjustment increases Market Adjusted Value and results in a higher payment. The Market Value Adjustment (MVA) uses this formula: MVA = GPV x .075 x (J^- I) x N Where: GPV is the Guarantee Period Value being withdrawn, I is the Guaranteed Interest Rate being credited to the Guarantee Period Value (GPV) subject to the Market Value Adjustment, J is the Current Interest Rate we declare, as of the effective date of the application of the Market Value Adjustment, for current allocations to a Guarantee Period the length of which is equal to the Guarantee Period for the Guarantee Period Amount subject to the Market Value Adjustment, and N is the number of months remaining in the Guarantee Period. The .075 factor used in the MVA formula is based on testing a number of interest rate scenarios so that the entire formula provides reasonable financial parity between terminating and continuing Contract 23 Owners and between Contract Owners and us with respect to changes in interest rates and asset values during various time periods. For an illustration showing an upward and a downward adjustment, see Appendix A. J. Death Benefit. If you (or the Annuitant) die during the Accumulation Period, prior to attaining age 75, the beneficiary will be paid the greatest of: . the Contract Value less Debt, or . the total amount of Purchase Payments, minus both Debt and the aggregate dollar amount of all previous partial withdrawals, or . the amount that would have been payable in the event of a full surrender on the date of death. If you (or the Annuitant) die at age 75 or later, the death benefit is the Contract Value minus Debt or, if larger, the amount that would have been paid in the event of a full surrender. You or the Beneficiary, as appropriate, may elect to have all or a part of the death proceeds paid to the Beneficiary under one of the Annuity Options described under "Annuity Options" below. For Non-Qualified Contracts, if you are not the Annuitant and you die before the Annuitant, the death benefit will be paid to your designated Beneficiary. The available Annuity Options are limited by the Code, as described under "Annuity Options". The death benefit is determined as stated above, except your age at death is used in determining the amount payable. If the Beneficiary is your surviving spouse, the surviving spouse may elect to be treated as the successor Owner of the Contract and is not required to begin death benefit distribution. The issue age of the deceased Owner applies in computing the death benefit, payable at the death of a spouse who has elected to be treated as the successor Owner. K. Guaranteed Minimum Death Benefit Rider. The Guaranteed Minimum Death Benefit Rider ("GMDB") is an optional Contract rider. You must elect GMDB on the initial contract application provided the oldest Owner is 80 years old or younger at the time the Contract is issued. You cannot elect the GMDB rider after the date we issue the Contract. We reserve the right to offer the GMDB rider to outstanding Contracts, and we may discontinue the offering of the GMDB rider at any time. GMDB coverage may not be terminated. The current charge for the GMDB rider is 0.15% of the Contract Value. The GMDB rider may not be available in all states or through all distributors. If you elect the GMDB rider, a death benefit will be paid to the designated Beneficiary upon the death of the Owner, a Joint Owner, or last Surviving Annuitant, during the Accumulation Period. If the Owner is not a natural person, we will pay the death benefit upon the death of any Annuitant. We will pay the death benefit to the Beneficiary when we receive due proof of death. We will then have no further obligation under this Contract. We compute the (1) below at the end of the Valuation Period following our receipt of due proof of death and the return of this Contract. We compute (2) and (3) below as of date of death. The proof may be a certified death Certificate or any other written proof satisfactory to us. The amount of the death benefit will be equal to the greater of items (1), (2) or (3) listed below, less debt: (1)the Contract Value or, if greater, the amount that would have been payable in the event of a full surrender on the date of death; (2)the total amount of Purchase Payments less adjustments for withdrawals accumulated at 5.00% per year to the earlier of your 85th birthday or date of death, increased by Purchase Payments made from your 85th birthday to the date of death and decreased by any adjustments for withdrawals from your 85th birthday to the date of death; or (3)the greatest anniversary value immediately preceding the earlier of your 86th birthday or date of death, increased by Purchase Payments made since the date of the greatest anniversary value and decreased by any adjustments for withdrawals since that date. The anniversary value equals the Contract Value on each Contract anniversary during the Accumulation Period. 24 An adjustment for a withdrawal is the sum of any amount available as a dollar for dollar reduction, and a proportionate reduction. The maximum dollar for dollar reduction is 5% of the Dollar for Dollar Base, less any prior dollar for dollar withdrawals in the contract year. The Dollar for Dollar Base is total premiums less withdrawals assessed a withdrawal charge and less any withdrawal charges. A proportionate reduction is applicable when the withdrawal and any withdrawal charges exceed the maximum dollar for dollar reduction. The proportionate reduction is the amount in (2) and/or (3), reduced by any dollar for dollar reduction, multiplied by (a) divided by (b), where: (a)is the withdrawal plus any withdrawal charges reduced by any dollar for dollar reduction, and (b)is the Contract Value, adjusted by any Market Value Adjustment that may exist on the Contract to which this rider is attached, reduced by any dollar for dollar reduction. The death benefit may be paid in a lump sum. This sum may be deferred for up to five years from the date of death. Instead of a lump sum payment, the Beneficiary may elect to have the death benefit distributed as stated in Annuity Option 1 for a period not to exceed the Beneficiary's life expectancy; Annuity Option 2; or Annuity Option with the guarantee period based upon the life expectancy of the Beneficiary as prescribed by federal regulations. The Beneficiary must make this choice within 60 days of the time we receive due proof of death, and distribution must commence within one year of the date of death. If the Beneficiary is not a natural person, the Beneficiary must elect that the entire death benefit be distributed within five years of your death. Distribution of the death benefit must start within one year after your death. It may start later if prescribed by federal regulations. If this Contract was issued as a Non-Qualified Contract, an IRA or Roth IRA and your spouse is the only primary Beneficiary when you die, your surviving spouse may elect among three Surviving Spouse Options. L. Earnings Based Death Benefit Rider. The Earnings Based Death Benefit ("EBDB") is an optional Contract rider. EBDB may be elected if the oldest Owner is 70 years old or younger at the time the Contract is issued. If you elect the EBDB rider, you must also elect the Guaranteed Minimum Death Benefit Rider (See "Guaranteed Minimum Death Benefit Rider" above). You must elect the GMDB rider on the initial contract application. You cannot elect the EBDB rider after the date we issue the Contract. We reserve the right to offer the EBDB rider to outstanding Contracts, and we may discontinue the offering of the EBDB rider at any time. EBDB coverage may not be terminated. The current charge for the EBDB rider is 0.20% of the Contract Value. The EBDB rider may not be available in all states or through all distributors. If elected, the death benefit would be as follows: . the Guaranteed Minimum Death Benefit (See "Guaranteed Minimum Death Benefit Rider" above); plus . the EBDB factor times the lessor of: a. remaining principal, or b. b. Contract Value minus remaining principal, but not less than zero. The EBDB factor is 0.40 if death occurs prior to the 10th Contract Anniversary, 0.50 if death occurs between the 10th and 15th Contract Anniversaries and 0.70 if death occurs on or after the 15th Contract Anniversary. Remaining principal equals total Purchase Payments less the total principal withdrawn. The amount of total principal withdrawn is calculated by totaling the amount of principal withdrawn with each withdrawal. For any withdrawal, the amount of principal withdrawn is the amount by which the withdrawal exceeds the earnings in the Contract at the time of the withdrawal. Earnings, at any given time, is the amount by which the Contract Value exceeds the excess of total Purchase Payments over total withdrawals. Purchase Payments which we receive less than one year prior to death (other than the initial Purchase Payment) are not used in calculating the amount of remaining principal. For purposes of determining EBDB, earnings will not be less than zero. The EBDB is calculated prior to the application of the Guaranteed Minimum Death Benefit. 25 M. Loans. The Owner of a Contract issued as a tax sheltered annuity under Section 403(b) of the Internal Revenue Code ("Code") or with a qualified plan under Code Section 401, may request a loan (if permitted by the Qualified Plan) any time during the accumulation period. The requirements and limitations governing the availability of loans, including the maximum amount that a participant may take as a loan, are subject to the rules in the Code, IRS regulations, and Company procedures in effect at the time a loan is made. In the case of loans made under Contracts which are subject to ERISA, additional requirements and limitations will apply such as those under the terms of the plan, Department of Labor regulations and ERISA. Because the rules governing loans under section 403(b) contracts and ERISA Qualified Plans are complicated, you should consult your tax advisor before exercising the loan privilege. Failure to meet the requirements for loans may result in adverse income tax consequences to you. The loan agreement you sign will describe the restrictions and limitations applicable to the loan at the time you apply. For loans subject to ERISA, you also may wish to consult your plan administrator. Federal tax law requires loans to be repaid in a certain manner and over a certain period of time. For example, loans generally are required to be repaid within 5 years (except in cases where the loan was used to acquire the principal residence of the plan participant), with repayments made at least quarterly and in substantially level amortized payments over the term of the loan. Interest will be charged on your loan amount. Failure to make a loan repayment when due will result in adverse tax income tax consequences to you. If there is an outstanding loan balance when the Contract is surrendered or annuitized, or when a death benefit is paid, the amount payable will be reduced by the amount of the loan outstanding plus accrued interest. In addition, loans, whether or not repaid, will have a permanent effect on the contract value because the investment results of the investment accounts will apply only to the unborrowed portion of the contract value. The longer a loan is unpaid, the greater the effect is likely to be. The effect could be favorable or unfavorable. If investment results are greater than the rate being credited on amounts held in your loan account while your loan is unpaid, your contract value will not increase as rapidly as it would have if no loan were unpaid. If investment results are below that rate, your contract value will be greater than it would have been had no loan been outstanding. N. Automatic Asset Rebalancing. You may elect Automatic Asset Rebalancing on a monthly, quarterly, semi-annual or annual basis. Funds held under the Dollar Cost Averaging program or MVA options are not eligible for this option. There is no charge for this service. CONTRACT CHARGES AND EXPENSES We deduct the following charges and expenses: . mortality and expense risk charge, . administrative expense charge, . records maintenance charge, . applicable premium taxes, . optional death benefit charges, and . optional MIAA expense charge (See "Asset Allocation Service.") Subject to certain expense limitations, you indirectly bear investment management fees and other Fund expenses. A. Charges Against the Separate Account. 1. Mortality and Expense Risk Charge. We assess each Subaccount a daily asset charge for mortality and expense risks at a rate of 1.00% per annum. Variable Annuity payments reflect the investment experience of each Subaccount but are not affected by changes in actual mortality experience or by actual expenses we incur. 26 The mortality risk we assume arises from two contractual obligations. First, if you or the Annuitant die before you attain age 75, we may, in some cases, pay more than Contract Value. (See "Death Benefit", page 18) Second, when Annuity Options involving life contingencies are selected, we assume the risk that Annuitants will live beyond actuarial life expectancies. We also assume an expense risk. Actual expenses of administering the Contracts may exceed the amounts we recover from the Records Maintenance Charge or the administrative cost portion of the daily asset charge. 2. Administrative Expense Charge. We assess each Subaccount a daily asset charge for administrative expenses at a rate of 0.25% per annum. For new Contracts we reserve the right to increase this charge to a maximum of 0.45 per annum. These charges reimburse us for expenses incurred for administering the Contracts. These expenses include your inquiries, changes in allocations, reports to you, Contract maintenance costs, and data processing costs. The administrative expense covers the average anticipated administrative expenses incurred while the Contracts are in force. There is not necessarily a direct relationship between the amount of the charge and the administrative expenses of the particular Contract. 3. Guaranteed Minimum Death Benefit Rider Charge. The annual charge for the Guaranteed Minimum Death Benefit rider is 0.15% of the Contract Value. For Purchase Payments allocated to the Fixed Account or any Guarantee Periods, the applicable credited rates will be reduced to reflect the relevant charge. This charge is not assessed after the Annuity Date. 4. Earnings Based Death Benefit Rider Charge. The annual charge for the Earnings Based Death Benefit rider is 0.20% of the Contract Value. For Purchase Payments allocated to the Fixed Account or any Guarantee Periods, the applicable credited rates will be reduced to reflect the relevant charge. This charge is not assessed after the Annuity Date. B. Asset Allocation Service Charge. The current annual charge for the optional MIAA program is 0.50% of the Contract Value allocated under the MIAA program. We reserve the right for new Contracts to increase the annual charge up to a maximum of 1.00%. We currently do not charge the maximum. If we increase the MIAA charge, the higher charge will be applicable only to Contracts purchased on or after the effective date of the higher MIAA charge. The MIAA Expense is paid by quarterly withdrawals from your Contract Value. The quarterly MIAA Expense with respect to the amount in each Subaccount covered by the MIAA program equals the average daily number of units in that Subaccount covered by the MIAA program, multiplied by the ending unit value for that Subaccount plus amounts in the General Account covered by the MIAA program, and multiplied by 0.125%. You will also be charged an MIAA Initial Set Up Fee of $30.00. C. Records Maintenance Charge. We will assess an annual Records Maintenance Charge (assessed ratably each quarter) during the Accumulation Period against each Contract which has participated in one or more of the Subaccounts during the calendar year whether or not any Purchase Payments have been made during the calendar year. The Records Maintenance Charge is: . $7.50 quarterly for Contracts with Contract Value under $25,000. . $3.75 quarterly for Contracts with Contract Value between $25,000 and $50,000. . No Records Maintenance Charge for Contracts with Contract Value over $50,000. The Record Maintenance Charge is not assessed during the Annuity Period. The Records Maintenance Charge is to reimburse us for expenses incurred in establishing and maintaining the records relating to a Contract's participation in the Separate Account. The Records Maintenance Charge will be assessed at the end of each calendar quarter, based on the Contract Value at that time, and will constitute a reduction in the net assets of each Subaccount. 27 At any time the Records Maintenance Charge is assessed, the applicable charge will be assessed ratably against each Subaccount in which the Contract is participating and a number of Accumulation Units sufficient to equal the proper portion of the charge will be redeemed from such Subaccount. If necessary to meet the assessment, amounts are also redeemed from the Guarantee Periods. D. Withdrawal Charge. There is no Withdrawal Charge. E. Investment Management Fees and Other Expenses. Each Portfolio's net asset value may reflect the deduction of investment management fees, Rule 12b-1 fees and general operating expenses. Subject to limitations, you indirectly bear these fees and expenses. (See "Summary of Expenses.") Further detail is provided in the attached prospectuses for the Portfolios and the Funds' Statements of Additional Information. F. State Premium Taxes. Certain state and local governments impose a premium tax ranging from 0% to 3.5% of Purchase Payments. If we pay state premium taxes, we may charge the amount paid against Contract Value upon annuitization, unless the tax was previously assessed. See "Appendix B--State Premium Tax Chart" in the Statement of Additional Information. It is our current practice under this Contract to pay premium tax directly and not charge you. This practice is subject to change without notice. G. Reduction or Elimination of Certain Charges. Contracts may be available for purchase in certain group or sponsored arrangements that qualify for reductions or elimination of certain charges, the time periods in which such charges apply, or both. Group arrangements include those in which a trustee, an employer or an association purchases Contracts covering a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer Contracts to its employees or members on an individual basis. In certain circumstances, the risk of adverse mortality and expense experience for Contracts purchased in certain group or sponsored arrangements may be reduced. Then, the daily asset charge for mortality and expense costs may likewise be reduced. The daily asset charge for administrative costs and the Records Maintenance Charge may also be reduced or eliminated if we anticipate lower administrative expenses. In certain other circumstances, sales expenses in certain group or sponsored arrangements may be reduced or eliminated. In determining whether a group or sponsored arrangement qualifies for reduced or eliminated charges, we will consider among other factors: . the size and type of group to which sales are to be made and administrative services provided, and the persistency expected from the group; . the total amount of Purchase Payments to be received and the method in which they will be remitted; . any prior or existing relationship with us; . the level of commission paid to selling broker-dealers; . the purpose for which the Contract is being purchased, and whether that purchase makes it likely that sales costs and administrative expenses will be reduced; and . the frequency of projected surrenders or distributions. We make any reductions or eliminations according to objective guidelines in effect when an application for a Contract is approved. We may change these guidelines from time to time. Any variation in the charges will reflect differences in costs or services and will be offered uniformly to all members of the group or sponsored arrangement. In no event will a charge reduction or elimination be permitted if it is unfairly discriminatory to any person or prohibited by law. 28 We may also decrease the mortality and expense risk charge, the administration charge, and the Records Maintenance Charge without notice. However, beyond what is disclosed above, we guarantee that they will not increase. We bear the risk that such charges will not cover our costs. On the other hand, should such charges exceed our costs, we will not refund any charges. Any profit is available for corporate purposes including, among other things, payment of distribution expenses. We may also offer reduced fees and charges, including but not limited to, Records Maintenance Charge and mortality and expense risk and administrative charges, for certain sales that may result in cost savings. Reductions in these fees and charges will not unfairly discriminate against any Owner. THE ANNUITY PERIOD Contracts may be annuitized under one of several Annuity Options, which are available either on a fixed or variable basis. You may annuitize any time after the first contract year but no later than the Annuitant's 90th birthday. We make annuity payments beginning on the Annuity Date under the Annuity Option you select. 1. Annuity Payments. Annuity payments are based on: . the annuity table specified in the Contract, . the selected Annuity Option, and . the investment performance of the selected Subaccount(s) (if variable annuitization is elected). Under variable annuitization, the Annuitant receives the value of a fixed number of Annuity Units each month. An Annuity Unit's value reflects the investment performance of the Subaccount(s) selected. The amount of each annuity payment varies accordingly. 2. Annuity Options. You may elect one of the Contract's Annuity Options. You may decide at any time (subject to the provisions of any applicable retirement plan and state variations) to begin annuity payments. You may change the Annuity Option before, but not after, the Annuity Date. Generally, annuity payments are made in monthly installments. However, we may make a lump sum payment if the net proceeds available to apply under an Annuity Option are less than $5,000. In addition, if the first monthly payment is less than $50 we may change the frequency of payments to quarterly, semiannual or annual intervals so that the initial payment is at least $50. The amount of periodic annuity payments may depend upon: . the Annuity Option you select; . the age and sex of the payee; . the investment experience of the selected Subaccount(s) (if variable annuitization is elected); and . the interest rates (if fixed annuitization is elected) at the time of annuitization. For example: . if Option 1, income for a specified period, is selected, shorter periods result in fewer payments with higher values. . if Option 2, life income, is selected, it is likely that each payment will be smaller than would result if income for a short period were specified. . if Option 3, life income with installments guaranteed, is selected, each payment will probably be smaller than would result if the life income option were selected. . if Option 4, the joint and survivor annuity, is selected, each payment is smaller than those measured by an individual life income option. 29 The age of the payee also influences the amount of periodic annuity payments because an older payee is expected to have a shorter life span, resulting in larger payments. Finally, if you participate in a Subaccount with higher investment performance, it is likely you will receive a higher periodic payment. For Non-Qualified Contracts, if you die before the Annuity Date, available Annuity Options are limited. The Annuity Options available are: . Option 2 or . Option 1 or 3 for a period no longer than the life expectancy of the Beneficiary (but not less than 5 years from your death). If the Beneficiary is not an individual, the entire interest must be distributed within 5 years of your death. The Death Benefit distribution must begin no later than one year from your death, unless a later date is prescribed by federal regulation. Option 1--Income for Specified Period. Option 1 provides an annuity payable monthly for a selected number of years ranging from five to thirty. Upon the payee's death, if the Beneficiary is an individual, we automatically continue payments to the Beneficiary for the remainder of the period specified. If the Beneficiary is not an individual (e.g., an estate or trust), we pay the discounted value of the remaining payments in the specified period. Although there is no life contingency risk associated with Option 1, we continue to deduct the daily asset charges for mortality and expense risks and administrative costs. You may elect to surrender the Contract or make partial withdrawals after annuity payments begin under Option 1. We will then pay the discounted value of the remaining payments. Option 2--Life Income. Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is elected, annuity payments terminate automatically and immediately on the payee's death without regard to the number or total amount of payments made. Thus, it is possible for an individual to receive only one payment if death occurred prior to the date the second payment was due. Option 3--Life Income with Installments Guaranteed. Option 3 provides an annuity payable monthly during the payee's lifetime. However, Option 3 also provides for the automatic continuation of payments for the remainder of the specified period if the Beneficiary is an individual and payments have been made for less than the specified period. The period specified may be five, ten, fifteen or twenty years. If the Beneficiary is not an individual, we pay the discounted value of the remaining payments in the specified period. Option 4--Joint and Survivor Annuity. Option 4 provides an annuity payable monthly while both payees are living. Upon either payee's death, the monthly income payable continues over the life of the surviving payee at a percentage specified when Option 4 is elected. Annuity payments terminate automatically and immediately upon the surviving payee's death without regard to the number or total amount of payments received. 3. Allocation of Annuity. You may elect payments on a fixed or variable basis, or a combination. Any Guarantee Period Value is annuitized on a fixed basis. Any Separate Account Contract Value is annuitized on a variable basis. The MVA Option is not available during the Annuity Period. You may exercise the transfer privilege during the Accumulation Period to arrange for variable or fixed annuitization. Transfers during the Annuity Period are subject to certain limitations. We reserve the right to restrict the number of Subaccounts available during the Annuity Period. 30 4. Transfer During Annuity Period. During the Annuity Period, the payee may, by written request, transfer Subaccount Value from one Subaccount to another Subaccount, subject to the following limitations: . Transfers among Subaccounts are prohibited during the first year of the Annuity Period; subsequent transfers are limited to one per year. . All interest in a Subaccount must be transferred. . If we receive notice of transfer to a Subaccount more than 7 days before an annuity payment date, the transfer is effective during the Valuation Period after the date we receive the notice. . If we receive notice of transfer to a Subaccount less than 7 days before an annuity payment date, the transfer is effective during the Valuation Period after the annuity payment date. . Transfers to the General Account are available only on an anniversary of the first Annuity Date. We must receive notice at least 30 days prior to the anniversary. A Subaccount's Annuity Unit value is determined at the end of the Valuation Period preceding the effective date of the transfer. We may suspend, change or terminate the transfer privilege at any time. 5. Annuity Unit Value. Annuity Unit value is determined independently for each Subaccount. Annuity Unit value for any Valuation Period is: . Annuity Unit value for the preceding Valuation Period, times . the net investment factor for the current Valuation Period, times . an interest factor which offsets the 2.5% per annum rate of investment earnings assumed by the Contract's annuity tables. The net investment factor for a Subaccount for any Valuation Period is: . the Subaccount's Accumulation Unit value at the end of the current Valuation Period, plus or minus the per share charge or credit for taxes reserved; divided by . the Subaccount's Accumulation Unit value at the end of the preceding Valuation Period, plus or minus the per share charge or credit for taxes reserved. 6. First Periodic Payment Under Variable Annuity. When annuity payments begin, the value of your Contract interest is: . Accumulation Unit values at the end of the Valuation Period falling on the 20th or 7th day of the month before the first annuity payment is due, times . the number of Accumulation Units credited at the end of the Valuation Period, minus . premium taxes. The first annuity payment is determined by multiplying the benefit per $1,000 of value shown in the applicable annuity table by the number of thousands of dollars of Contract Value. A 2.5% per annum rate of investment earnings is assumed by the Contract's annuity tables. If the actual net investment earnings rate exceeds 2.5% per annum, payments increase accordingly. Conversely, if the actual rate is less than 2.5% per annum, annuity payments decrease. 7. Subsequent Periodic Payments Under Variable Annuity. Subsequent annuity payments are determined by multiplying the number of Annuity Units by the Annuity Unit value at the Valuation Period before each annuity payment is due. The first annuity payment is divided by 31 the Annuity Unit value as of the Annuity Date to establish the number of Annuity Units representing each annuity payment. This number does not change. 8. Fixed Annuity Payments. Each Fixed Annuity payment is determined from tables we prepare. These tables show the monthly payment for each $1,000 of Contract Value allocated to a Fixed Annuity. Payment is based on the Contract Value at the date before the annuity payment is due. Fixed Annuity payments do not change regardless of investment, mortality or expense experience. 9. Death Proceeds. If the payee dies after the Annuity Date while the Contract is in force, the death benefit, if any, depends upon the form of annuity payment in effect at the time of death. (See "Annuity Options.") FEDERAL INCOME TAXES A. Introduction This discussion is not exhaustive and is not intended as tax advice. A qualified tax adviser should always be consulted with regard to the application of the law to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and the courts. This discussion does not address state or local tax consequences nor federal estate or gift tax consequences, associated with buying a Contract. In addition, we make no guarantee regarding any tax treatment--federal, state, or local--of any Contract or of any transaction involving a Contract. B. Our Tax Status We are taxed as a life insurance company and the operations of the Separate Account are treated as a part of our total operations. The Separate Account is not separately taxed as a "regulated investment company". Investment income and capital gains of the Separate Account are not taxed to the extent they are applied under a Contract. We do not anticipate that we will incur federal income tax liability attributable to the income and gains of the Separate Account, and therefore we do not intend to provide for these taxes. If we are taxed on investment income or capital gains of the Separate Account, then we may impose a charge against the Separate Account to provide for these taxes. C. Taxation of Annuities in General 1. Tax Deferral During Accumulation Period Under the Code, except as described below, increases in the Contract Value of a Non-Qualified Contract are generally not taxable to you or the Annuitant until received as annuity payments or otherwise distributed. However, certain requirements must be satisfied for this general rule to apply, including: . the Contract must be owned by an individual, . Separate Account investments must be "adequately diversified", . we, rather than you, must be considered the owner of Separate Account assets for federal tax purposes, and . annuity payments must appropriately amortize Purchase Payments and Contract earnings. Non-Natural Owner. As a general rule, deferred annuity contracts held by "non-natural persons", such as corporations, trusts or similar entities, are not annuity contracts for federal income tax purposes. The investment income on these contracts is taxed each year as ordinary income received or accrued by the non-natural owner. There are exceptions to this general rule for non-natural owners. Contracts are generally treated as held by a natural person if the nominal owner is a trust or other entity holding the contract as an 32 agent for a natural person. However, this special exception does not apply to an employer who is the nominal owner of a contract under a non-qualified deferred compensation plan for its employees. Additional exceptions to this rule include: . certain contracts acquired by a decedent's estate, . certain Qualified Contracts, . certain contracts used with structured settlement agreements, and . certain contracts purchased with a single premium when the annuity starting date is no later than a year from contract purchase and substantially equal periodic payments are made at least annually. Diversification Requirements. For a contract to be treated as an annuity for federal income tax purposes, separate account investments must be "adequately diversified". The Treasury Secretary issued regulations prescribing standards for adequately diversifying separate account investments. If the separate account failed to comply with these diversification standards, the contract would not be treated as an annuity contract for federal income tax purposes and the owner would generally be taxed on the difference between the contract value and the purchase payments. Although we do not control Fund investments, we expect that each Portfolio of the Funds will comply with these regulations so that each Subaccount of the Separate Account will be considered "adequately diversified." Ownership Treatment. In certain circumstances, a variable annuity contract owner may be considered the owner of the assets of the separate account supporting the contract. In those circumstances, income and gains from separate account assets are includible in the owner's gross income. The Internal Revenue Service ("IRS"), in published rulings, stated that a variable contract owner will be considered the owner of separate account assets if the owner possesses the ability to exercise investment control over the assets. As of the date of this Prospectus, no comprehensive guidance has been issued by the IRS clarifying the circumstances when such investment control by a variable contract owner would exist. As a result, your right to allocate the Contract Value among the Subaccounts may cause you to be considered the owner of the assets of the Separate Account. We do not know what limits may be set forth in any guidance that the IRS may issue, or whether any such limits will apply to existing Contracts. We therefore reserve the right to modify the Contract as necessary to attempt to prevent you from being considered the owner of the Separate Account assets. However there is no assurance that such efforts would be successful. Delayed Annuity Dates. If the Annuity Date occurs (or is scheduled to occur) when you have reached an advanced age, e.g., past age 85, the Contract might not be treated as an annuity for federal income tax purposes. In that event, the income and gains under the Contract could be currently includible in your income. The following discussion assumes that the Contract is treated as an annuity contract for tax purposes and that we are treated as the owner of Separate Account assets. 2. Taxation of Partial and Full Withdrawals from Nonqualified Contracts Partial withdrawals from a Non-Qualified Contract are includible in income to the extent the Contract Value exceeds the "investment in the contract." This amount is referred to as the "income on the contract". Full withdrawals are also includible in income to the extent they exceed the "investment in the contract." Investment in the contract equals the total of Purchase Payments minus any amounts previously received from the Contract that were not includible in your income. Credits we make to your Contract in connection with Market Value Adjustments are not part of your investment in your Contract (and thus, for tax purposes, are treated in the same way as investment gains). Any assignment or pledge (or agreement to assign or pledge) of Contract Value, is treated as a withdrawal. Investment in the contract is increased by the amount includible in income with respect to such assignment or pledge. If you transfer a contract interest, without adequate consideration, to someone other than your spouse (or to a former spouse incident to divorce), you will be taxed on the income on the contract. In this case, the transferee's investment in the contract is increased to reflect the increase in your income. 33 The Contract's optional death benefits, if elected, may exceed Purchase Payments or Contract Value. As described in the Prospectus, we impose certain charges with respect to these death benefits. It is possible that those charges (or some portion) could be treated as a partial withdrawal. As described elsewhere in the Prospectus, you may elect to enter into a separate investment advisory agreement pursuant to which you will receive asset allocation services ("MIAA"). For Non-Qualified Contracts, payments of MIAA Expense and Set Up Fees are treated as a taxable event. This means the MIAA Expense and Set Up Fee are taxable distributions to you and may subject you to an additional 10% tax penalty. If the Contract includes the Guaranteed Retirement Income Benefit rider (the "GRIB rider"), and the Guaranteed Retirement Income Benefit Base is greater than the Contract Value, it is possible that the income on the contract could be a greater amount than would otherwise be the case. This could result in a larger amount being included in your income in connection with a partial withdrawal, assignment, pledge or other transfer. There is also some uncertainty regarding the treatment of the market value adjustment for purposes of determining the income on the contract. This uncertainty could result in the income on the contract being a greater (or lesser) amount. There may be special income tax issues present in situations where the Owner and the Annuitant are not the same person and are not married to one another. A tax adviser should be consulted in those situations. 3. Taxation of Annuity Payments Normally, the portion of each annuity payment taxable as income equals the payment minus the exclusion amount. The exclusion amount for variable annuity payments is the "investment in the contract" allocated to the variable annuity option and adjusted for any period certain or refund feature, divided by the number of payments expected to be made. The exclusion amount for fixed annuity payments is the payment times the ratio of the investment in the contract allocated to the fixed annuity option and adjusted for any period certain or refund feature, to the expected value of the fixed annuity payments. Once the total amount of the investment in the contract is excluded using these ratios, annuity payments will be fully taxable. If annuity payments stop because the annuitant dies before the total amount of the investment in the contract is recovered, the unrecovered amount generally is allowed as a deduction to the annuitant in the last taxable year. With respect to a Contract issued with the GRIB rider, the Annuitant may elect to receive a lump sum payment after the Annuity Date. In the case of a Non-Qualified Contract, the Company will treat a portion of such lump sum payment as includible in income, and will determine the taxable portion of subsequent annuity payments by applying an exclusion ratio to the periodic payments. However, the federal income tax treatment of such a lump sum payment, and of the periodic payments made thereafter, is uncertain. It is possible that the IRS could take a position that greater amounts are includible in income than the Company currently believes is the case. Prior to electing a lump sum payment after the Annuity Date, you should consult a tax adviser about the tax implications of making such an election. 4. Taxation of Death Benefits Amounts may be distributed upon your or the Annuitant's death. Before the Annuity Date, death benefits are includible in income and: . if distributed in a lump sum are taxed like a full withdrawal, or . if distributed under an Annuity Option are taxed like annuity payments. After the Annuity Date, where a guaranteed period exists and the Annuitant dies before the end of that period, payments made to the Beneficiary for the remainder of that period are includible in income as follows: . if received in a lump sum are includible in income to the extent they exceed the unrecovered investment in the Contract, or . if distributed in accordance with the selected annuity option are fully excludable from income until the remaining investment in the contract is deemed to be recovered. 34 Thereafter, all annuity payments are fully includible in income. 5. Penalty Tax on Premature Distributions A 10% penalty tax applies to a taxable payment from a Non-Qualified Contract unless: . received on or after you reach age 591/2, . attributable to your disability, . made to a Beneficiary after your death or, for non-natural Owners, after the primary Annuitant's death, . made as a series of substantially equal periodic payments (at least annually) for your life (or life expectancy) or for the joint lives (or joint life expectancies) of you and a designated beneficiary (within the meaning of the tax law), . made under a Contract purchased with a single premium when the annuity starting date is no later than a year from Contract purchase and substantially equal periodic payments are made at least annually, or . made with annuities used with certain structured settlement agreements. 6. Aggregation of Contracts The taxable amount of an annuity payment or withdrawal from a Non-Qualified Contract may be determined by combining some or all of the Non-Qualified Contracts you own. For example, if you purchase a Contract and also purchase an immediate annuity at approximately the same time, the IRS may treat the two contracts as one contract. Similarly, if a person transfers part of his interest in one annuity contract to purchase another annuity contract, the IRS might treat the two contracts as one contract. In addition, if you purchase two or more deferred annuity contracts from the same company (or its affiliates) during any calendar year, these contracts are treated as one contract. The effects of this aggregation are not always clear. However, it could affect the taxable amount of an annuity payment or withdrawal and the amount which might be subject to the 10% penalty tax. 7. Loss of Interest Deduction Where Contracts are Held by or for the Benefit of Certain Non-Natural Persons For Contracts issued after June 8, 1997 to a non-natural owner, all or some portion of otherwise deductible interest may not be deductible by the owner. However, this interest deduction disallowance does not affect Contracts where the Owner is taxable each year on the investment income under the Contract. Entities considering purchasing the Contract, or entities that will be beneficiaries under a Contract, should consult a tax adviser. D. Qualified Plans Qualified Contracts are used with retirement plans which receive favorable tax treatment as Individual Retirement Annuities, Simplified Employee Pensions--IRAs, Roth Individual Retirement Annuities, tax sheltered annuities, and certain deferred compensation plans ("qualified plans"). Numerous special tax rules apply to qualified plans and to Qualified Contracts. Therefore, we make no attempt to provide more than general information about use of Qualified Contracts. Persons intending to use the contract in connection with qualified plans should consult a tax advisor. Under the Code, qualified plans generally enjoy tax-deferred accumulation of amounts invested in the plan. Therefore, in considering whether or not to purchase a Contract in a qualified plan, you should only consider the Contract's other features, including the availability of lifetime annuity payments and death benefit protection. The tax rules applicable to qualified plans vary according to the type, terms and conditions of the plan. For example, for both withdrawals and annuity payments under certain Qualified Contracts, there may be no "investment in the contract" and the total amount received may be taxable. Both the amount of the permitted contribution, and the corresponding deduction or exclusion, are limited under qualified plans. In Qualified 35 Contracts, the Owner and Annuitant generally are the same individual. Also, if the joint Annuitant is not the Annuitant's spouse, the annuity options may be limited, depending on the difference in their ages. Furthermore, the length of any Guarantee Period may be limited in some circumstances to satisfy certain minimum distribution requirements under the Code. Qualified Contracts are subject to special rules specifying the time at which distributions must begin and the amount that must be distributed each year. In the case of Individual Retirement Annuities, distributions of minimum amounts must generally begin by April 1 of the calendar year following the calendar year in which the owner attains age 70 1/2. An excise tax is imposed for the failure to comply with the minimum distribution requirements. This excise tax generally equals 50% of the amount by which a minimum required distribution exceeds the accrual distribution. The death benefit under your Contract may affect the amount of the minimum required distribution that must be taken from your Contract. If you purchase a Qualified Contract with a GRIB rider and elect to receive a lump sum payment of a portion of the annuity income payments, it is possible that the remaining annuity income payments will not satisfy the minimum distribution requirements. You should consult a tax adviser about the implications under the minimum distribution requirements of taking a lump sum payment under the GRIB rider. A 10% penalty tax may apply to the taxable amount of payments from Qualified Contracts. For Individual Retirement Annuities, the penalty tax does not apply to a payment: . received after you reach age 59 1/2, . received after your death or because of your disability, or . made as a series of substantially equal periodic payments (at least annually) for your life (or life expectancy) or for the joint lives (or joint life expectancies) of you and your designated beneficiary. In addition, the penalty tax does not apply to certain distributions used for qualified first time home purchases or for higher education expenses. Special conditions must be met to qualify for these exceptions. If you wish to take a distribution for these purposes you should consult your tax adviser. Other exceptions may apply. Qualified Contracts are amended to conform to plan requirements. However, you are cautioned that the rights of any person to any benefits under qualified plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Contract. In addition, we are not bound by terms and conditions of qualified plans if they are inconsistent with the Contract. 1. Qualified Plan Types We may issue Contracts for the following types of qualified plans. Individual Retirement Annuities. The Code permits eligible individuals to contribute to an individual retirement annuity known as an "IRA." The Code limits the amounts contributed, the persons eligible and the time when distributions start. Also, subject to direct rollover and mandatory withholding requirements, distributions from other types of qualified plans may be "rolled over" on a tax-deferred basis into an IRA. The Contract may not fund a "Coverdell Education Savings Account" (formerly known as an "Education IRA"). Simplified Employee Pensions (SEP-IRAs). The Code allows employers to establish simplified employee pension plans, using the employees' IRAs. Under these plans the employer may make limited deductible contributions on behalf of the employees to IRAs. Employers and employees intending to use the Contract in connection with these plans should consult a tax adviser. SIMPLE IRAs. The Code permits certain small employers to establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their employees. Under SIMPLE IRAs, certain deductible contributions are made by both employees and employers. SIMPLE IRAs are subject to various requirements, including limits on the amounts that may be contributed, the persons who may be eligible, and the time when distributions may commence. 36 Roth IRAs. The Code permits contributions to an IRA known as a "Roth IRA." Roth IRAs differ from other IRAs in certain respects, including: . Roth IRA contributions are never deductible, . "qualified distributions" from a Roth IRA are excludable from income, . mandatory distribution rules do not apply before death, . a rollover to a Roth IRA must be a "qualified rollover contribution," under the Code, . special eligibility requirements apply, and . contributions to a Roth IRA can be made after the Owner reaches age 70 1/2 All or part of an IRA may be converted into a Roth IRA without taking an actual distribution. You may convert by notifying the IRA issuer or trustee. You must be eligible for a qualified rollover contribution to convert an IRA to a Roth IRA. A conversion typically results in the inclusion of some or all of the IRA value in gross income, except that the 10% penalty tax does not apply on the conversion. Persons with adjusted gross incomes in excess of $100,000 or who are married and file a separate return are not eligible to make a qualified rollover contribution or a transfer in a taxable year from a non-Roth IRA to a Roth IRA. Any "qualified distribution," as defined in Section 408A, from a Roth IRA is excludible from gross income. A qualified distribution includes a distribution made after you reach age 59 1/2, after your death, because of your disability, or made to a first-time homebuyer. Tax-Sheltered Annuities. Code Section 403(b) permits public school employees and employees of certain types of charitable, educational and scientific organizations to have their employers purchase annuity contracts for them and, subject to certain limitations, to exclude the amount of purchase payments from gross income for tax purposes. These annuity contracts are commonly referred to as "tax-sheltered annuities". If you purchase a Contract for such purposes, you should seek competent advice as to eligibility, limitations on permissible amounts of purchase payments and other tax consequences associated with the Contracts. In particular, you should consider that the Contract provides optional death benefits that in certain circumstances may exceed the greater of the Purchase Payments and the Contract Value (see "K. Guaranteed Minimum Death Benefit Rider" and "L. Earnings Based Death Benefit Rider" above). It is possible that such death benefits could be characterized as incidental death benefits. If the death benefit were so characterized, this could result in currently taxable income to you. In addition, there are limitations on the amount of incidental benefits that may be provided under a tax-sheltered annuity. Tax-sheltered annuity contracts must contain restrictions on withdrawals of: . contributions made pursuant to a salary reduction agreement in years beginning after December 31, 1988, . earnings on those contributions, and . earnings after December 31, 1988 on amounts attributable to salary reduction contributions held as of December 31, 1988. These amounts can be paid only if you have reached age 59 1/2, separated from service, died, or become disabled (within the meaning of the tax law), or in the case of hardship (within the meaning of the tax law). Amounts permitted to be distributed in the event of hardship are limited to actual contributions; earnings thereon cannot be distributed on account of hardship. Amounts subject to the withdrawal restrictions applicable to Section 403(b)(7) custodial accounts may be subject to more stringent restrictions. (These limitations on withdrawals generally do not apply to the extent you direct us to transfer some or all of the Contract Value to the issuer of another tax-sheltered annuity or into a Section 403(b)(7) custodial account.) Additional restrictions may be imposed by the plan sponsor. Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations. The Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. Generally, a Contract purchased by a state or local government or a tax-exempt organization will not be treated as an annuity contract for federal income tax purposes. Those who intend to use the Contracts in connection with such plans should seek competent advice. 37 2. Direct Rollovers If the Contract is used with a retirement plan that is qualified under Sections 401(a), 403(a), or 403(b) of the Code or with an eligible deferred compensation plan that has a government sponsor and that is qualified under Section 457(b), any "eligible rollover distribution" from the Contract will be subject to "direct rollover" and mandatory withholding requirements. An eligible rollover distribution generally is any taxable distribution from such a qualified retirement plan, excluding certain amounts such as: . minimum distributions required under Section 401(a)(9) of the Code, and . certain distributions for life, life expectancy, or for 10 years or more which are part of a "series of substantially equal periodic payments." Under these requirements, federal income tax equal to 20% of the eligible rollover distribution will be withheld from the amount of the distribution. Unlike withholding on certain other amounts distributed from the Contract, discussed below, you cannot elect out of withholding with respect to an eligible rollover distribution. However, this 20% withholding will not apply if, instead of receiving the eligible rollover distribution, you elect to have it directly transferred to certain types of qualified retirement plans. Prior to receiving an eligible rollover distribution, a notice will be provided explaining generally the direct rollover and mandatory withholding requirements and how to avoid withholding by electing a direct rollover. E. Federal Income Tax Withholding We withhold and send to the U.S. Government a part of the taxable portion of each distribution unless the payee notifies us before distribution of an available election not to have any amounts withheld. In certain circumstances, we may be required to withhold tax. The withholding rates for the taxable portion of periodic annuity payments are the same as the withholding rates for wage payments. In addition, the withholding rate for the taxable portion of non-periodic payments (including withdrawals prior to the maturity date and conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The withholding rate for eligible rollover distributions is 20%. DISTRIBUTION OF CONTRACTS The Contracts are sold by licensed insurance agents in those states where the Contract may be lawfully sold. The agents are also registered representatives of registered broker-dealers who are members of the National Association of Securities Dealers, Inc. Sales commissions may vary, but are not expected to exceed 6.25% of Purchase Payments. In addition to commissions, we may pay additional promotional incentives, in the form of cash or other compensation, to selling broker-dealers. These incentives may be offered to certain licensed broker-dealers that sell or are expected to sell certain minimum amounts during specified time periods. The Contracts are distributed through the principal underwriter for the Separate Account: Investors Brokerage Services, Inc. ("IBS") 1600 McConnor Parkway Schaumburg, Illinois, 60196-6801 IBS is our wholly-owned subsidiary. IBS enters into selling group agreements with affiliated and unaffiliated broker-dealers. All of the investment options are not available to all Owners. The investment options are available only under Contracts that are sold or serviced by broker-dealers having a selling group agreement with IBS authorizing the sale of Contracts with the investment options specified in this Prospectus. Other distributors may sell and service contracts with different investment options. VOTING RIGHTS Proxy materials in connection with any Fund shareholder meeting are delivered to each Owner with Subaccount interests invested in the Fund as of the record date. Proxy materials include a voting instruction form. We vote all Fund shares proportionately in accordance with instructions received from Owners. We will also vote any Fund shares attributed to amounts we have accumulated in the Subaccounts in the same proportion that Owners vote. A Fund is not required to hold annual shareholders' meetings. Funds hold special meetings as required or deemed desirable for such purposes as electing trustees, changing fundamental policies or approving an investment advisory agreement. 38 Owners have voting rights in a Portfolio based upon the Owner's proportionate interest in the corresponding Subaccount as measured by units. Owners have voting rights before surrender, the Annuity Date or the death of the Annuitant. Thereafter, the payee entitled to receive Variable Annuity payments has voting rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity Units decrease. REPORTS TO CONTRACT OWNERS AND INQUIRIES Each quarter, we send you a statement showing amounts credited to each Subaccount and to the Guarantee Period Value. In addition, if you transfer amounts among the investment options or make additional unscheduled payments, you will receive written confirmation of these transactions. We will also send a current statement upon your request. We also send you annual and semi-annual reports for the Portfolios that underlie the Subaccounts in which you invest and a list of the securities held by that Portfolio. You will have access to Contract information through the Interactive Voice Response System (IVR) at (888) 477-9700. You will also be able to access your account information from our website at www.zurichkemper.com. You may also direct inquiries to the selling agent or may call 1-888-477-9700 or write to Kemper Investors Life Insurance Company, Customer Service, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801. DOLLAR COST AVERAGING Dollar Cost Averaging for the Kemper Money Market and Kemper Government Securities Subaccounts Under our Dollar Cost Averaging program ("DCA"), you designate a portion of the Scudder Money Market or Scudder Government Securities Subaccount Value to be transferred on a monthly or quarterly basis to the other Subaccounts. The DCA program is available only during the Accumulation Period. DCA to the MVA Options are not permitted. The DCA theoretically gives you a lower average cost per unit over time than you would receive if you made a one time purchase of the selected Subaccounts. There is not guarantee that DCA will produce that result. There is currently no charge for this service. The first DCA will occur on the requested beginning date. If the requested beginning date is a non-business day, the first DCA will occur on the first business day prior to the requested beginning date. If you do not provide a requested beginning date, the first DCA will occur on the first business day following receipt of your request. We will delay the beginning date if information is missing from your request or if your request is deemed not in good order. Subsequent DCA transfers will occur, every one or three months, on the same day of the month as the initial DCA transfer. If a subsequent DCA transfer is scheduled for a non-business day, the transfer will take place on the business day prior to the scheduled DCA transfer date. Dollar Cost Averaging from our General Account Deposits and transfers into our general account will be automatically transferred to the subaccounts on a monthly frequency over a period no greater than seven (7) months from the date of the initial transfer or deposit to the General Account. All assets transferred or deposited to the General Account will be transferred from the General Account by the end of the seven (7) month period. The first DCA transfer will occur one month following the date of the initial deposit or transfer to the DCA account. Subsequent DCA transfers will occur on the same day of the month as the initial DCA transfer. If a subsequent DCA transfer is scheduled for a non-business day, the transfer will take place on the business day prior to the scheduled DCA transfer date. We reserve the right to offer additional DCA periods at any time. All additional DCA periods will be offered for a limited period of time and may be changed, revoked or canceled at any time for future deposits or transfers. SYSTEMATIC WITHDRAWAL PLAN We offer a Systematic Withdrawal Plan ("SWP") allowing you to pre-authorize periodic withdrawals during the Accumulation Period. You instruct us to withdraw selected amounts from the Subaccounts or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis. SWP is not available from the MVA 39 accounts or under the DCA Program. Withdrawals taken under the SWP may be subject to the 10% tax penalty on early withdrawals and to income taxes and withholding. If you are interested in SWP, you may obtain an application and information concerning this program and its restrictions from us or your agent. We give thirty days' notice if we amend the SWP. The SWP may be terminated at any time by the you or us. ASSET ALLOCATION SERVICE You may elect, where available, to enter into a separate investment advisory agreement with our affiliate, PMG Asset Management, Inc. ("PMG"). PMG is registered as an investment adviser with the SEC. For a fee, PMG provides a discretionary asset allocation service under its Managed Investment Advisory Account ("MIAA") which is fully described in a separate disclosure statement. Under an agreement with PMG, BARRA RogersCasey ("BARRA") performs certain functions for the MIAA program. BARRA is an unaffiliated registered investment adviser. MIAA is not available in all states or through all distributors. A. Summary of the Service Provided. Under MIAA, your Contract Value is allocated among certain Subaccounts. PMG selects the appropriate allocation model based on your financial objectives and risk tolerance, utilizing BARRA's proprietary analysis of the Subaccounts and the underlying Funds. PMG then periodically transfers Contract Value between the Subaccounts in accordance with your selected allocation model. Currently, if you enroll in the MIAA program, all of your Contract Value must be placed under the MIAA program. If you transfer your Contract Value placed under the MIAA program, your participation in the MIAA program will automatically end. In the future, however, we expect to make changes to permit you to place only a portion of your Contract Value under the MIAA program and to allocate the remainder yourself. B. MIAA Charges. PMG's current annual charge for the optional MIAA program is one-half of one percent (0.50%) of the Contract Value allocated under the MIAA program. We reserve the right for new Contracts to increase the annual charge up to a maximum of one percent (1.00%). We currently do not charge the maximum. If we increase the MIAA charge, the higher charge will be applicable only to Contracts purchased on or after the effective date of the higher MIAA charge. The MIAA Expense is paid by quarterly withdrawals from your Contract Value. The quarterly MIAA Expense with respect to the amount in each Subaccount covered by the MIAA program equals the average daily number of units in that Subaccount covered by the MIAA program, multiplied by the ending unit value for that Subaccount, and multiplied by .125%. You will also be charged an MIAA Initial Set Up Fee ("Set Up Fee") of $30.00. The MIAA Expense and Set Up Fee are in addition to the Contract Charges and Expenses appearing in the "Summary of Expenses". C. Tax Treatment of Fees and Charges. This discussion is not exhaustive and is not intended as tax advice. A qualified tax adviser should always be consulted in the application of the law to individual circumstances. For Qualified Contracts, the MIAA Expense and Set Up Fee will not be treated as taxable distributions. For Non-Qualified Contracts, payments of MIAA Expense and Set Up Fee are treated as a taxable event. This means the MIAA Expense and Set Up Fee are taxable distributions to you and may subject you to an additional 10% tax penalty. D. Risks to You. When you elect the MIAA program, you understand that: . all investments involve risk, the amount of which may vary significantly, . performance cannot be predicted or guaranteed, and . the value of your allocations in the Subaccounts will fluctuate due to market conditions and other factors. 40 PMG has not authorized anyone to make any guarantee, either written or oral, that your investment objectives will be met. PMG seeks to perform services in a professional manner. However, except for negligence, malfeasance, or violations of applicable law, PMG and its officers, directors, agents and employees are not liable for any action performed or omitted to be performed or for any errors of judgment in your asset allocation or in transferring your Contract Value. The federal securities laws impose liabilities under certain circumstances on persons who act in good faith and, therefore, nothing herein in any way constitutes a waiver or limitation on any rights that you may have under federal securities laws. E. Termination. You may terminate your participation in the MIAA program at any time by contacting us. If you terminate within 5 business days of enrolling in the MIAA program, you will not be charged any MIAA Expense or Set Up Fee. Otherwise, you will be charged any unpaid MIAA Expense for the period before your termination, and your Set Up Fee will not be refunded. PMG reserves the right, however, to waive the collection of unpaid MIAA Expense upon termination. F. Conflicts of Interest. The MIAA program is marketed directly by officers of PMG and through solicitors who recommend the MIAA program, but who have no discretionary investment authority. The PMG solicitor is a registered representative with a broker-dealer registered under the Securities Exchange Act of 1934. As such, the PMG solicitor may receive or may have received commissions for your purchase of your Contract. PMG solicitors may also receive a portion of the MIAA Expense (See "MIAA Charges") as compensation. You will be charged the same fees for the MIAA program whether or not a PMG solicitor is involved. Since the PMG solicitor may receive commissions for the purchase of your Contract and may receive a portion of the MIAA Expense charged to your Contract, there is a potential for a conflict of interest. EXPERTS The consolidated financial statements of KILICO as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, and the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows for the years ended December 31, 2001, 2000, and 1999, and the financial statements of assets and liabilities and contract owners' equity of Kemper Investors Life Insurance Company's KILICO Variable Annuity Separate Account as of December 31, 2001, and the related statements of operations for the year then ended and the statements of changes in contract owners' equity for each of the two years in the period then ended, incorporated in this Prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 2001 and from the Statement of Additional Information, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independant accountants, given on the authority of said firm as experts in auditing and accounting. LEGAL MATTERS Legal matters with respect to our organization, our authority to issue annuity contracts and the validity of the Contract, have been passed upon by Debra P. Rezabek, our Executive Vice President, General Counsel and Corporate Secretary. Jorden Burt LLP, Washington, D.C., has advised us on certain legal matters concerning federal securities laws applicable to the issue and sale of the Contracts. SPECIAL CONSIDERATIONS We reserve the right to amend the Contract to meet the requirements of federal or state laws or regulations. We will notify you in writing of these amendments. Your rights under a Contract may be assigned as provided by law. An assignment will not be binding upon us until we receive a written copy of the assignment. You are solely responsible for the validity or effect of any assignment. You, therefore, should consult a qualified tax advisor regarding the tax consequences, as an assignment may be a taxable event. 41 AVAILABLE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934 and file reports and other information with the SEC. These reports and other information can be inspected and copied at the SEC's public reference facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also can be obtained from the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or at the SEC's web site (http://www.sec.gov). We have filed registration statements (the "Registration Statements") relating to the Contracts with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940. This Prospectus has been filed as part of the Registration Statements and does not contain all of the information set forth in the Registration Statements. These Registration Statements contain further information about us and the Contracts. The Registration Statements may be inspected and copied, and copies can be obtained at prescribed rates, as mentioned above. LEGAL PROCEEDINGS KILICO has been named as defendant in certain lawsuits incidental to our insurance business. Based upon the advice of legal counsel, our management believes that the resolution of these various lawsuits will not result in any material adverse effect on our consolidated financial position. TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION The Statement of Additional Information, Table of Contents is: Services to the Separate Account; Performance Information of Subaccounts; State Regulation; Condensed Financial Information; Experts; Financial Statements; Report of Independent Accountants; Financial Statements of the Separate Account; Report of Independent Accountants; Financial Statements of KILICO; Appendix A Table of Historical Hypothetical Accumulation Unit Values and Performance Information; and Appendix B State Premium Tax Chart. The Statement of Additional Information should be read in conjunction with this Prospectus. FINANCIAL STATEMENTS The financial statements of KILICO and the Separate Account are set forth in the Statement of Additional Information. The financial statements of KILICO should be considered primarily as bearing on our ability to meet our obligations under the Contracts. The Contracts are not entitled to participate in our earnings, dividends or surplus. CONTRACTS ISSUED MAY 1, 2001 THROUGH FEBRUARY 19, 2002 Guaranteed Retirement Income Benefit: General The Guaranteed Retirement Income Benefit ("GRIB") was an optional Contract benefit available under Contracts issued on or after May 1, 2001 and before February 19, 2002. The GRIB rider is not offered on Contracts issued on or after February 19, 2002. We reserve the right to begin offering GRIB at any time. GRIB provides a guaranteed amount of annuity payments for the lifetime of the Annuitant or for a period certain upon annuitization as described below. GRIB may be exercised only within thirty days after a Contract anniversary after the end of your seven or ten year waiting period or after any subsequent Contract anniversary date. The waiting period may not extend beyond the Annuity Date. If you elected the GRIB rider, the charge is 0.40% and 0.30% of the Contract Value, respectively, for the seven and ten year waiting periods. The GRIB rider charge is in addition to the Contract Charges and Expenses appearing in the "Summary of Expenses". You may cancel the GRIB rider any time after the Contract anniversary following the end of the applicable seven or ten year waiting period. Within 30 days 42 after the second Contract anniversary or any Contract anniversary thereafter, you are permitted to replace your existing GRIB rider with any GRIB rider, if any, then currently being offered by us. The new GRIB benefit and waiting period will begin on the day you elect to replace the existing GRIB rider. GRIB only applies to the determination of income payments upon annuitization in the circumstances described in this section of the Prospectus. It is not a guarantee of Contract Value or performance. This benefit does not enhance the amounts paid in partial withdrawals, surrenders, or death benefits. If you surrender your Contract, you will not receive any benefit under GRIB. Annuity Payments with GRIB Annuity payments are based on the greater of: (1)the income provided by applying the GRIB base to the guaranteed annuity factors, or (2)the income provided by applying the Contract Value to the current annuity factors. The GRIB base is the greater of (1), (2) or (3) listed below, less debt: (1)the Contract Value or, if greater, the amount that would have been payable in the event of a full surrender on the date of death; (2)the total amount of Purchase Payments less adjustments for withdrawals accumulated at 5.00% per year to the earlier of the original Annuitant's 85th birthday or the GRIB exercise date, increased by Purchase Payments made from the 85th birthday to the GRIB exercise date and decreased by any adjustments for withdrawals from the 85th birthday to the GRIB exercise date; or (3)the greatest anniversary value immediately preceding the earlier of the original Annuitant's 86th birthday or the GRIB exercise date, increased by Purchase Payments made since the date of the greatest anniversary value and decreased by any adjustments for withdrawals since that date. The anniversary value equals the Contract Value on each Contract anniversary during the Accumulation Period. For joint annuitants, the age of the older of the original two Annuitants will be used for purposes of 2 and 3 above. An adjustment for a withdrawal is the sum of any amount available as a dollar for dollar reduction, and a proportionate reduction. The maximum dollar for dollar reduction is 5% of the Dollar for Dollar Base, less any prior dollar for dollar withdrawals in the Contract year. The Dollar for Dollar Base is total premiums less withdrawals assessed a withdrawal charge and less any withdrawal charges. A proportionate reduction is applicable when the withdrawal and any withdrawal charges exceed the maximum dollar for dollar reduction. The proportionate reduction is the amount in (2) and/or (3) above, reduced by any dollar for dollar reduction, multiplied by (a) divided by (b), where: (a)is the withdrawal plus any withdrawal charges reduced by any dollar for dollar reduction, and (b)is the Contract Value, adjusted by any Market Value Adjustment, reduced by any dollar for dollar reduction. The guaranteed annuity factors are based on the "1983 Table a" individual Annuity mortality table developed by the Society of Actuaries, projected using Projection Scale G, with interest at 2.5%. However, for GRIB elections, interest at 3.00% is assumed for all years. Contracts issued in the state of Montana or in connection with certain employer sponsored employee benefit plans are required to use unisex annuity factors. In such cases, the guaranteed annuity factors will be based on unisex rates. Since GRIB is based on conservative actuarial factors, the income guaranteed may often be less than the income provided under the regular provisions of the Contract. If the regular annuitization provisions would provide a greater benefit than GRIB, the greater amount will be paid. GRIB is paid for the life of a single Annuitant or the lifetimes of two Annuitants. If paid for the life of a single Annuitant, GRIB is paid in the amount determined above. If paid for the lifetimes of two Annuitants, GRIB is paid in the amount determined above, using the joint ages of the Annuitants. 43 If you elect a GRIB payable for the life of a single Annuitant, we will guarantee payment for a period certain of 5, 10, 15, or 20 years. If you elect a GRIB payable for the lifetimes of two Annuitants, the period certain is 25 years. The full GRIB is payable as long as at least one of the two Annuitants is alive, but for no less than 25 years. When the Annuitant dies, (or in the case of joint annuitants, when both, have died) we will automatically continue any unpaid installments for the remainder of the elected period certain. However, if the Beneficiary so elects, We will pay a commuted value of the remaining payments. In determining the commuted value, the present value of the remaining payments in the period certain will be calculated based on the applicable interest rate plus an interest rate adjustment factor. The interest rate adjustment factor is equal to the following:
Number of years remaining Interest rate in the period certain adjustment ------------------------- ------------- 15 or more years...... 1.00% 10-14 years........... 1.50% less than 10 years.... 2.00%
The interest rate adjustment factor is a part of the formula we use to determine the present value of the remaining annuity payments under a period certain variable annuity option if you elect to commute such payments under GRIB. 2% is the highest percentage adjustment. The actual rate will depend on the number of years remaining in the period certain. The amount of each payment for purposes of determining the present value of any variable installments will be determined by applying the Annuity Unit Value next determined following Our receipt of due proof of death. GRIB payments are also available on a quarterly, semi-annual or annual basis. We may make other annuity options available. Commutable Annuity Payments . If you exercise the GRIB option, you may elect partial lump sum payments during the Annuity Period. . Lump sum payments are available only during the period certain applicable under the payout option you elected; for example, lump sum payments can be elected only during the 5, 10, 15, 20 or 25 year certain period that applies to the payout. . Lump sum payments are available once in each Contract Year and may not be elected until one year after you elect to exercise GRIB. . You may elect to receive a partial lump sum payment of the present value of the remaining payments in the period certain subject to the restrictions described below. If a partial lump sum payment is elected, the remaining payments in the period certain will be reduced based on the ratio of the amount of the partial withdrawal to the amount of the present value of the remaining installments in the period certain prior to the withdrawal. If the Annuitant is still living after the period certain is over, the Payee will begin receiving the original annuitization payment amount again. . Each time that a partial lump sum payment is made, we will determine the percentage that the payment represents of the present value of the remaining installments in the period certain. For Non-Qualified Contracts, the sum of these percentages over the life of the Contract cannot exceed 75%. For Qualified Contracts, partial lump sum payments of up to 100% of the present value of the remaining installments in the period certain may be made. . In determining the amount of the lump sum payment that is available, the present value of the remaining installments in the period certain will be calculated based on an interest rate equal to the GRIB annuity factor interest rate of 3% plus an interest rate adjustment. The interest rate adjustment is equal to the following:
Number of years remaining Interest rate in the period certain adjustment ------------------------- ------------- 15 or more years...... 1.00% 10-14 years........... 1.50% Less than 10 years.... 2.00%
44 The interest rate adjustment factor is a part of the formula we use to determine the present value of the remaining annuity payments under a period certain variable annuity option if you elect to commute such payments under GRIB. 2% is the highest percentage adjustment. The actual rate will depend on the number of years remaining in the period certain. The amount of each payment for purposes of determining the present value of any variable installments will be determined by applying the Annuity Unit Value next determined following Our receipt of your request for commutation. ANNUAL REPORTS AND OTHER DOCUMENTS KILICO's annual report on Form 10K for the year ended December 31, 2001 is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act of 1934 are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. Accordingly, only the statement that is changed or replaced will legally be a part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10K and Form 10Q electronically on the SEC's "EDGAR" system using the identifying number CIK No.0000353448. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of the SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at Kemper Investors Life Insurance Company, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 or 1-800-477-9700. 45 APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT Purchase Payment........ $40,000 Guarantee Period........ 5 Years Guaranteed Interest Rate 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment may affect the values of a Contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate is the rate required to be used in the "Summary of Expenses." In these examples, the withdrawal occurs one year after the Date of Issue. The Market Value Adjustment operates in a similar manner for transfers. The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at the end of the five-year Guarantee Period. After one year, when the withdrawals occur in these examples, the Guarantee Period Value is $42,000.00. It is also assumed, for the purposes of these examples, that no prior partial withdrawals or transfers have occurred. The Market Value Adjustment will be based on the rate we are then crediting (at the time of the withdrawal) on new Contracts with the same Guarantee Period as the time remaining in your Guarantee Period rounded to the next higher number of complete years. One year after the Purchase Payment there would have been four years remaining in your Guarantee Period. Example of a Downward Market Value Adjustment A downward Market Value Adjustment results from a full or partial withdrawal that occurs when interest rates have increased. Assume interest rates have increased one year after the Purchase Payment and we are then crediting 6.5% for a four-year Guarantee Period. Upon a full withdrawal, the market value adjustment factor would be: .054 = .075 X 48 X (.065 -.05) The Market Value Adjustment is a reduction of $2,268.00 from the Guarantee Period Value: 2,268.00 = .054 X 42,000.00 The Market Adjusted Value would be: $39,732.00 = $42,000.00 -$2,268.00 If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn (partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of the full withdrawal: $1,134.00 = .054 X $21,000.00 The Market Adjusted Value would be: $19,866.00 = $21,000.00-$1,134.00 Example of an Upward Market Value Adjustment An upward Market Value Adjustment results from a withdrawal that occurs when interest rates have decreased. Assume interest rates have decreased one year later and we are then crediting 4% for a four-year Guarantee Period. Upon a full withdrawal, the market value adjustment factor would be: -.036 = .075 X 48 X (.04 -.05) The Market Value Adjustment is an increase of $1,512.00 to the Guarantee Period Value: -$1,512.00 = $42,000.00 X -.036 The Market Adjusted Value would be: $43,512.00 = $42,000.00 - (-$1,512.00) If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn (partial withdrawal of 50%), the Market Value Adjustment would be: -$756.00 = $21,000.00 X -.036 The Market Adjusted Value of $21,000.00 would be: $21,756.00 = $21,000.00 + $756.00 Actual Market Value Adjustment may have a greater or lesser impact than that shown in the Examples, depending on the actual change in interest crediting rates and the timing of the withdrawal or transfer in relation to the time remaining in the Guarantee Period. 46 APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT This Disclosure Statement describes the statutory and regulatory provisions applicable to the operation of traditional Individual Retirement Annuities (IRAs), Roth Individual Retirement Annuities (Roth IRAs) and Simple Individual Retirement Annuities (SIMPLE IRAs). Internal Revenue Service regulations require that this be given to each person desiring to establish an IRA, Roth IRA or a SIMPLE IRA. Except where otherwise indicated, IRA discussion includes Simplified Employee Pension IRAs (SEP IRAs). Further information can be obtained from Kemper Investors Life Insurance Company and from any district office of the Internal Revenue Service. A. Revocation Within 7 days of the date you signed your enrollment application, you may revoke the Contract and receive back 100% of your money. To do so, wire Kemper Investors Life Insurance Company, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801, or call 1-800-621-5001. B. Statutory Requirements This Contract is intended to meet the requirements of Section 408(b) of the Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable. The Contract has not been approved as to form for use as an IRA, Roth IRA or a SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal Revenue Service is a determination only as to form of the Contract, and does not represent a determination on the merits of the Contract. 1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable, must be fully vested at all times and the entire interest of the owner must be nonforfeitable. 2. The Contract must be nontransferable by the owner. 3. The Contract must have flexible premiums. 4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before April 1 of the year following the year in which you reach age 70 1/2 (the required beginning date)(see "Required Distributions"). However, Section 401(a)(9)(A) of the Code (relating to minimum distributions required to commence at age 70 1/2), and the incidental death benefit requirements of Section 401(a) of the Code, do not apply to Roth IRAs. If you die before your entire interest in your Contract is distributed, unless otherwise permitted under applicable law, any remaining interest in the Contract must be distributed to your beneficiary by December 31 of the calendar year containing the fifth anniversary of your death; except that: (1) if the interest is payable to an individual who is your designated beneficiary (within the meaning of Section 401(a)(9) of the Code), the designated beneficiary may elect to receive the entire interest over his or her life, or over a period certain not extending beyond his or her life expectancy, commencing on or before December 31 of the calendar year immediately following the calendar year in which you die; and (2) if the sole designated beneficiary is your spouse, the Contract will be treated as his or her own IRA, or, where applicable, Roth IRA. 5. Except in the case of a rollover contribution or a direct transfer (see "Rollovers and Direct Transfers"), or a contribution made in accordance with the terms of a Simplified Employee Pension (SEP), all contributions to an IRA, Roth IRA and SIMPLE IRA must be cash contributions, which do not exceed certain limits. 6. The Contract must be for the exclusive benefit of you and your beneficiaries. 47 C. Rollovers and Direct Transfers for IRAs and SIMPLE IRAs 1. A rollover is a tax-free transfer from one retirement program to another that you cannot deduct on your tax return. There are two kinds of tax-free rollover payments to an IRA. In one, you transfer amounts from another IRA. With the other, you transfer amounts from a qualified plan under Section 401(a) of the Code, a qualified annuity under Section 403(a) of the Code, a tax-sheltered annuity or custodial account under Section 403(b) of the Code, or a governmental plan under Section 457(b) of the Code (collectively referred to as "qualified employee benefit plans"). Tax-free rollovers can be made from a SIMPLE IRA to another SIMPLE Individual Retirement Account under Section 408(p) of the Code. An individual can make a tax-free rollover to an IRA from a SIMPLE IRA, or vice versa, after a two-year period has expired since the individual first participated in a SIMPLE plan. 2. You must complete the transfer by the 60th day after the day you receive the distribution from your IRA or other qualified employee benefit plan or SIMPLE IRA. The failure to satisfy this 60-day requirement may be waived by the Internal Revenue Service in certain circumstances. 3. A rollover distribution may be made to you only once a year. The one-year period begins on the date you receive the rollover distribution, not on the date you roll it over (reinvest it). 4. A trustee-to-trustee transfer to an IRA of funds in an IRA from one trustee or insurance company to another is not a rollover. It is a transfer that is not affected by the one-year waiting period. 5. All or a part of the premium for this Contract used as an IRA may be paid from a rollover from an IRA or qualified employee benefit plan or from a trustee-to-trustee transfer from another IRA. All or part of the premium for this Contract used as a SIMPLE IRA may be paid from a rollover from a SIMPLE Individual Retirement Account or, to the extent permitted by law, from a direct transfer from a SIMPLE IRA. 6. A distribution that is eligible for rollover treatment from a qualified employee benefit plan will be subject to twenty percent (20%) withholding by the Internal Revenue Service even if you roll the distribution over within the 60-day rollover period. One way to avoid this withholding is to make the distribution as a direct transfer to the IRA trustee or insurance company. D. Contribution Limits and Allowance of Deduction for IRAs 1. In general, the amount you can contribute each year to an IRA is the lesser of (1) 100% of your compensation, or (2) the maximum annual contributions under Section 219(b) of the Code, including "catch-up" contributions for certain individuals age 50 and older. The maximum annual contribution limit for IRA contributions is equal to $3,000 for 2002 through 2004, $4,000 for 2005 through 2007, and $5,000 for 2008. After 2008, the limit is indexed annually in $500 increments, except as otherwise provided by law. An individual who has attained age 50 may make additional "catch-up" IRA contributions. The maximum annual contribution limit for the individual is increased by $500 for 2002 through 2005, and $1,000 for 2006 and thereafter, except as otherwise provided by law. If you have more than one IRA, the limit applies to the total contributions made to your own IRAs for the year. Generally, if you work the amount that you earn is compensation. Wages, salaries, tips, professional fees, bonuses and other amounts you receive for providing personal services are compensation. If you own and operate your own business as a sole proprietor, your net earnings reduced by your deductible contributions on your behalf to self-employed retirement plans is compensation. If you are an active partner in a partnership and provide services to the partnership, your share of partnership income reduced by deductible contributions made on your behalf to qualified retirement plans is compensation. All taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance is compensation. 2. In the case of a married couple filing a joint return, up to the maximum annual contribution can be contributed to each spouse's IRA, even if one spouse has little or no compensation. This means that the total combined contributions that can be made to both IRAs can be as much as $6,000 for the year. 3. In the case of a married couple with unequal compensation who file a joint return, the limit on the deductible contributions to the IRA of the spouse with less compensation is the smaller of: a. the maximum annual contribution or b. The total compensation of both spouses, reduced by any deduction allowed for contributions to IRAs of the spouse with more compensation. The deduction for contributions to both spouses' IRAs may be further limited if either spouse is covered by an employer retirement plan. 48 4. If either you or your spouse is an active participant in an employer-sponsored plan and have a certain level of income, the amount of the contribution to your IRA that is deductible is phased out, and in some cases eliminated. If you are an active participant in an employer-sponsored plan, the deductibility of your IRA contribution will be phased out, depending on your adjusted gross income, or combined adjusted gross income in the case of a joint tax return, as follows:. Joint Returns
Taxable year beginning in: Phase-out range -------------------------- ---------------- 2002................... $54,000-$ 64,000 2003................... $60,000-$ 70,000 2004................... $65,000-$ 75,000 2005................... $70,000-$ 80,000 2006................... $75,000-$ 85,000 2007 and thereafter.... $80,000-$100,000
Single Taxpayers
Taxable year beginning in: Phase-out range -------------------------- --------------- 2002................... $34,000-$44,000 2003................... $40,000-$50,000 2004................... $45,000-$55,000 2005 and thereafter.... $50,000-$60,000
The phase-out range for married individuals filing separately is $0-$10,000. If you file a joint tax return and are not an active participant in an employer sponsored plan, but your spouse is, the amount of the deductible IRA contribution is phased out for adjusted gross income between $150,000 and $160,000. 5. Contributions to your IRA for a year can be made at any time up to April 15 of the following year. If you make the contribution between January 1 and April 15, however, you may elect to treat the contribution as made either in that year or in the preceding year. You may file a tax return claiming a deduction for your IRA contribution before the contribution is actually made. You must, however, make the contribution by the due date of your return not including extensions. 6. You cannot make a contribution other than a rollover or transfer contribution to your IRA for the year in which you reach age 70 1/2 or thereafter. E. SEP IRAs 1. SEP IRA rules concerning eligibility and contributions are governed by Code Section 408(k). The maximum deductible contribution for a SEP IRA is the lesser of $40,000 (indexed for cost-of-living increases beginning after 2002 or 25% of compensation. 2. A SEP must be established and maintained by an employer (corporation, partnership, sole proprietor). F. SIMPLE IRAs 1. A SIMPLE IRA must be established with your employer using a qualified salary reduction agreement. 2. You may elect to have your employer contribute to your SIMPLE IRA, under a qualified salary reduction agreement, an amount (expressed as a percentage of your compensation) not to exceed $7,000 for 2002, $8,000 for 2003, $9,000 for 2004, and $10,000 for 2005. After 2005, the limit is indexed annually, except as otherwise provided by law. In addition to these employee elective contributions, your employer is required to make each year either (1) a matching contribution equal to up to 3 percent, and not less than 1 percent, of your SIMPLE IRA contribution for the year, or (2) a nonelective contribution equal to 2 percent of your compensation for the year (up to $200,000 of compensation, as adjusted for inflation). No other contributions may be made to a SIMPLE IRA. 3. Employee elective contributions and employer contributions (i.e., matching contributions and nonelective contributions) to your SIMPLE IRA are excluded from your gross income. 4. To the extent an individual with a SIMPLE IRA is no longer participating in a SIMPLE plan (e.g., the individual has terminated employment), and two years has passed since the individual first participated in the plan, the individual may treat the SIMPLE IRA as an IRA. G. Tax Status of the Contract and Distributions for IRAs and SIMPLE IRAs 1. Earnings of your IRA annuity contract are not taxed until they are distributed to you. 2. In general, taxable distributions are included in your gross income in the year you receive them. 49 3. Distributions under your IRA are non-taxable to the extent they represent a return of non-deductible contributions (if any). The non-taxable percentage of a distribution is determined generally by dividing your total undistributed, non-deductible IRA contributions by the value of all your IRAs (including SEPs and rollovers). 4. You cannot choose the special five-year or ten-year averaging that may apply to lump sum distributions from qualified employer plans. H. Required Distributions for IRAs and SIMPLE IRAs You must start receiving minimum distributions required under the Contract and Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum distribution for a particular year must be received by December 31 of that year. However, you may delay the required minimum distribution for the year you reach age 70 1/2 until April 1 of the following year (i.e., the required beginning date). Annuity payments which begin by April 1 of the year following your 70 1/2 year satisfy the minimum distribution requirement if they provide for non-increasing payments over your life or the lives of you and your designated beneficiary (within the meaning of Section 401(a)(9) of the Code), provided that, if installments are guaranteed, the guaranty period does not exceed the lesser of 20 years or the applicable life or joint life expectancy. The applicable life expectancy is your remaining life expectancy or the remaining joint life and last survivor expectancy of you and your designated beneficiary, determined as set forth in applicable federal income tax regulations, using the expected return multiple tables shown in IRS Publication 590 "Individual Retirement Arrangements." To obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your area as shown in your income tax return instructions. If you have more than one IRA, you must determine the required minimum distribution separately for each IRA; however, you can take the actual distributions of these amounts from any one or more of your IRAs. If the actual distribution from your Contract is less than the minimum amount that should be distributed in accordance with the minimum distribution requirements mentioned above, the difference generally is an excess accumulation. There is a 50% excise tax on any excess accumulations. If the excess accumulation is due to reasonable error, and you have taken (or are taking) steps to remedy the insufficient distribution, you can request that this 50% excise tax be excused by filing with your tax return an IRS Form 5329, together with a letter of explanation and the excise tax payment. I. Roth IRAs 1. If your Contract is a special type of individual retirement plan known as Roth IRA, it will be administered in accordance with the requirements of section 408A of the Code. (Except as otherwise indicated, references herein to an "IRA" are to an "individual retirement plan," within the meaning of Section 7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same as other IRAs, except as described here. 2. We will apply to the IRS for opinion letters approving annuities as Roth IRAs. Such approval will be a determination only as to the form of the annuity, and will not represent a determination of the merits of the annuity. 3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be attached to, and to amend, your Contract after we obtain approval of the endorsement from the IRS and your state insurance department. We reserve the right to amend the Contract as necessary or advisable from time to time to comply with future changes in the Internal Revenue Code, regulations or other requirements imposed by the IRS to obtain or maintain its approval of the annuity as a Roth IRA. 4. Earnings in your Roth IRA are not taxed until they are distributed to you, and will not be taxed if they are paid as a "qualified distribution," as described to you in section L, below. 50 J. Eligibility and Contributions for Roth IRAs 1. Generally, you are eligible to establish or make a contribution to your Roth IRA only if you meet certain income limits. No deduction is allowed for contributions to your Roth IRA. Contributions to your Roth IRA may be made even after you attain age 70 1/2. 2. The maximum aggregate amount of contributions for any taxable year to all IRAs, including all Roth IRAs, maintained for your benefit (the "contribution limit") generally is the lesser of (1) 100% of your compensation, or (2) the maximum annual contributions under Section 219(b) of the Code, including "catch-up" contributions for certain individuals age 50 and older (as discussed in section D, above). The contribution limit for any taxable year is reduced (but not below zero) by the amount which bears the same ratio to such amount as: (a) the excess of (i) your adjusted gross income for the taxable year, over (ii) the "applicable dollar amount", bears to (b) $15,000 (or $10,000 if you are married). For this purpose, "adjusted gross income" is determined in accordance with Section 219(g)(3) of the Code and (1) excludes any amount included in gross income as a result of any rollover from, transfer from, or conversion of an IRA to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In addition, the "applicable dollar amount" is equal to $150,000 for a married individual filing a joint return, $0 for a married individual filing a separate return, and $95,000 for any other individual. A "qualified rollover contribution" (discussed in Section K, below), and a non-taxable transfer from another Roth IRA, are not taken into account for purposes of determining the contribution limit. K. Rollovers, Transfers and Conversions to Roth IRAs 1. Rollovers and Transfers--A rollover may be made to a Roth IRA only if it is a "qualified rollover contribution." A "qualified rollover contribution" is a rollover to a Roth IRA from another Roth IRA or from an IRA, but only if such rollover contribution also meets the rollover requirements for IRAs under Section 408(d)(3). In addition, a transfer may be made to a Roth IRA directly from another Roth IRA or from an IRA. You may not make a qualified rollover contribution or transfer in a taxable year from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year exceeds $100,000 or (b) you are married and file a separate return. The rollover requirements of Section 408(d)(3) are complex and should be carefully considered before you make a rollover. One of the requirements is that the amount received be paid into another IRA (or Roth IRA) within 60 days after receipt of the distribution. The failure to satisfy this 60-day requirement may be waived by the Internal Revenue Service in certain circumstances. In addition, a rollover contribution from a Roth IRA may be made by you only once a year. The one-year period begins on the date you receive the Roth IRA distribution, not on the date you roll it over (reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you may roll over part of the withdrawal tax free into another Roth IRA and keep the rest of it. A portion of the amount you keep may be included in your gross income. 2. Taxation of Rollovers and Transfers to Roth IRAs--A qualified rollover contribution or transfer from a Roth IRA maintained for your benefit to another Roth IRA maintained for your benefit which meets the rollover requirements for IRAs under Section 408(d)(3) is tax-free. In the case of a qualified rollover contribution or a transfer from an IRA maintained for your benefit to a Roth IRA maintained for your benefit, any portion of the amount rolled over or transferred which would be includible in your gross income were it not part of a qualified rollover contribution or a nontaxable transfer will be includible in your gross income. However, Code Section 72(t) ( relating to the 10 percent penalty tax on premature distributions) will generally not apply unless the amounts rolled over or transferred are withdrawn within the five-year period beginning with the taxable year in which such contribution was made. 51 3. Transfers of Excess IRA Contributions to Roth IRAs--If, before the due date of your federal income tax return for any taxable year (not including extensions), you transfer, from an IRA, contributions for such taxable year (and earnings thereon) to a Roth IRA, such amounts will not be includible in gross income to the extent that no deduction was allowed with respect to such amount. 4. Taxation of Conversions of IRAs to Roth IRAs--All or part of amounts in an IRA maintained for your benefit may be converted into a Roth IRA maintained for your benefit. The conversion of an IRA to a Roth IRA is treated as a special type of qualified rollover contribution. Hence, you must be eligible to make a qualified rollover contribution in order to convert an IRA to a Roth IRA. A conversion typically will result in the inclusion of some or all of your IRA's value in gross income, as described above. A conversion of an IRA to a Roth IRA can be made without taking an actual distribution from your IRA. For example, an individual may make a conversion by notifying the IRA issuer or trustee, whichever is applicable. UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS, YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR ABILITY AND DESIRE TO PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED OVER, TRANSFERRED, OR CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID WITH WITHDRAWALS FROM YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED DISTRIBUTIONS"). YOU SHOULD CONSULT A QUALIFIED TAX ADVISER BEFORE ROLLING OVER, TRANSFERRING, OR CONVERTING ALL OR PART OF AN IRA TO A ROTH IRA. 5. Separate Roth IRAs--Due to the complexity of, and proposed changes to, the tax law, it may be advantageous to maintain amounts rolled over, transferred, or converted from an IRA in separate Roth IRAs from those containing regular Roth IRA contributions. For the same reason, you should consider maintaining a separate Roth IRA for each amount rolled over, transferred, or converted from an IRA. These considerations should be balanced against the additional costs you may incur from maintaining multiple Roth IRAs. You should consult your tax adviser if you intend to contribute rollover, transfer, or conversion amounts to your Contract or if you intend to roll over or transfer amounts from your Contract to another Roth IRA maintained for your benefit. L. Income Tax Consequences of Roth IRAs 1. Qualified Distributions--Any "qualified distribution" from a Roth IRA is excludible from gross income. A "qualified distribution" is a payment or distribution which satisfies two requirements. First, the payment or distribution must be (a) made after you attain 59 1/2, (b) made after your death, (c) attributable to your being disabled, or (d) a "qualified special purpose distribution" (i.e., a qualified first-time homebuyer distribution under Section 72(t)(2)(F) of the Code). Second, the payment or distribution must be made in a taxable year that is at least five years after (1) the first taxable year for which a contribution was made to any Roth IRA established for you, or (2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA, the taxable year in which the rollover or conversion was made if the payment or distribution is allocable (as determined in the manner set forth in guidance issued by the IRS) to the rollover contribution or conversion (or to income allocable thereto). 2. Nonqualified Distributions--A distribution from a Roth IRA which is not a qualified distribution is taxed under Section 72 (relating to annuities), except that such distribution is treated as made first from contributions to the Roth IRA to the extent that such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate amount of contributions to the Roth IRA. For purposes of determining the amount taxed, (a) all Roth IRAs established for you will be treated as one contract, (b) all distributions during any taxable year from Roth IRAs established for you will be treated as one distribution, and (c) the value of the contract, income on the contract, and investment in the contract, if applicable, will be 52 computed as of the close of the calendar year in which the taxable year begins. An additional tax of 10% is imposed on nonqualified distributions (including amounts deemed distributed as the result of a prohibited loan or use of your Roth IRA as security for a loan) made before the benefited individual has attained age 59 1/2, unless one of the exceptions discussed in Section N applies. M. Tax on Excess Contributions 1. You must pay a 6% excise tax each year on excess contributions that remain in your Contract. Generally, an excess contribution is the amount contributed to your Contract that is more than you can contribute. The excess is taxed for the year of the excess contribution and for each year after that until you correct it. 2. You will not have to pay the 6% excise tax if you withdraw the excess amount by the date your tax return is due including extensions for the year of the contribution. You do not have to include in your gross income an excess contribution that you withdraw from your Contract before your tax return is due if the income earned on the excess was also withdrawn and no deduction was allowed for the excess contribution. You must include in your gross income the income earned on the excess contribution. N. Tax on Premature Distributions There is an additional tax on premature distributions from your IRA, Roth IRA or SIMPLE IRA, equal to 10% of the taxable amount. For premature distributions from a SIMPLE IRA made within the first 2 years you participate in a SIMPLE plan, the additional tax is equal to 25% of the amount of the premature distribution that must be included in gross income. Premature distributions are generally amounts you withdraw before you are age 59 1/2. However, the tax on premature distributions does not apply generally: 1. To amounts that are rolled over or transferred tax free; 2. To a distribution which is made on or after your death, or on account of you being disabled within the meaning of Code Section 72(m)(7); 3. To a distribution which is part of a series of substantially equal periodic payments (made at least annually) over your life or your life expectancy or the joint life or joint life expectancy of you and your beneficiary; or 4. To a distribution which is used for qualified first-time homebuyer expenses, qualified high education expenses, certain medical expenses, or by an unemployed individual to pay health insurance premiums. O. IRA Excise Tax Reporting Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans (Including IRAs), Annuities, and Modified Endowment Contracts, to report the excise taxes on excess contributions, premature distributions, and excess accumulations. If you do not owe any IRA, Roth IRA or SIMPLE IRA excise taxes, you do not need Form 5329. Further information can be obtained from any district office of the Internal Revenue Service. P. Borrowing If you borrow money against your Contract or use it as security for a loan, the Contract will lose its classification as an IRA, Roth IRA or SIMPLE IRA, whichever is applicable, and you must include in gross income the fair market value of the Contract as of the first day of your tax year. In addition, you may be subject to the tax on premature distributions described above. (Note: This Contract does not allow borrowings against it, nor may it be assigned or pledged as collateral for a loan.) Q. Reporting We will provide you with any reports required by the Internal Revenue Service. R. Estate Tax Generally, the value of your IRA, including your Roth IRA, is included in your gross estate for federal estate tax purposes. S. Financial Disclosure for the Separate Account (Variable Account) and MVA Option. 1. If on the enrollment application you indicated an allocation to a Subaccount, this Contract will be assessed a daily charge of an amount which will equal an aggregate of 1.25% per annum. 2. An annual records maintenance charge of $30.00 will be assessed against the Separate Account Value each Contract Year. If no values are in the Subaccounts, the charge will be assessed against Guarantee Period Value. 53 3. Withdrawal and early annuitization charges will be assessed based on the Contract Years elapsed since the Contract was issued as described in the prospectus under the heading "Withdrawal Charge." Withdrawals, transfers and early annuitizations of Guarantee Period Value may be subject to a Market Value Adjustment as described in the prospectus under the heading "Market Value Adjustment." 4. The method used to compute and allocate the annual earnings is contained in the prospectus under the heading "Accumulation Unit Value" for Separate Account Value and under the headings "Guarantee Periods of the MVA Option" and "Establishment of Guaranteed Interest Rates" for Guarantee Period Value. 5. The growth in value of your Contract is neither guaranteed nor projected but is based on the investment experience of the Subaccounts or rates of interest as declared by Kemper Investors Life Insurance Company. 54 STATEMENT OF ADDITIONAL INFORMATION MAY 1, 2002 -------------------------------------------------------------------------------- INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS -------------------------------------------------------------------------------- ZURICH PREFERRED Issued By KILICO Variable Annuity Separate Account and KEMPER INVESTORS LIFE INSURANCE COMPANY HOME OFFICE: 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 (847) 874-4000 This Statement of Additional Information is not a prospectus. This Statement of Additional Information should be read in conjunction with the Prospectus of the Separate Account dated May 1, 2002. The Prospectus may be obtained from Kemper Investors Life Insurance Company by writing or calling the address or telephone number listed above. TABLE OF CONTENTS Page ---- Services to the Separate Account. 1 Performance Information of Subaccounts. 1 State Regulation. 3 Condensed Financial Information 3 Experts 3 Financial Statements. 3 Report of Independent Accountants 4 Financial Statements of the Separate Account. 5 Report of Independent Accountants 42 Financial Statements of KILICO 43 Appendix A Tables of Adjusted Accumulation Unit Values (reflecting current charges) and Performance Information 71 Appendix B State Premium Tax Chart. 89 Appendix C Condensed Financial Information 90 SERVICES TO THE SEPARATE ACCOUNT Kemper Investors Life Insurance Company ("KILICO") maintains the books and records of the KILICO Variable Annuity Separate Account (the "Separate Account"). KILICO holds the assets of the Separate Account. The assets are kept segregated and held separate and apart from the general funds of KILICO. KILICO maintains records of all purchases and redemptions of shares of each Fund by each of the Subaccounts. All expenses incurred in the operations of the Separate Account, except the charge for mortality and expense risk and administrative expenses, and records maintenance charge (as described in the Prospectus) are borne by KILICO. The independent accountants for the Separate Account are PricewaterhouseCoopers LLP, Chicago, Illinois, for the years ended December 31, 2001, 2000 and 1999. The firm performed the annual audit of the financial statements of the Separate Account and KILICO for the years ended December 31, 2001, 2000 and 1999. The Contracts are sold by licensed insurance agents, where the Contracts may be lawfully sold, who are registered representatives of broker-dealers which are registered under the Securities Exchange Act of 1934 and are members of the National Association of Securities Dealers, Inc. The Contracts are distributed through the principal underwriter for the Separate Account, Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO, which enters into selling group agreements with the affiliated and unaffiliated broker-dealers. Subject to the provisions of the Contracts, units of the Subaccounts under the Contract are offered on a continuous basis. KILICO pays commissions to the seller which may vary but are not anticipated to exceed in the aggregate an amount equal to 6.25% of Purchase Payments. During 2000 and 2001, KILICO paid gross commissions of approximately $1.2 million and $1 million, respectively, to licensed insurance agents. PERFORMANCE INFORMATION OF SUBACCOUNTS As described in the Prospectus, a Subaccount's historical performance may be shown in the form of standardized "average annual total return" and nonstandardized "total return" calculations in the case of all Subaccounts; "yield" information may be provided in the case of the Scudder High Yield Subaccount, Scudder Investment Grade Bond Subaccount, Scudder Government Securities Subaccount and the Scudder Bond Subaccount; and "yield" and "effective yield" information may be provided in the case of the Scudder Money Market Subaccount #1 (the "Scudder Money Market Subaccount"). These various measures of performance are described below. A Subaccount's standardized average annual total return quotation is computed in accordance with a standard method prescribed by rules of the Securities and Exchange Commission. The standardized average annual total return for a Subaccount for a specific period is found by first taking a hypothetical $1,000 investment in each of the Subaccount's units on the first day of the period at the maximum offering price, which is the Accumulation Unit value per unit ("initial investment") and computing the ending redeemable value ("redeemable value") of that investment at the end of the period. The redeemable value reflects the effect of recurring charges and fees applicable under the Contract to all Contract Owner accounts. The redeemable value does not reflect the effect of premium taxes. The redeemable value is then divided by the initial investment and this quotient is taken to the Nth root (N represents the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage carried to the nearest hundredth of one percent. Standardized average annual total return figures are annualized and, therefore, represent the average annual percentage change in the value of a Subaccount over the applicable period. In general, there is no formula prescribed for calculating nonstandardized total return performance. Nonstandardized total return performance for a specific period is calculated by first taking an investment (assumed to be $40,000 below) in each Subaccount's units on the first day of the period at the maximum offering price, which is the Accumulation Unit Value per unit ("initial investment") and computing the ending value ("ending value") of that investment at the end of the period. The ending value does not reflect the effect of premium tax and the Records Maintenance Charges. The nonstandardized total return percentage is then determined by subtracting the initial investment from the ending value and dividing the remainder by the initial investment and expressing the result as a percentage. An assumed investment of $40,000 was chosen because that approximates the size of a typical account. Both annualized and nonannualized (cumulative) nonstandardized total return figures may be provided. Annualized nonstandardized total return figures represent the average annual percentage change in the value of a Subaccount over the applicable period while nonannualized (cumulative) figures represent the actual percentage change over the applicable period. 1 Standardized average annual total return quotations will be current to the last day of the calendar quarter and nonstandardized total return quotations will be current to the last day of the calendar month preceding the date on which an advertisement is submitted for publication. Standardized average annual total return will cover periods of one, five and ten years, if applicable, and a period covering the time the underlying Portfolio has been held in a Subaccount (life of Subaccount). Nonstandardized total return will cover periods of one, three, five and ten years, if applicable, and a period covering the time the underlying Portfolio held in a Subaccount has been in existence (life of Portfolio). For those underlying Portfolios which have not been held as Subaccounts within the Separate Account for one of the quoted periods, the nonstandardized total return quotations will show the investment performance such underlying Portfolios would have achieved had they been held as Subaccounts within the Separate Account for the period quoted. Performance information will be shown for periods from April 6, 1982 (inception) for the Scudder Money Market Subaccount, Scudder Total Return Subaccount and Scudder High Yield Subaccount, and for periods from December 9, 1983 (inception) for the Kemper Growth Subaccount. In addition, on that date the Scudder Government Securities Subaccount was added to the Separate Account to invest in the Fund's Government Securities Portfolio. For the Scudder Government Securities Subaccount, performance figures will reflect investment experience as if the Scudder Government Securities Subaccount had been available under the Contracts since September 3, 1987, the inception date of the Scudder Government Securities Portfolio. The yield for the Scudder High Yield Subaccount, the Scudder Investment Grade Bond Subaccount, the Scudder Government Securities Subaccount and the Scudder Bond Subaccount is computed in accordance with a standard method prescribed by rules of the Securities and Exchange Commission. The yields for the Scudder High Yield Subaccount, the Scudder Government Securities Subaccount, the Scudder Investment Grade Bond Subaccount, and the Scudder Bond Subaccount, based upon the one month period ended March 28, 2002 were 8.97%, 3.39%, 3.44%, and 3.75%, respectively. The yield quotation is computed by dividing the net investment income per unit earned during the specified one month or 30-day period by the accumulation unit values on the last day of the period, according to the following formula that assumes a semi-annual reinvestment of income: YIELD = 2[ ( a-b +1)/6/-1] --- cd a = net dividends and interest earned during the period by the Fund attributable to the Subaccount b = expenses accrued for the period (net of reimbursements) c = the average daily number of Accumulation Units outstanding during the period d = the Accumulation Unit value per unit on the last day of the period The yield of each Subaccount reflects the deduction of all recurring fees and charges applicable to each Subaccount, but does not reflect the deduction of premium taxes. The Scudder Money Market Subaccount's yield is computed in accordance with a standard method prescribed by rules of the Securities and Exchange Commission. Under that method, the current yield quotation is based on a seven-day period and computed as follows: the net change in the Accumulation Unit Value during the period is divided by the Accumulation Unit Value at the beginning of the period ("base period return") and the result is divided by 7 and multiplied by 365 and the current yield figure carried to the nearest one-hundredth of one percent. Realized capital gains or losses and unrealized appreciation or depreciation of the Account's portfolio are not included in the calculation. The yield for the seven-day period ended March 28, 2002 was 0.06% for the Scudder Money Market Subaccount. The average portfolio maturity was 57 days. The Scudder Money Market Subaccount's effective yield is determined by taking the base period return (computed as described above) and calculating the effect of assumed compounding. The formula for the effective yield is: (base period return +1)/365/7/-1. The effective yield for the seven-day period ended March 31, 2002 was 0.06% for the Scudder Money Market Subaccount. In computing yield, the Separate Account follows certain standard accounting practices specified by Securities and Exchange Commission rules. These practices are not necessarily consistent with the accounting practices that the Separate Account uses in the preparation of its annual and semi-annual financial statements. A Subaccount's performance quotations are based upon historical earnings and are not necessarily representative of future performance. The Subaccount's units are sold at Accumulation Unit value. Performance figures and Accumulation Unit value will fluctuate. Factors affecting a Subaccount's performance include general market conditions, operating expenses and investment management. Units of a Subaccount are redeemable at Accumulation Unit value, which may be more or less than original cost. 2 Standardized average annual total returns include the deduction of all expenses and fees, including a prorated portion of the Records Maintenance Charge. Standardized average annual total returns do not reflect the effect of any applicable premium tax. Yield, effective yield and nonstandardized total returns include the deduction of all expenses and fees except the effect of premium taxes that may be imposed upon the redemption of units and the prorated portion of the Records Maintenance Charge. Thus, nonstandardized total return figures may be higher than if these charges were deducted. The Subaccounts may also provide comparative information on an annualized or nonannualized (cumulative) basis with regard to various indexes described in the Prospectus. In addition, the Subaccounts may provide performance analysis rankings of Lipper Analytical Services, Inc., the VARDS Report, Morningstar, Inc., Ibbotson Associates or Micropal. From time to time, the Separate Account may quote information from publications such as Morningstar, Inc., The Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune, USA today, Institutional Investor, National Underwriter, Selling Life Insurance, Broker World, Registered Representative, Investment Advisor and VARDS. The tables in Appendix A include standardized average annual total return and nonstandardized total return quotations for various periods as of December 31, 2001. The performance figures reflect the deduction of all expenses and fees, including the maximum MIAA charge, a prorated portion of the Records Maintenance Charge, and the charge for the Guaranteed Minimum Death Benefit rider, and the Earnings Based Death Benefit rider. The nonstandardized performance figures reflect the deduction of all expenses and fees, excluding a prorated portion of the Records Maintenance Charge and the current charge for the MIAA Program. The first table shows standardized and nonstandardized performance for contracts without the Guaranteed Minimum Death Benefit rider and the Earnings Based Death Benefit rider. The second table shows standardized and nonstandardized performance for contract with these two riders. STATE REGULATION KILICO is subject to the laws of Illinois governing insurance companies and to regulation by the Illinois Department of Insurance. An annual statement in a prescribed form is filed with the Illinois Department of Insurance each year. KILICO's books and accounts are subject to review by the Department of Insurance at all times, and a full examination of its operations is conducted periodically. Such regulation does not, however, involve any supervision of management or investment practices or policies. In addition, KILICO is subject to regulation under the insurance laws of other jurisdictions in which it may operate. CONDENSED FINANCIAL INFORMATION The tables in Appendix C list the Condensed Financial Information (the accumulation unit values for accumulation unit outstanding) for Contracts with optional benefits yielding variable account charges that fall between the highest and lowest variable account charges possible under the Contract as of December 31, 2001. Tables that represent the maximum and minimum variable account charges possible under the Contract appear in the Prospectus. EXPERTS The consolidated financial statements of KILICO as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, and the related consolidated statement of operations, comprehensive income, stockholder's equity and cash flows for the years ended December 31, 2001, 2000 and 1999 and the financial statements of assets and liabilities and contract owners' equity of Kemper Investors Life Insurance Company's KILICO Variable Annuity Separate Account as of December 31, 2001, and the related statements of operations for the year then ended and the statements of changes in contract owners' equity for each of the two years in the period then ended, have been included herein in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm experts in auditing and accounting. FINANCIAL STATEMENTS This Statement of Additional Information contains financial statements for KILICO and the Separate Account. The financial statements of KILICO should be considered primarily as bearing on our ability to meet our obligations under the Contract. The Contracts are not entitled to participate in our earnings, dividends, or surplus. The financial statements for the Separate Account reflect assets attributable to the Contracts and also reflect assets attributable to other variable annuity contracts offered by KILICO through the Separate Account. 3 Report of Independent Accountants To the Board of Directors and Stockholders of Kemper Investors Life Insurance Company and Contract Owners of Kemper Investors Life Insurance Company's KILICO Variable Annuity Separate Account: In our opinion, the accompanying statement of assets, liabilities and contract owners' equity and the related statement of operations and changes in contract owners' equity present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company's KILICO Variable Annuity Separate Account (which includes the following subaccounts: Alger American Balanced, Alger American Growth, Alger American Leveraged AllCap, Alger American MidCap Growth, Alger American Small Capitalization, American Century VP Income & Growth, American Century VP Value, Credit Suisse Trust Emerging Markets, Credit Suisse Trust Global Post-Venture Capital, Dreyfus Socially Responsible Growth Fund, Dreyfus I.P. Mid Cap Stock, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP II Asset Manager, Fidelity VIP II Index 500, Fidelity VIP II Contrafund, Templeton Developing Markets Securities, INVESCO VIF Utilities, Janus Aspen Aggressive Growth, Janus Aspen Balanced, Janus Aspen Capital Appreciation, Janus Aspen Growth and Income, Janus Aspen Growth, Janus Aspen Worlwide Growth, J.P. Morgan Small Company, PIMCO Foreign Bond, PIMCO Low Duration Bond, Pilgrim Emerging Markets, Pilgrim Natural Resources Trust, Scudder 21st Century Growth, Scudder Bond, Scudder Capital Growth, Scudder Global Discovery, Scudder Growth and Income, Scudder Health Sciences, Scudder International, Scudder Money Market, Scudder Aggressive Growth, Scudder Blue Chip, Scudder Contrarian Value, Scudder Global Blue Chip, Scudder Government Securities, Scudder Growth, Scudder High Yield, Scudder International Research, Scudder Investment Grade Bond, Scudder Money Market, Scudder New Europe, Scudder Small Cap Growth, Scudder Small Cap Value, Scudder Strategic Income, Scudder Technology Growth, Scudder Total Return, SVS Dreman Financial Services, SVS Dreman High Return Equity, SVS Dynamic Growth, SVS Focus Value + Growth, SVS Focused Large Cap Growth, SVS Growth and Income, SVS Growth Opportunities, SVS Index 500, SVS Mid Cap Growth, SVS Strategic Equity, and SVS Venture Value) at December 31, 2001 and the results of its operations for the year then ended and the changes in contract owners' equity for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of portfolio shares owned at December 31, 2001 by correspondence with the underlying funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Chicago, Illinois February 22, 2002 4 KILICO Variable Annuity Separate Account Statement of Assets, Liabilities and Contract Owners' Equity December 31, 2001 (in thousands)
The Alger American Fund ----------------------------------------------------- Total KILICO Alger American Alger American Alger American Variable Annuity Balanced Growth Leveraged AlCap Separate Account Subaccount Subaccount Subaccount ----------------- ------------------------------------------------------ ASSETS Investments in underlying portfolio funds, at current market value $ 5,287,985 84,021 21,732 73,388 Dividends and other receivables 4,055 1 73 2 ---------------- ------------------------------------------------------ Total assets 5,292,040 84,022 21,805 73,390 ---------------- ------------------------------------------------------ LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges 158 1 - 2 Other payables 2,672 - 3 - ---------------- ------------------------------------------------------ Total liabilities 2,830 1 3 2 ---------------- ------------------------------------------------------ Contract owners' equity $ 5,289,210 84,021 21,802 73,388 ================ ====================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions $ 4,123,858 85,441 27,672 93,329 Accumulated net investment income (loss) 1,597,813 503 4,801 1,968 Accumulated net realized gain (loss) on sales of investments 131,018 (264) (7,876) (5,086) Unrealized appreciation (depreciation) of investments (563,479) (1,659) (2,795) (16,823) ---------------- ------------------------------------------------------ Contract owners' equity $ 5,289,210 84,021 21,802 73,388 ================ ====================================================== American Century Variable Portfolios, Inc. -------------------------------------- Alger American American Century Alger American Small VP Income & American Century MidCap Growth Capitalization Growth VP Value Subaccount Subaccount Subaccount Subaccount -------------------------------- --------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 4,678 3,636 5,411 23,380 Dividends and other receivables 227 9 1 109 ------------------------------- -------------------------------- Total assets 4,905 3,645 5,412 23,489 ------------------------------- -------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables 30 8 9 34 ------------------------------- -------------------------------- Total liabilities 30 8 9 34 ------------------------------- -------------------------------- Contract owners' equity 4,875 3,637 5,403 23,455 =============================== ================================ ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 4,836 7,493 6,234 21,674 Accumulated net investment income (loss) 753 1,883 (102) (156) Accumulated net realized gain (loss) on sales of investments (825) (5,673) (382) 431 Unrealized appreciation (depreciation) of investments 111 (66) (347) 1,506 ------------------------------ -------------------------------- Contract owners' equity 4,875 3,637 5,403 23,455 The Drefus Socially Dreyfus Responsible Investment Credit Suisse Trust Growth Fund, Inc. Portfolios ------------------------------ --------------------------------- Credit Sussie Dreyfus Socially Credit Sussie Trust Global Responsible Dreyfus I.P. Trust Emerging Post- Venture Growth Mid Markets Capital Fund Cap Stock Subaccount Subaccount Subaccount Subaccount ------------------------------ --------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 16,663 13,982 15,699 84,453 Dividends and other receivables - - 2 - ------------------------------ ------------------------------ Total assets 16,663 13,982 15,701 84,453 ------------------------------ ------------------------------ LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - 1 - Other payables 2 - 45 1 ------------------------------ ------------------------------ Total liabilities 2 - 46 1 ------------------------------ ------------------------------ Contract owners' equity 16,661 13,982 15,655 84,452 ============================== ============================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 21,084 18,751 20,170 83,150 Accumulated net investment income (loss) 148 891 (162) (192) Accumulated net realized gain (loss) on sales of investments (1,550) (335) (929) (47) Unrealized appreciation (depreciation) of investments (3,021) (5,325) (3,424) 1,541 ------------------------------ -------------------------------- Contract owners' equity 16,661 13,655 15,655 84,452 ============================== ================================
See accompanying notes to financial statements. 5 KILICO Variable Annuity Separate Account Statement of Assets, Liabilities and Contract Owners' Equity December 31, 2001 (in thousands)
Fidelty Variable Insurance Products Fund ------------------------------------------ Fidelity VIP Equity Income Fidelty VIP Growth Subaccount Subaccount ------------------------------------------ ASSETS Investments in underlying portfolio funds, at current market value 50,216 81,527 Dividends and other receivables 7 91 ------------------------------------------ Total assets 50,223 81,618 ------------------------------------------ LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges 21 36 Other payables 71 27 ------------------------------------------ Total liabilities 92 63 ------------------------------------------ Contract owners' equity 50,131 81,555 ========================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 42,535 83,742 Accumulated net investment income (loss) 8,074 19,181 Accumulated net realized gain (loss) on sales of investments 65 (10,966) Unrealized appreciation (depreciation) of investments (543) (10,402) ------------------------------------------ Contract owners' equity 50,131 81,555 ========================================== Fidelity Variable Insurance Products Fund II ---------------------------------------------------------------- Fidelity VIP II Fidelity VIP II Fidelity VIP II Index Asset Manager Contrafund 500 Subaccount Subaccount Subaccount ---------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 7,226 62,588 146,877 Dividends and other receivables 32 36 443 ---------------------------------------------------------------- Total assets 7,258 62,624 147,320 ---------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges 3 26 62 Other payables 25 84 - ---------------------------------------------------------------- Total liabilities 28 110 62 ---------------------------------------------------------------- Contract owners' equity 7,230 62,514 147,258 ================================================================ ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 6,297 51,271 139,285 Accumulated net investment income (loss) 2,061 13,193 1,166 Accumulated net realized gain (loss) on sales of investments (868) 1,328 11,063 Unrealized appreciation (depreciation) of investments (260) (3,278) (4,256) --------------------------------------------------------------- Contract owners' equity 7,230 62,514 147,258 =============================================================== Franklin Templeton INVESCO Variable Variable Insurance Investment Funds, Product Trust Inc. ------------------- ----------------- Templeton Devloping INVESCO VIF Janus Aspen Janus Aspen Markets Securities Utilities Aggressive Growth Balanced Subaccount Subaccount Subaccount Subaccount ------------------- ----------------- -------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 30 6,825 81,659 161,184 Dividends and other receivables - - 237 197 -------------------- ----------------- -------------------------------- Total assets 30 6,825 81,896 161,381 -------------------- ----------------- -------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables - - 199 - -------------------- ----------------- -------------------------------- Total liabilities - - 199 - -------------------- ----------------- -------------------------------- Contract owners' equity 30 6,825 81,697 161,381 ==================== ================= ================================ ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 63 7,255 136,833 142,941 Accumulated net investment income (loss) 1 47 19,188 21,321 Accumulated net realized gain (loss) on sales of investments (26) (323) (40,168) 2,604 Unrealized appreciation (depreciation) of investments (8) (154) (34,156) (5,485) -------------------- ----------------- -------------------------------- Contract owners' equity 30 6,825 81,697 161,381 ==================== ================= ================================ Janus Aspen Series -------------------------------------------------------------------------- Janus Aspen Janus Aspen Capital Janus Aspen Growth and Janus Aspen Appreciation Growth Income Worldwide Growth Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 2,043 189,564 74,529 212,598 Dividends and other receivables - 103 1 57 -------------------------------------------------------------------------- Total assets 2,043 189,667 74,530 212,655 -------------------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables - 29 1 514 -------------------------------------------------------------------------- Total liabilities - 29 1 514 -------------------------------------------------------------------------- Contract owners' equity 2,043 189,638 74,529 212,141 ========================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 3,424 244,518 89,724 184,854 Accumulated net investment income (loss) - 20,716 749 23,414 Accumulated net realized gain (loss) on sales of investments (431) (8,723) 3,810 18,708 Unrealized appreciation (depreciation) of investments (950) (66,873) (19,754) (14,835) -------------------------------------------------------------------------- Contract owners' equity 2,043 189,638 74,529 212,141 ==========================================================================
See accompanying notes to financial statements. 6 KILICO Variable Annuity Separate Account Statement of Assets, Liabilities and Contract Owners' Equity December 31, 2001 (in thousands)
J.P. Morgan Series Pilgrim Emerging Pilgrim Natural Trust II Markets Fund, Inc. Resources Trust ------------------ ------------------ ----------------- J.P. Morgan Small Pilgrim Emerging Pilgrim Natural Company Markets Fund Resources Trust Subaccount Subaccount Subaccount ------------------ ------------------ ----------------- ASSETS Investments in underlying portfolio funds, at current market value 10,764 5,432 3,252 Dividends and other receivables 3 - 86 ------------------ ----------------- ----------------- Total assets 10,767 5,432 3,338 ------------------ ----------------- ----------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - Other payables 29 265 1 ------------------ ----------------- ----------------- Total liabilities 29 265 1 ------------------ ----------------- ----------------- Contract owners' equity 10,738 5,167 3,337 ================== ================= ================= ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 11,016 8,741 3,345 Accumulated net investment income (loss) (96) 1,075 391 Accumulated net realized gain (loss) on sales of investments (643) (3,424) (275) Unrealized appreciation (depreciation) of investments 461 (1,225) (124) ------------------ ----------------- ----------------- Contract owners' equity 10,738 5,167 3,337 ================== ================= ================= PIMCO Variable Insurance Trust ---------------------------------- PIMCO Foreign PIMCO Low Bond Duration Bond Subaccount Subaccount ---------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 389 278 Dividends and other receivables - - --------------------------------- Total assets 389 278 --------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - Other payables 1 - --------------------------------- Total liabilities 1 - --------------------------------- Contract owners' equity 388 278 ================================= ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 331 245 Accumulated net investment income (loss) 47 24 Accumulated net realized gain (loss) on sales of investments - 3 Unrealized appreciation (depreciation) of investments 10 6 --------------------------------- Contract owners' equity 388 278 ================================= Scudder Variable Series I ------------------------------------------------------------------ Scudder 21st Scudder Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ ASSETS Investments in underlying portfolio funds, at current market value 26,068 13,450 45,339 74,591 Dividends and other receivables - 12 - 1 ------------------------------------------------------------------ Total assets 26,068 13,462 45,339 74,592 ------------------------------------------------------------------ LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables - 4 7 1 ------------------------------------------------------------------ Total liabilities - 4 7 1 ------------------------------------------------------------------ Contract owners' equity 26,068 13,458 45,332 74,591 ================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 28,220 13,184 52,486 92,033 Accumulated net investment income (loss) (217) 136 5,297 797 Accumulated net realized gain (loss) on sales of investments (461) 109 (874) 629 Unrealized appreciation (depreciation) of investments (1,474) 29 (11,577) (18,868) ------------------------------------------------------------------ Contract owners' equity 26,068 13,458 45,332 74,591 ================================================================== ----------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 43,629 44,542 82,158 65 Dividends and other receivables - 1 116 - ----------------------------------------------------------------- Total assets 43,629 44,543 82,274 65 ----------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables - - 3 - ----------------------------------------------------------------- Total liabilities - - 3 - ----------------------------------------------------------------- Contract owners' equity 43,629 44,543 82,271 65 ================================================================= ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 47,736 42,966 102,962 57 Accumulated net investment income (loss) 957 (25) 15,723 8 Accumulated net realized gain (loss) on sales of investments (1,044) (4) (33,538) - Unrealized appreciation (depreciation) of investments (4,020) 1,606 (2,876) - ----------------------------------------------------------------- Contract owners' equity 43,629 44,543 82,271 65 =================================================================
See accompanying notes to financial statements. 7 KILICO Variable Annuity Separate Account Statement of Assets, Liabilities and Contract Owners' Equity December 31, 2001 (in thousands)
------------------------------------------------------------------------------- Scudder Scudder Scudder Global Aggressive Growth Scudder Blue Chip Contrarian Value Blue Chip Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 40,084 97,162 128,715 22,866 Dividends and other receivables - 1 1 - ------------------------------------------------------------------------------- Total assets 40,084 97,163 128,716 22,866 ------------------------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables - 1 41 - ------------------------------------------------------------------------------- Total liabilities - 1 41 - ------------------------------------------------------------------------------- Contract owners' equity 40,084 97,162 128,675 22,866 =============================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemption 50,385 109,767 103,548 24,808 Accumulated net investment income (loss) (315) (1,542) 23,552 47 Accumulated net realized gain (loss) on sales of investments (1,026) 1,605 2,073 126 Unrealized appreciation (depreciation) of investments (8,960) (12,668) (498) (2,115) ------------------------------------------------------------------------------- Contract owners' equity 40,084 97,162 128,675 22,866 =============================================================================== Scudder Variable Series II ------------------------------------------------------------------------------- Scudder Government Scudder High Yield Securities Scudder Growth Scudder High Yield 10+ Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 160,645 302,393 189,316 - Dividends and other receivables 109 114 230 - ------------------------------------------------------------------------------- Total assets 160,754 302,507 189,546 - ------------------------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - 5 - Other payables 105 553 8 - ------------------------------------------------------------------------------- Total liabilities 105 553 13 - ------------------------------------------------------------------------------- Contract owners' equity 160,649 301,954 189,533 - =============================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemption 112,239 (56,902) (12,646) (2,477) Accumulated net investment income (loss) 43,409 345,017 260,787 2,552 Accumulated net realized gain (loss) on sales of investments 1,766 84,519 (41,144) (75) Unrealized appreciation (depreciation) of investments 3,235 (70,680) (17,464) - ------------------------------------------------------------------------------- Contract owners' equity 160,649 301,954 189,533 - =============================================================================== ------------------------------------------------------------------------------- Scudder Scudder Scudder Horizon International Investment Grade 20+ Scudder Horizon 5 Research Bond Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value - - 72,774 64,981 Dividends and other receivables - - 477 109 ------------------------------------------------------------------------------- Total assets - - 73,251 65,090 ------------------------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables - - 83 8 ------------------------------------------------------------------------------- Total liabilities - - 83 8 ------------------------------------------------------------------------------- Contract owners' equity - - 73,168 65,082 =============================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemption (1,439) (1,047) 15,063 61,973 Accumulated net investment income (loss) 1,657 1,105 61,699 2,009 Accumulated net realized gain (loss) on sales of investments (218) (58) 17,640 523 Unrealized appreciation (depreciation) of investments - - (21,234) 577 ------------------------------------------------------------------------------- Contract owners' equity - - 73,168 65,082 =============================================================================== ------------------------------------- Scudder Money Scudder New Market Europe Subaccount Subaccount ------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 407,432 15,722 Dividends and other receivables 344 - ------------------------------------- Total assets 407,776 15,722 ------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - Other payables 263 - ------------------------------------- Total liabilities 263 - ------------------------------------- Contract owners' equity 407,513 15,722 ===================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemption 317,283 18,414 Accumulated net investment income (loss) 90,230 (49) Accumulated net realized gain (loss) on sales of investments - (1,318) Unrealized appreciation (depreciation) of investments - (1,325) ------------------------------------- Contract owners' equity 407,513 15,722 =====================================
See accompanying notes to financial statements. 8 KILICO Variable Annuity Separate Account Statement of Assets, Liabilities and Contract Owners' Equity December 31, 2001 (in thousands)
------------------------------------------------------------------ Scudder Scudder Small Scudder Small Scudder Strategic Technology Cap Growth Cap Value Income Growth Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ ASSETS Investments in underlying portfolio funds, at current market value 152,170 113,833 11,501 217,576 Dividends and other receivables 368 48 4 15 ------------------------------------------------------------------ Total assets 152,538 113,881 11,505 217,591 ------------------------------------------------------------------ LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables 3 - 6 2 ------------------------------------------------------------------ Total liabilities 3 - 6 2 ------------------------------------------------------------------ Contract owners' equity 152,535 113,881 11,499 217,589 ================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 138,113 102,428 11,221 314,054 Accumulated net investment income (loss) 59,792 (772) 46 (3,206) Accumulated net realized gain (loss) on sales of investments 4,278 1,712 153 (653) Unrealized appreciation (depreciation) of investments (49,648) 10,513 79 (92,606) ------------------------------------------------------------------ Contract owners' equity 152,535 113,881 11,499 217,589 ================================================================== Scudder Variable Series II ---------------------------------------------------------------------- Scudder Total SVS Dreman SVS Dremane High SVS Dynamic Return Financial Services Return Equity Growth Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 566,841 51,630 280,450 19,666 Dividends and other receivables 337 - - - ---------------------------------------------------------------------- Total assets 567,178 51,630 280,450 19,666 ---------------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges 1 - - - Other payables 197 - 1 - ---------------------------------------------------------------------- Total liabilities 198 - 1 - ---------------------------------------------------------------------- Contract owners' equity 566,980 51,630 280,449 19,666 ====================================================================== ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions (84,708) 50,222 271,520 18,725 Accumulated net investment income (loss) 543,761 (185) 938 (29) Accumulated net realized gain (loss) on sales of investments 146,150 651 (752) (158) Unrealized appreciation (depreciation) of investments (38,223) 942 8,743 1,128 ---------------------------------------------------------------------- Contract owners' equity 566,980 51,630 280,449 19,666 ====================================================================== ----------------------------------------------------------------------- SVS Focus Value SVS Focused SVS Growth and SVS Growth + Growth Large Cap Growth Income Opportunities Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 51,767 37,898 105,768 94,012 Dividends and other receivables 47 - 3 1 ----------------------------------------------------------------------- Total assets 51,814 37,898 105,771 94,013 ----------------------------------------------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - - - Other payables 4 - 3 1 ----------------------------------------------------------------------- Total liabilities 4 - 3 1 ----------------------------------------------------------------------- Contract owners' equity 51,810 37,898 105,768 94,012 ======================================================================= ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 45,304 40,725 115,170 119,624 Accumulated net investment income (loss) 6,909 (188) (758) (1,290) Accumulated net realized gain (loss) on sales of investments 7,351 (509) (353) (929) Unrealized appreciation (depreciation) of investments (7,754) (2,130) (8,291) (23,393) ----------------------------------------------------------------------- Contract owners' equity 51,810 37,898 105,768 94,012 ======================================================================= ---------------------------- SVS Mid Cap SVS Index 500 Growth Subaccount Subaccount ---------------------------- ASSETS Investments in underlying portfolio funds, at current market value 145,352 40,665 Dividends and other receivables - - ---------------------------- Total assets 145,352 40,665 ---------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - Other payables - - ---------------------------- Total liabilities - - ---------------------------- Contract owners' equity 145,352 40,665 ============================ ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemptions 156,850 39,196 Accumulated net investment income (loss) (851) 38 Accumulated net realized gain (loss) on sales of investments (3,780) (38) Unrealized appreciation (depreciation) of investments (6,867) 1,469 ---------------------------- Contract owners' equity 145,352 40,665 ============================
See accompanying notes to financial statements. 9 KILICO Variable Annuity Separate Account Statement of Assets, Liabilities and Contract Owners' Equity December 31, 2001 (in thousands)
Scudder Variable Series II --------------------------------- SVS Strategic Equity SVS Venture Value Subaccount Subaccount --------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 35,442 87,458 Dividends and other receivables - - --------------------------------- Total assets 35,442 87,458 --------------------------------- LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities: Mortality and expense risk charges - - Other payables - - --------------------------------- Total liabilities - - --------------------------------- Contract owners' equity 35,442 87,458 ================================= ANALYSIS OF CONTRACT OWNERS' EQUITY Excess (deficiency) of proceeds from sales over payments for redemption 35,069 85,478 Accumulated net investment income (loss) (4) (109) Accumulated net realized gain (loss) on sales of investments (225) (308) Unrealized appreciation (depreciation) of investments 602 2,397 --------------------------------- Contract owners' equity 35,442 87,458 =================================
See accompanying notes to financial statements. 10 KILICO Variable Annuity Separate Account Statement of Operations For the year ended December 31, 2001 (in thousands)
The Alger American Fund ----------------------------------------------------------------- Alger Alger Total KILICO Alger Alger Alger American American American Variable American American Leveraged MidCap Small Annuity Balanced Growth AllCap Growth Capitalization Separate Account Subaccount Subaccount Subaccount Subaccount Subaccount ---------------- ----------------------------------------------------------------- REVENUE Dividend income $ 199,892 972 2,962 1,847 795 2 --------------- ----------------------------------------------------------------- EXPENSES Mortality and expense risk charges 52,021 533 233 697 39 28 Maintenance fees 2,223 6 23 16 3 6 Guaranteed retirement income benefit expense 3,976 98 - 132 - - --------------- ----------------------------------------------------------------- Total expenses 58,220 637 256 845 42 34 --------------- ----------------------------------------------------------------- Net investment income (loss) 141,672 335 2,706 1,002 753 (32) --------------- ----------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (324,527) (222) (6,907) (4,875) (825) (3,455) Change in unrealized appreciation (depreciation) of investments (490,153) (731) 1,100 (4,932) 111 1,692 --------------- ----------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (814,680) (953) (5,807) (9,807) (714) (1,763) --------------- ----------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations $ (673,008) (618) (3,101) (8,805) 39 (1,795) =============== ================================================================= The Dreyfus Socially Dreyfus Responsible Variable American Century Variable Growth Investment Portfolios, Inc. Credit Suisse Trust Fund, Inc. Fund ------------------------- --------------------------- ---------------------------- Credit Suisse American Credit Suisse Trust Dreyfus Century American Trust Global Post- Socially Dreyfus I.P. VP Income & Century Emerging Venture Responsible Mid Cap Growth VP Value Markets Capital Growth Fund Stock Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------- --------------------------- ---------------------------- REVENUE Dividend income 43 70 - - 10 130 ------------------------- -------------------------- ---------------------------- EXPENSES Mortality and expense risk charges 80 225 151 97 168 358 Maintenance fees 4 21 5 3 11 6 Guaranteed retirement income benefit expense - - 29 22 19 101 ------------------------- -------------------------- ---------------------------- Total expenses 84 246 185 122 198 465 ------------------------- -------------------------- ---------------------------- Net investment income (loss) (41) (176) (185) (122) (188) (335) ------------------------- -------------------------- ---------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (482) 495 (1,775) (626) (1,049) (86) Change in unrealized appreciation (depreciation) of investments 9 1,267 579 (2,242) (2,190) 1,728 ------------------------- -------------------------- ---------------------------- Net realized and unrealized gain (loss) on investments (473) 1,762 (1,196) (2,868) (3,239) 1,642 ------------------------- -------------------------- ---------------------------- Net increase (decrease) in contract owners' equity resulting from operations (514) 1,586 (1,381) (2,990) (3,427) 1,307 ========================= ========================== ============================
See accompanying notes to financial statements. 11 KILICO Variable Annuity Separate Account Statement of Operations For the year ended December 31, 2001 (in thousands)
Fidelity Variable Insurance Products Fund ------------------------------------------ Fidelity VIP Equity Income Fidelity VIP Growth Subaccount Subaccount ------------------------------------------ REVENUE Dividend income 2,756 6,068 ------------------------------------------ EXPENSES Mortality and expense risk charges 601 1,015 Maintenance fees 44 93 Guaranteed retirement income benefit expense - - ------------------------------------------ Total expenses 645 1,108 ------------------------------------------ Net investment income (loss) 2,111 4,960 ------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (2,511) (16,676) Change in unrealized appreciation (depreciation) of investments (2,765) (6,202) ------------------------------------------ Net realized and unrealized gain (loss) on investments (5,276) (22,878) ------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (3,165) (17,918) ========================================== Fidelity Variable Insurance Products Fund II ------------------------------------------------------------ Fidelity VIP II Fidelity VIP II Fidelity VIP II Index Asset Manager Contrafund 500 Subaccount Subaccount Subaccount ------------------------------------------------------------ REVENUE Dividend income 415 2,527 1,668 ------------------------------------------------------------ EXPENSES Mortality and expense risk charges 82 771 1,554 Maintenance fees 7 53 132 Guaranteed retirement income benefit expense - - - ------------------------------------------------------------ Total expenses 89 824 1,686 ------------------------------------------------------------ Net investment income (loss) 326 1,703 (18) ------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (890) (9,096) (6,662) Change in unrealized appreciation (depreciation) of investments 151 (3,036) (13,968) ------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (739) (12,132) (20,630) ------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (413) (10,429) (20,648) ============================================================ Franklin Templeton Variable Insurance Products Trust ------------------ --------------- -------------------------------- Templeton Developing INVESCO VIF Janus Aspen Janus Aspen Markets Securities Utilities Aggressive Growth Balanced Subaccount Subaccount (a) Subaccount Subaccount ------------------ --------------- -------------------------------- REVENUE Dividend income - 63 - 4,305 ------------------ --------------- -------------------------------- EXPENSES Mortality and expense risk charges - 12 1,238 2,109 Maintenance fees - - 121 107 Guaranteed retirement income benefit expense - 4 - - ------------------ --------------- -------------------------------- Total expenses - 16 1,359 2,216 ------------------ --------------- -------------------------------- Net investment income (loss) - 47 (1,359) 2,089 ------------------ --------------- -------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1) (323) (53,957) (1,697) Change in unrealized appreciation (depreciation) of investments (2) (154) (3,877) (10,970) ------------------ --------------- -------------------------------- Net realized and unrealized gain (loss) on investments (3) (477) (57,834) (12,667) ------------------ --------------- -------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3) (430) (59,193) (10,578) ================== =============== ================================ Janus Aspen Series ---------------------------------------------------------- Janus Aspen Janus Aspen Capital Janus Aspen Growth and Janus Aspen Appreciation Growth Income Worldwide Growth Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------- REVENUE Dividend income 27 598 1,160 1,173 ---------------------------------------------------------- EXPENSES Mortality and expense risk charges 30 2,934 1,150 3,428 Maintenance fees 3 161 30 190 Guaranteed retirement income benefit expense 3 192 178 - ---------------------------------------------------------- Total expenses 36 3,287 1,358 3,618 ---------------------------------------------------------- Net investment income (loss) (9) (2,689) (198) (2,445) ---------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (138) (24,674) 1,190 803 Change in unrealized appreciation (depreciation) of investments (446) (45,271) (15,755) (69,116) ---------------------------------------------------------- Net realized and unrealized gain (loss) on investments (584) (69,945) (14,565) (68,313) ---------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (593) (72,634) (14,763) (70,758) ==========================================================
See accompanying notes to financial statements. (a) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 12 KILICO Variable Annuity Separate Account Statement of Operations For the year ended December 31, 2001 (in thousands)
J.P. Morgan Series Pilgrim Emerging Pilgrim Natural Trust II Market Funds, Inc. Resources Trust ------------------ ------------------ ----------------- J.P. Morgan Small Pilgrim Emerging Pilgrim Natural Company Markets Fund Resources Trust Subaccount Subaccount Subaccount ------------------ ------------------ ----------------- REVENUE Dividend income 2 1,425 - ------------------ ------------------ ----------------- EXPENSES Mortality and expense risk charges 90 377 10 Maintenance fees 26 5 3 Guaranteed retirement income benefit expense - - - ------------------ ------------------ ----------------- Total expenses 116 382 13 ------------------ ------------------ ----------------- Net investment income (loss) (114) 1,043 (13) ------------------ ------------------ ----------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (570) (3,380) (211) Change in unrealized appreciation (depreciation) of investments 692 989 (821) ------------------ ------------------ ----------------- Net realized and unrealized gain (loss) on investments 122 (2,391) (1,032) ------------------ ------------------ ----------------- Net increase (decrease) in contract owners' equity resulting from operations 8 (1,348) (1,045) ================== ================== ================= PIMCO Variable Insurance Trust ------------------------------ -------------------------------- PIMCO Foreign PIMCO Low Scudder 21st Bond Duration Bond Century Growth Scudder Bond Subaccount Subaccount Subaccount Subaccount ------------------------------ -------------------------------- REVENUE Dividend income 19 19 - 240 ------------------------------ -------------------------------- EXPENSES Mortality and expense risk charges 6 5 150 97 Maintenance fees - - 1 24 Guaranteed retirement income benefit expense 1 - 29 - ------------------------------ -------------------------------- Total expenses 7 5 180 121 ------------------------------ -------------------------------- Net investment income (loss) 12 14 (180) 119 ------------------------------ -------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments 2 3 (433) 104 Change in unrealized appreciation (depreciation) of investments 12 2 (837) (23) ------------------------------ -------------------------------- Net realized and unrealized gain (loss) on investments 14 5 (1,270) 81 ------------------------------ -------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 26 19 (1,450) 200 ============================== ================================ Scudder Variable Series I --------------------------------------------------------------------- Scudder Capital Scudder Global Scudder Growth Scudder Health Growth Discovery and Income Sciences Subaccount Subaccount Subaccount Subaccount (b) --------------------------------------------------------------------- REVENUE Dividend income 3,617 995 929 - --------------------------------------------------------------------- EXPENSES Mortality and expense risk charges 389 735 344 (3) Maintenance fees 9 18 7 - Guaranteed retirement income benefit expense 66 135 65 28 --------------------------------------------------------------------- Total expenses 464 888 416 25 --------------------------------------------------------------------- Net investment income (loss) 3,153 107 513 (25) --------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,068) 61 (1,026) (4) Change in unrealized appreciation (depreciation) of investments (8,582) (15,681) (2,976) 1,606 --------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (9,650) (15,620) (4,002) 1,602 --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (6,497) (15,513) (3,489) 1,577 ===================================================================== ------------------------------ Scudder Scudder Money International Market Subaccount Subaccount ------------------------------ REVENUE Dividend income 11,570 4 ------------------------------ EXPENSES Mortality and expense risk charges 560 1 Maintenance fees 35 - Guaranteed retirement income benefit expense 132 - ------------------------------ Total expenses 727 1 ------------------------------ Net investment income (loss) 10,843 3 ------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (26,888) - Change in unrealized appreciation (depreciation) of investments (2,774) - ------------------------------ Net realized and unrealized gain (loss) on investments (29,662) - ------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (18,819) 3 ==============================
See accompanying notes to financial statements. (b) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 13 KILICO Variable Annuity Separate Account Statement of Operations For the year ended December 31, 2001 (in thousands)
--------------------------------------------------------------------------- Scudder Scudder Scudder Global Aggressive Growth Scudder Blue Chip Contrarian Value Blue Chip Subaccount Subccount Subaccount Subaccount --------------------------------------------------------------------------- REVENUE Dividend income 276 289 1,631 344 EXPENSES Mortality and expense risk charges 338 898 1,266 192 Maintenance fees 9 19 41 3 Guaranteed retirement income benefit expense 71 140 98 32 --------------------------------------------------------------------------- Total expenses 418 1,057 1,405 227 --------------------------------------------------------------------------- Net investment income (loss) (142) (768) 226 117 --------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,231) (394) (3,562) (87) Change in unrealized appreciation (depreciation) of investments (5,518) (11,570) 3,923 (2,222) --------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (6,749) (11,964) 361 (2,309) --------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (6,891) (12,732) 587 (2,192) ===========================================================================
Scudder Variable Series II -------------------------------------------------------------------- Scudder Government Scudder Horizon Securities Scudder Growth Scudder High Yield 10+ Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income 4,027 31,903 21,092 1,178 -------------------------------------------------------------------- EXPENSES Mortality and expense risk charges 1,482 4,185 2,094 54 Maintenance fees 34 206 86 1 Guaranteed retirement income benefit expense 83 77 76 2 -------------------------------------------------------------------- Total expenses 1,599 4,468 2,256 57 -------------------------------------------------------------------- Net investment income (loss) 2,428 27,435 18,836 1,121 -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments 2,369 (42,881) (28,541) (2,021) Change in unrealized appreciation (depreciation) of investments 1,063 (82,605) 13,300 722 -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 3,432 (125,486) (15,241) (1,299) -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 5,860 (98,051) 3,595 (178) ====================================================================
-------------------------------------------------------------------- Scudder Scudder Horizon International 20+ Scudder Horizon 5 Research Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income 635 466 14,491 -------------------------------------------------------------------- EXPENSES Mortality and expense risk charges 74 44 1,049 Maintenance fees 1 1 51 Guaranteed retirement income benefit expense 1 1 25 -------------------------------------------------------------------- Total expenses 76 46 1,125 -------------------------------------------------------------------- Net investment income (loss) 559 420 13,366 -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments 1,456) (617) (26,243) Change in unrealized appreciation (depreciation) of investments 623 166 (13,717) -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (833) (451) (39,960) -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (274) (31) (26,594) ====================================================================
-------------------------------------- Scudder Investment Grade Scudder Money Bond Market Subaccount Subaccount -------------------------------------- REVENUE Dividend income 1,528 8,990 -------------------------------------- EXPENSES Mortality and expense risk charges 560 3,068 Maintenance fees 7 49 Guaranteed retirement income benefit expense 59 246 -------------------------------------- Total expenses 626 3,363 -------------------------------------- Net investment income (loss) 902 5,627 -------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments 420 - Change in unrealized appreciation (depreciation) of investments (239) - -------------------------------------- Net realized and unrealized gain (loss) on investments 181 - -------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 1,083 5,627 ======================================
14 KILICO Variable Annuity Separate Account Statement of Operations For the year ended December 31, 2001 (in thousands)
--------------------------------------------------------------------- Scudder New Scudder Small Scudder Small Scudder Strategic Europe Cap Growth Cap Value Income Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- REVENUE Dividend income 129 21,657 - 45 --------------------------------------------------------------------- EXPENSES Mortality and expense risk charges 145 1,644 585 97 Maintenance fees 2 94 19 1 Guaranteed retirement income benefit expense 21 98 83 16 --------------------------------------------------------------------- Total expenses 168 1,836 687 114 --------------------------------------------------------------------- Net investment income (loss) (39) 19,821 (687) (69) --------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,407) (32,119) 897 248 Change in unrealized appreciation (depreciation) of investments (1,282) (43,474) 10,183 25 --------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (2,689) (75,593) 11,080 273 --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (2,728) (55,772) 10,393 204 ===================================================================== Scudder Variable Series II --------------------------------------------------------------------- Scudder Technology Scudder Total SVS Dreman SVS Dreman High Growth Return Financial Services Return Equity Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- REVENUE Dividend income 280 39,531 334 1,037 --------------------------------------------------------------------- EXPENSES Mortality and expense risk charges 2,118 7,175 358 1,587 Maintenance fees 41 299 5 22 Guaranteed retirement income benefit expense 372 146 68 335 --------------------------------------------------------------------- Total expenses 2,531 7,620 431 1,944 --------------------------------------------------------------------- Net investment income (loss) (2,251) 31,911 (97) (907) --------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,442) (11,356) 749 228 Change in unrealized appreciation (depreciation) of investments (60,716) (65,762) (1,843) 928 --------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (62,158) (77,118) (1,094) 1,156 --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (64,409) (45,207) (1,191) 249 ===================================================================== ------------------------------------------------------------------------------------------------------------------------------------ SVS Dynamic SVS Focus Value SVS Focused SVS Focused Growth + Growth Large Cap Growth Income Subaccount(c) Subaccount Subaccount Subaccount --------------------------------------------------------------------- REVENUE Dividend income - 3,050 - 297 EXPENSES Mortality and expense risk charges 15 554 116 704 Maintenance fees - 18 2 11 Guaranteed retirement income benefit expense 14 35 42 147 --------------------------------------------------------------------- Total expenses 29 607 160 862 --------------------------------------------------------------------- Net investment income (loss) (29) 2,443 (160) (565) --------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (158) (1,975) (458) (344) Change in unrealized appreciation (depreciation) of investments 1,128 (7,822) (1,113) (5,511) --------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 970 (9,797) (1,571) (5,855) --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 941 (7,354) (1,731) (6,420) ===================================================================== ------------------ SVS Growth Opportunities Subaccount ------------------ REVENUE Dividend income - ------------------ EXPENSES Mortality and expense risk charges 802 Maintenance fees 16 Guaranteed retirement income benefit expense 163 ------------------ Total expenses 981 ------------------ Net investment income (loss) (981) ------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (932) Change in unrealized appreciation (depreciation) of investments (16,177) ------------------ Net realized and unrealized gain (loss) on investments (17,109) ------------------ Net increase (decrease) in contract owners' equity resulting from operations (18,090) ==================
See accompanying notes to financial statements. (c) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 15 KILICO Variable Annuity Separate Account Statement of Operations For the year ended December 31, 2001 (in thousands)
Scudder Variable Series II --------------------------------------------------------------------- SVS Mid Cap SVS Strategic SVS Index 500 Growth Equity SVS Venture Value Subaccount Subaccount (d) Subaccount (d) Subaccount (d) --------------------------------------------------------------------- REVENUE Dividend income 271 - - - --------------------------------------------------------------------- EXPENSES Mortality and expense risk charges 560 (64) (20) 47 Maintenance fees 11 - - 1 Guaranteed retirement income benefit expense 182 26 23 60 --------------------------------------------------------------------- Total expenses 753 (38) 3 108 --------------------------------------------------------------------- Net investment income (loss) (482) 38 (3) (108) --------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,794) (38) (225) (308) Change in unrealized appreciation (depreciation) of investments (3,696) 1,469 601 2,396 --------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (7,490) 1,431 376 2,088 --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (7,972) 1,469 373 1,980 =====================================================================
See accompanying notes to financial statements. (d) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 16 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2001 (in thousands)
The Alger American Fund ----------------------------------------------------------------- Alger Alger Total KILICO Alger Alger Alger American American American Variable American American Leveraged MidCap Small Annuity Balanced Growth AllCap Growth Capitalization Separate Account Subaccount Subaccount Subaccount Subaccount Subaccount ---------------- ----------------------------------------------------------------- OPERATIONS Net investment income (loss) $ 141,672 335 2,706 1,002 753 (32) Net realized gain (loss) on sale of investments (324,527) (222) (6,907) (4,875) (825) (3,455) Change in unrealized appreciation (depreciation) of investments (490,153) (731) 1,100 (4,932) 111 1,692 ----------- --------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (673,008) (618) (3,101) (8,805) 39 (1,795) ----------- --------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 2,029,517 56,892 4,011 39,755 1,334 1,059 Net transfer (to) from affiliate and subaccounts 318,218 15,478 1,884 4,227 3,551 30 Payments for redemptions (427,441) (1,409) (1,476) (2,424) (53) (442) ----------- --------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 1,920,294 70,961 4,419 41,558 4,832 647 ----------- --------------------------------------------------------------- Total increase (decrease) in contract owners' equity 1,247,286 70,343 1,318 32,753 4,871 (1,148) CONTRACT OWNERS' EQUITY Beginning of period 4,041,927 13,678 20,484 40,635 4 4,785 ----------- --------------------------------------------------------------- End of period $ 5,289,210 84,021 21,802 73,388 4,875 3,637 =========== =============================================================== The Dreyfus Socially Responsible Dreyfus American Century Variable Growth Investment Portfolios, Inc. Credit Suisse Trust Fund, Inc. Portfolios ------------------------- -------------------------- ---------------------------- American Credit Suisse Credit Suisse Dreyfus Century American Trust Global Post- Socially Dreyfus I.P. VP Income & Century Emerging Venture Responsible Mid Cap Growth VP Value Markets Capital Growth Fund Stock Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------- -------------------------- ---------------------------- OPERATIONS Net investment income (loss) (41) (176) (185) (122) (188) (335) Net realized gain (loss) on sale of investments (482) 495 (1,775) (626) (1,049) (86) Change in unrealized appreciation (depreciation) of investments 9 1,267 579 (2,242) (2,190) 1,728 ----------------------- -------------------------- ----------------------- Net increase (decrease) in contract owners' equity resulting from operations (514) 1,586 (1,381) (2,990) (3,427) 1,307 ----------------------- -------------------------- ----------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 844 4,086 8,319 8,103 7,247 51,129 Net transfer (to) from affiliate and subaccounts 749 15,893 86 227 1,594 19,611 Payments for redemptions (567) (1,090) (340) (286) (705) (992) ----------------------- -------------------------- ----------------------- Net increase (decrease) from contract owners' equity transactions 1,026 18,889 8,065 8,044 8,136 69,748 ----------------------- -------------------------- ----------------------- Total increase (decrease) in contract owners' equity 512 20,475 6,684 5,054 4,709 71,055 CONTRACT OWNERS' EQUITY Beginning of period 4,891 2,980 9,977 8,928 10,946 13,397 ----------------------- -------------------------- ----------------------- End of period 5,403 23,455 16,661 13,982 15,655 84,452 ======================= ========================== =======================
See accompanying notes to financial statements. 17 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2001 (in thousands)
Fidelity Variable Insurance Proudcts Fund Fidelity Variable Insurance Products Fund II ----------------------------------------------------------------------------- Fidelity VIP Fidelity Fidelity VIP II Fidelity VIP II Fidelity VIP II Equity Income VIP Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 2,111 4,960 326 1,703 (18) Net realized gain (loss) on sale of investments (2,511) (16,676) (890) (9,096) (6,662) Change in unrealized appreciation (depreciation) of investments (2,765) (6,202) 151 (3,036) (13,968) ----------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3,165) (17,918) (413) (10,429) (20,648) ----------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,760 11,996 736 7,004 15,974 Net transfer (to) from affiliate and subaccounts 7,682 1,654 (207) (5,172) 6,729 Payments for redemptions (4,509) (6,721) (702) (5,537) (10,543) ----------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 9,933 6,929 (173) (3,705) 12,160 ----------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 6,768 (10,989) (586) (14,134) (8,488) CONTRACT OWNERS' EQUITY Beginning of period 43,363 92,544 7,816 76,648 155,746 ----------------------------------------------------------------------------- End of period 50,131 81,555 7,230 62,514 147,258 ============================================================================= Franklin Templeton INVESCO Variable Variable Insurance Investment Products Trust Funds, Inc. Janus Aspen Series -------------- -------------- ------------------------------------- Templeton Janus Developing Aspen Janus Aspen Markets INVESCO VIF Aggresive Janus Aspen Capital Securities Utilities Growth Balanced Appreciation Subaccount Subaccount (a) Subaccount Subaccount Subaccount -------------- -------------- ------------------------------------- OPERATIONS Net investment income (loss) - 47 (1,359) 2,089 (9) Net realized gain (loss) on sale of investments (1) (323) (53,957) (1,697) (138) Change in unrealized appreciation (depreciation) of investments (2) (154) (3,877) (10,970) (446) -------------- -------------- ------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3) (430) (59,193) (10,578) (593) -------------- -------------- ------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 2 5,405 15,276 16,805 80 Net transfer (to) from affiliate and subaccounts - 1,915 (14,797) (3,392) 91 Payments for redemptions (2) (65) (6,650) (12,492) (102) -------------- -------------- ------------------------------------- Net increase (decrease) from contract owners' equity transactions - 7,255 (6,171) 921 69 -------------- -------------- ------------------------------------- Total increase (decrease) in contract owners' equity (3) 6,825 (65,364) (9,657) (524) CONTRACT OWNERS' EQUITY Beginning of period 33 - 147,061 171,038 2,567 -------------- -------------- ------------------------------------- End of period 30 6,825 81,697 161,381 2,043 ============== ============== ===================================== Janus Aspen Series -------------------------------------- Janus Janus Janus Aspen Aspen Aspen Growth Worldwide Growth and Income Growth Subaccount Subaccount Subaccount -------------------------------------- OPERATIONS Net investment income (loss) (2,689) (198) (2,445) Net realized gain (loss) on sale of investments (24,674) 1,190 803 Change in unrealized appreciation (depreciation) of investments (45,271) (15,755) (69,116) -------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (72,634) (14,763) (70,758) -------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 16,023 1,741 25,115 Net transfer (to) from affiliate and subaccounts (24,635) (9,913) (32,891) Payments for redemptions (14,613) (3,892) (16,475) -------------------------------------- Net increase (decrease) from contract owners' equity transactions (23,225) (12,064) (24,251) -------------------------------------- Total increase (decrease) in contract owners' equity (95,859) (26,827) (95,009) CONTRACT OWNERS' EQUITY Beginning of period 285,497 101,356 307,150 -------------------------------------- End of period 189,638 74,529 212,141 ======================================
See accompanying notes to financial statements. (a) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 18 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2001 (in thousands)
J.P. Morgan Serles Pilgrim Emerging Pilgrim Natural Trust II Markets Fund, Inc. Resources Trust ------------------- ------------------ ----------------- J.P. Morgan Small Pilgrim Emerging Pilgrim Natural Conpany Markets Fund Resources Trust Subaccount Subaccount Subaccount ------------------- ----------------- ----------------- OPERATIONS Net investment income (loss) (114) 1,043 (13) Net realized gain (loss) on sale of investments (570) (3,380) (211) Change in unrealized appreciation (depreciation) of investments 692 989 (821) ---------------- ----------------- ------------------ Net increase (decrease) in contract owners' equity resulting from operations 8 (1,348) (1,045) ---------------- ----------------- ------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 2,799 602 426 Net transfer (to) from affiliate and subaccounts 6,662 (1,249) (1,134) Payments for redemptions (419) (542) (461) ---------------- ----------------- ------------------ Net increase (decrease) from contract owners' equity transactions 9,042 (1,189) (1,169) ---------------- ----------------- ------------------ Total increase (decrease) in contract owners' equity 9,050 (2,537) (2,214) CONTRACT OWNERS' EQUITY Beginning of period 1,688 7,704 5,551 ---------------- ----------------- ------------------ End of period 10,738 5,167 3,337 ================ ================= ================== PIMCO Variable Insurance Trust Scrudder Variable Series I -------------------------------- ------------------------------- PIMCO Foreign PIMCO Low Scudder 21st Bond Duration Bond Century Growth Scudder Bond Subaccount Subaccount Subaccount Subaccount ------------------------------- ------------------------------- OPERATIONS Net investment income (loss) 12 14 (180) 119 Net realized gain (loss) on sale of investments 2 3 (433) 104 Change in unrealized appreciation (depreciation) of investments 12 2 (837) (23) ----------------------- ----------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 26 19 (1,450) 200 ----------------------- ----------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6 2 17,085 4,004 Net transfer (to) from affiliate and subaccounts (85) (55) 6,570 8,667 Payments for redemptions (40) (27) (298) (753) ----------------------- ----------------------------------- Net increase (decrease) from contract owners' equity transactions (119) (80) 23,357 11,918 ----------------------- ----------------------------------- Total increase (decrease) in contract owners' equity (93) (61) 21,907 12,118 CONTRACT OWNERS' EQUITY Beginning of period 481 339 4,161 1,340 ----------------------- ----------------------------------- End of period 388 278 26,068 13,458 ======================= =================================== Scudder Variable Series I ------------------------------------------------------------------------------------------ Scudder Capital Scudder Global Scudder Growth Scudder Health Scrudder Scudder Money Growth Discovery and Income Sciences International Market Subaccount Subaccount Subaccount Subaccount (b) Subaccount Subaccount ------------------------------------------------------------------------------------------ OPERATIONS Net investment income (loss) 3,153 107 513 (25) 10,843 3 Net realized gain (loss) on sale of investments (1,068) 61 (1,026) (4) (26,888) - Change in unrealized appreciation (depreciation) of investments (8,582) (15,681) (2,976) 1,606 (2,774) - ------------------------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (6,497) (15,513) (3,489) 1,577 (18,819) 3 ------------------------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 22,254 32,278 18,888 32,945 39,682 9 Net transfer (to) from affiliate and subaccounts 3,615 10,335 5,061 10,307 5,342 (48) Payments for redemptions (1,284) (2,017) (912) (286) (2,621) (22) ------------------------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 24,585 40,596 23,037 42,966 42,403 (61) ------------------------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 18,088 25,083 19,548 44,543 23,584 (58) CONTRACT OWNERS' EQUITY Beginning of period 27,244 49,508 24,081 - 58,687 123 ------------------------------------------------------------------------------------------ End of period 45,332 74,591 43,629 44,543 82,271 65 ==========================================================================================
See accompanying notes to financial statements. (b) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 19 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2001 (in thousands)
Scudder Variable Series II --------------------------------------------------------------------------- Scudder Scudder Scudder Scudder Aggressive Scudder Contrarian Global Government Scudder Growth Blue Chip Value Blue Chip Securities Growth Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (142) (768) 226 117 2,428 27,435 Net realized gain (loss) on sale of investments (1,231) (394) (3,562) (87) 2,369 (42,881) Change in unrealized appreciation (depreciation) of investments (5,518) (11,570) 3,923 (2,222) 1,063 (82,605) --------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (6,891) (12,732) 587 (2,192) 5,860 (98,051) --------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 19,927 41,555 34,423 13,651 68,231 33,092 Net transfer (to) from affiliate and subaccounts 3,534 11,326 15,252 1,631 27,492 (12,697) Payments for redemptions (1,298) (5,360) (9,600) (516) (11,615) (44,679) --------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 22,163 47,521 40,075 14,766 84,108 (24,284) --------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 15,272 34,789 40,662 12,574 89,968 (122,335) CONTRACT OWNERS' EQUITY Beginning of period 24,812 62,373 88,013 10,292 70,681 424,289 --------------------------------------------------------------------------- End of period 40,084 97,162 128,675 22,866 160,649 301,954 =========================================================================== Scudder Variable Series II --------------------------------------------------------------------- Scudder Scudder Scudder Scudder Scudder International High Yield Horizon 10+ Horizon 20+ Horizon 5 Research Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- OPERATIONS Net investment income (loss) 18,836 1,121 559 420 13,366 Net realized gain (loss) on sale of investments (28,541) (2,021) (1,456) (617) (26,243) Change in unrealized appreciation (depreciation) of investments 13,300 722 623 166 (13,717) --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 3,595 (178) (274) (31) (26,594) --------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 29,931 483 367 232 9,594 Net transfer (to) from affiliate and subaccounts 9,089 (13,207) (8,018) (7,140) (5,250) Payments for redemptions (26,200) (454) (398) (498) (11,880) --------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 12,820 (13,178) (8,049) (7,406) (7,536) --------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 16,415 (13,356) (8,323) (7,437) (34,130) CONTRACT OWNERS' EQUITY Beginning of period 173,118 13,356 8,323 7,437 107,298 --------------------------------------------------------------------- End of period 189,533 - - - 73,168 ===================================================================== Scudder Variable Series II -------------------------- Scudder Investment Scudder Grade Bond Money Market Subaccount Subaccount -------------------------- OPERATIONS Net investment income (loss) 902 5,627 Net realized gain (loss) on sale of investments 420 - Change in unrealized appreciation (depreciation) of investments (239) - -------------------------- Net increase (decrease) in contract owners' equity resulting from operations 1,083 5,627 -------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 28,647 467,417 Net transfer (to) from affiliate and subaccounts 15,137 (113,554) Payments for redemptions (4,263) (96,321) -------------------------- Net increase (decrease) from contract owners' equity transactions 39,521 257,542 -------------------------- Total increase (decrease) in contract owners' equity 40,604 263,169 CONTRACT OWNERS' EQUITY Beginning of period 24,478 144,344 -------------------------- End of period 65,082 407,513 ==========================
See accompanying notes to financial statements. 20 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2001 (in thousands)
------------------------------------------------------------------ Scudder New Scudder Small Scudder Small Scudder Strategic Europe Cap Growth Cap Value Income Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ OPERATIONS Net investment income (loss) (39) 19,821 (687) (69) Net realized gain (loss) on sale of investments (1,407) (32,119) 897 248 Change in unrealized appreciation (depreciation) of investments (1,282) (43,474) 10,183 25 ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (2,728) (55,772) 10,393 204 ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 10,800 39,205 45,871 6,159 Net transfer (to) from affiliate and subaccounts 4,252 (1,696) 29,421 2,441 Payments for redemptions (344) (14,122) (4,126) (519) ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 14,708 23,387 71,166 8,081 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 11,980 (32,385) 81,559 8,285 CONTRACT OWNERS' EQUITY Beginning of period 3,742 184,920 32,322 3,214 ------------------------------------------------------------------ End of period 15,722 152,535 113,881 11,499 ================================================================== Scudder Variable Series II ------------------------------------------------------------------ Scudder Technology Scudder Total SVS Dreman SVS Dremane High Growth Return Financial Services Return Equity Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ OPERATIONS Net investment income (loss) (2,251) 31,911 (97) (907) Net realized gain (loss) on sale of investments (1,442) (11,356) 749 228 Change in unrealized appreciation (depreciation) of investments (60,716) (65,762) (1,843) 928 ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (64,409) (45,207) (1,191) 249 ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 70,793 55,750 29,969 167,852 Net transfer (to) from affiliate and subaccounts 117,727 24,024 6,846 54,385 Payments for redemptions (4,359) (71,022) (1,177) (5,557) ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 184,161 8,752 35,638 216,680 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 119,752 (36,455) 34,447 216,929 CONTRACT OWNERS' EQUITY Beginning of period 97,837 603,435 17,183 63,520 ------------------------------------------------------------------ End of period 217,589 566,980 51,630 280,449 ================================================================== -------------------------------------------------------- SVS Dynamic SVS Focus Value SVS Focused Growth + Growth Large Cap Growth Subaccount (c) Subaccount Subaccount -------------------------------------------------------- OPERATIONS Net investment income (loss) (29) 2,443 (160) Net realized gain (loss) on sale of investments (158) (1,975) (458) Change in unrealized appreciation (depreciation) of investments 1,128 (7,822) (1,113) -------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 941 (7,354) (1,731) -------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 15,136 16,182 25,144 Net transfer (to) from affiliate and subaccounts 3,698 3,645 7,756 Payments for redemptions (109) (4,088) (470) -------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 18,725 15,739 32,430 -------------------------------------------------------- Total increase (decrease) in contract owners' equity 19,666 8,385 30,699 CONTRACT OWNERS' EQUITY Beginning of period - 43,425 7,199 -------------------------------------------------------- End of period 19,666 51,810 37,898 ======================================================== ------------------------------- SVS Growth and SVS Growth Income Opportunities Subaccount Subaccount ------------------------------- OPERATIONS Net investment income (loss) (565) (981) Net realized gain (loss) on sale of investments (344) (932) Change in unrealized appreciation (depreciation) of investments (5,511) (16,177) ------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (6,420) (18,090) ------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 63,069 52,213 Net transfer (to) from affiliate and subaccounts 16,830 14,805 Payments for redemptions (1,914) (1,711) ------------------------------- Net increase (decrease) from contract owners' equity transactions 77,985 65,307 ------------------------------- Total increase (decrease) in contract owners' equity 71,565 47,217 CONTRACT OWNERS' EQUITY Beginning of period 34,203 46,795 ------------------------------- End of period 105,768 94,012 ===============================
See accompanying notes to financial statements. (c) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 21 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2001 (in thousands)
Scudder Variable Series II ------------------------------------------------------------------ SVS Mid Cap SVS Strategic SVS Venture SVS Index 500 Growth Equity Value Subaccount Subaccount (d) Subaccount (d) Subaccount (d) ------------------------------------------------------------------ OPERATIONS Net investment income (loss) (482) 38 (3) (108) Net realized gain (loss) on sale of investments (3,794) (38) (225) (308) Change in unrealized appreciation (depreciation) of investments (3,696) 1,469 601 2,396 ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (7,972) 1,469 373 1,980 ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 90,220 28,315 26,789 61,824 Net transfer (to) from affiliate and subaccounts 22,650 11,033 8,370 24,054 Payments for redemptions (2,430) (152) (90) (400) ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 110,440 39,196 35,069 85,478 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 102,468 40,665 35,442 87,458 CONTRACT OWNERS' EQUITY Beginning of period 42,884 - - - ------------------------------------------------------------------ End of period 145,352 40,665 35,442 87,458 ==================================================================
See accompanying notes to financial statements. (d) For the period (commencement of operations): May 1, 2001 to December 31, 2001. 22 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2000 (in thousands)
The Alger American Fund ------------------------------------------------- Total KILICO Alger American Alger American Alger American Variable Annuity Balanced Growth Leveraged AllCap Separate Account Subaccount Subaccount Subaccount ---------------- ------------------------------------------------- OPERATIONS Net investment income (loss) $ 295,349 168 2,127 965 Net realized gain (loss) on sale of investments 73,014 (42) (1,010) (213) Change in unrealized appreciation (depreciation) of investments (914,152) (933) (5,258) (11,937) ---------------- ------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (545,789) (807) (4,141) (11,185) ---------------- ------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 862,463 9,106 5,450 33,347 Net transfer (to) from affiliate and subaccounts 335,849 5,320 9,119 18,646 Payments for redemptions (426,615) (157) (855) (817) ---------------- ------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 771,697 14,269 13,714 51,176 ---------------- ------------------------------------------------- Total increase (decrease) in contract owners' equity 225,908 13,462 9,573 39,991 CONTRACT OWNERS' EQUITY Beginning of period 3,816,019 216 10,911 644 ---------------- ------------------------------------------------- End of period $ 4,041,927 13,678 20,484 40,635 ================ ================================================= American Century Variable Portfolios, Inc. ------------------------- Alger American American Century American Alger American Small VP Income & Century VP MidCap Growth Capitalization Growth Value Subaccount Subaccount Subaccount Subaccount ------------------------------ ------------------------------ OPERATIONS Net investment income (loss) - 1,924 (48) 22 Net realized gain (loss) on sale of investments - (2,473) 88 (61) Change in unrealized appreciation (depreciation) of investments - (2,117) (595) 287 ------------------------------- ------------------------------ Net increase (decrease) in contract owners' equity resulting from operations - (2,666) (555) 248 ------------------------------- ------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 4 1,912 599 277 Net transfer (to) from affiliate and subaccounts - 3,761 2,367 2,044 Payments for redemptions - (365) (244) (169) ------------------------------- ------------------------------ Net increase (decrease) from contract owners' equity transactions 4 5,308 2,722 2,152 ------------------------------- ------------------------------ Total increase (decrease) in contract owners' equity 4 2,642 2,167 2,400 CONTRACT OWNERS' EQUITY Beginning of period - 2,143 2,724 580 ------------------------------- ------------------------------ End of period 4 4,785 4,891 2,980 =============================== ============================== The Dreyfus Socially Responsible Credit Suisse Trust Growth Fund, Inc. ------------------------------------------ ------------------ Credit Suisse Credit Suisse Dreyfus Socially Trust Emerging Trust Global Post- Responsible Markets Venture Capital Growth Fund Subaccount Subaccount Subaccount ------------------------------------------ ------------------ OPERATIONS Net investment income (loss) 240 1,023 (61) Net realized gain (loss) on sale of investments 161 237 89 Change in unrealized appreciation (depreciation) of investments (4,074) (3,631) (1,502) ------------------------------------------ ------------------ Net increase (decrease) in contract owners' equity resulting from operations (3,673) (2,371) (1,474) ------------------------------------------ ------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 7,692 7,114 6,369 Net transfer (to) from affiliate and subaccounts 3,151 2,297 3,456 Payments for redemptions (238) (125) (272) ------------------------------------------ ------------------ Net increase (decrease) from contract owners' equity transactions 10,605 9,286 9,553 ------------------------------------------ ------------------ Total increase (decrease) in contract owners' equity 6,932 6,915 8,079 CONTRACT OWNERS' EQUITY Beginning of period 3,045 2,013 2,867 ------------------------------------------ ------------------ End of period 9,977 8,928 10,946 ========================================== ==================
See accompanying notes to financial statements. 23 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2000 (in thousands)
Dreyfus Investment Fidelity Variable Insurance Products Portfolios Fund -------------------- -------------------------------------- Dreyfus I.P. Mid Fidelity VIP Equity Fidelity VIP Cap Stock Income Growth Subaccount Subaccount Subaccount ------------------- -------------------------------------- OPERATIONS Net investment income (loss) 144 2,853 8,680 Net realized gain (loss) on sale of investments 33 693 3,666 Change in unrealized appreciation (depreciation) of investments (187) (1,195) (25,747) ------------------- -------------------------------------- Net increase (decrease) in contract owners' equity resutling from operations (10) 2,351 (13,401) ------------------- -------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 8,911 4,482 12,794 Net transfer (to) from affiliate and subaccounts 4,460 (5,358) 8,768 Payments for redemptions (87) (3,341) (6,919) ------------------- -------------------------------------- Net increase (decrease) from contract owners' equity transactions 13,284 (4,217) 14,643 ------------------- -------------------------------------- Total increase (decrease) in contract owners' equity 13,274 (1,866) 1,242 CONTRACT OWNERS' EQUITY Beginning of period 123 45,229 91,302 ------------------- -------------------------------------- End of period 13,397 43,363 92,544 =================== ====================================== Fidelity Variable Insurance Products Funds II -------------------------------------- ----------------- Fidelity VIP II Fidelity VIP II Fidelity VIP II Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount -------------------------------------------------------- OPERATIONS Net investment income (loss) 790 9,142 436 Net realized gain (loss) on sale of investments (130) 1,979 6,654 Change in unrealized appreciation (depreciation) of investments (1,092) (17,749) (25,473) -------------------------------------------------------- Net increase (decrease) in contract owners' equity resutling from operations (432) (6,628) (18,383) -------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,304 9,085 21,874 Net transfer (to) from affiliate and subaccounts (430) 1,010 (5,501) Payments for redemptions (1,019) (5,215) (12,523) -------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (145) 4,880 3,850 -------------------------------------------------------- Total increase (decrease) in contract owners' equity (577) (1,748) (14,533) CONTRACT OWNERS' EQUITY Beginning of period 8,393 78,396 170,279 -------------------------------------------------------- End of period 7,816 76,648 155,746 ======================================================== Franklin Templeton Variable Insruance Products Trust Janus Aspen Series -------------------------------------------------------------------- Templeton Janus Aspen Janus Aspen Developing Aggressive Janus Aspen Capital Markets Securities Growth Balanced Appreciation Subaccount Subaccount Subaccount Subaccount -------------------- ---------------------------------------------- OPERATIONS Net investment income (loss) - 19,887 16,775 11 Net realized gain (loss) on sale of investments (25) 9,804 2,057 (296) Change in unrealized appreciation (depreciation) of investments (5) (105,037) (25,020) (679) -------------------- ---------------------------------------------- Net increase (decrease) in contract owners' equity resutling from operations (30) (75,346) (6,188) (964) -------------------- ---------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 161 28,406 22,994 3,902 Net transfer (to) from affiliate and subaccounts (97) 46,904 20,123 (843) Payments for redemptions (1) (11,296) (9,984) (271) -------------------- ---------------------------------------------- Net increase (decrease) from contract owners' equity transactions 63 64,014 33,133 2,788 -------------------- ---------------------------------------------- Total increase (decrease) in contract owners' equity 33 (11,332) 26,945 1,824 CONTRACT OWNERS' EQUITY Beginning of period - 158,393 144,093 743 -------------------- ---------------------------------------------- End of period 33 147,061 171,038 2,567 ==================== ============================================== --------------- Janus Aspen Growth Subaccount --------------- OPERATIONS Net investment income (loss) 21,501 Net realized gain (loss) on sale of investments 9,844 Change in unrealized appreciation (depreciation) of investments (86,494) ---------------- Net increase (decrease) in contract owners' equity resutling from operations (55,149) --------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 57,316 Net transfer (to) from affiliate and subaccounts 59,436 Payments for redemptions (16,605) --------------- Net increase (decrease) from contract owners' equity transactions 100,147 --------------- Total increase (decrease) in contract owners' equity 44,998 CONTRACT OWNERS' EQUITY Beginning of period 240,499 --------------- End of period 285,497 ===============
See accompanying notes to financial statements. 24 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2000 (in thousands)
J.P. Morgan Pilgrim Emerging Janus Aspen Series Series Trust II Markets Fund, Inc. ------------------------------- ----------------- ------------------ Janus Aspen Growth and Janus Aspen J.P. Morgan Small Pilgrim Emerging Income Worldwide Growth Company Markets Fund Subaccount Subaccount Subaccount Subaccount ------------------------------- ----------------- ------------------ OPERATIONS Net investment income (loss) 1,121 24,916 12 (149) Net realized gain (loss) on sale of investments 2,189 9,421 (91) 2,067 Change in unrealized appreciation (depreciation) of investments (21,513) (98,483) (275) (7,924) ------------------------------- ------------------ ------------------- Net increase (decrease) in contract owners' equity resulting from operations (18,203) (64,146) (354) (6,006) ------------------------------- ------------------ ------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 26,953 38,769 639 1,373 Net transfer (to) from affiliate and subaccounts 29,812 25,761 1,182 871 Payments for redemptions (4,361) (22,250) (149) (1,083) ------------------------------- ------------------ ------------------- Net increase (decrease) from contract owners' equity transactions 52,404 42,280 1,672 1,161 ------------------------------- ------------------ ------------------- Total increase (decrease) in contract owners' equity 34,201 (21,866) 1,318 (4,845) CONTRACT OWNERS' EQUITY Beginning of period 67,155 329,016 370 12,549 ------------------------------- ------------------ ------------------- End of period 101,356 307,150 1,688 7,704 =============================== ================== =================== Pilgrim Natural Resources Trust PIMCO Variable Insurance Trust --------------- ------------------------------ Pilgrim Natural PIMCO Foreign PIMCO Low Resources Trust Bond Duration Bond Subaccount Subaccount Subaccount ---------------- ------------------------------ OPERATIONS Net investment income (loss) (18) 28 10 Net realized gain (loss) on sale of investments 78 (1) - Change in unrealized appreciation (depreciation) of investments 742 - 4 ---------------- ------------------------------ Net increase (decrease) in contract owners' equity resulting from operations 802 27 14 ---------------- ---------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 500 152 188 Net transfer (to) from affiliate and subaccounts 276 71 117 Payments for redemptions (401) (18) (2) ---------------- ---------------------------- Net increase (decrease) from contract owners' equity transactions 375 205 303 ---------------- ---------------------------- Total increase (decrease) in contract owners' equity 1,177 232 317 CONTRACT OWNERS' EQUITY Beginning of period 4,374 249 22 ---------------- ---------------------------- End of period 5,551 481 339 ================ ============================ Scudder Variable Series I ---------------------------------------------------------------- Scudder 21st Scudder Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount (a) Subaccount Subaccount Subaccount ---------------------------------------------------------------- OPERATIONS Net investment income (loss) (36) 18 1,955 710 Net realized gain (loss) on sale of investments (28) 2 159 529 Change in unrealized appreciation (depreciation) of investments (637) 51 (5,217) (5,494) ---------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (701) 71 (3,103) (4,255) ---------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 3,784 393 10,374 30,214 Net transfer (to) from affiliate and subaccounts 1,092 713 7,230 15,829 Payments for redemptions (14) (13) (982) (638) ---------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 4,862 1,093 16,622 45,405 ---------------------------------------------------------------- Total increase (decrease) in contract owners' equity 4,161 1,164 13,519 41,150 CONTRACT OWNERS' EQUITY Beginning of period - 176 13,725 8,358 ---------------------------------------------------------------- End of period 4,161 1,340 27,244 49,508 ================================================================
See accompanying notes to financial statements. (a) For the period (commencement of operations): June 5, 2000 to December 31, 2000 25 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2000 (in thousands)
Scudder Variable Series -------------------------------------------- ----------------------------- Scudder Scudder Growth Scudder Scudder Money Aggressive and Income International Market Growth Scudder Blue Chip Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------- ----------------------------- OPERATIONS Net investment income (loss) 216 4,151 6 (170) (556) Net realized gain (loss) on sale of investments (36) (9,580) - 202 1,024 Change in unrealized appreciation (depreciation) of investments (1,011) (2,773) - (3,577) (5,911) --------------------------------------------- ----------------------------- Net increase (decrease) in contract owners' equity resulting from operations (831) (8,202) 6 (3,545) (5,443) --------------------------------------------- ----------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,918 26,465 639 19,636 21,928 Net transfer (to) from affiliate and subaccounts 7,486 14,156 (508) 7,934 14,786 Payments for redemptions (632) (1,314) (14) (449) (5,071) --------------------------------------------- ----------------------------- Net increase (decrease) from contract owners' equity transactions 13,772 39,307 117 27,121 31,643 --------------------------------------------- ----------------------------- Total increase (decrease) in contract owners' equity 12,941 31,105 123 23,576 26,200 CONTRACT OWNERS' EQUITY Beginning of period 11,140 27,582 - 1,236 36,173 --------------------------------------------- ----------------------------- End of period 24,081 58,687 123 24,812 62,373 ============================================= ============================= Scudder Variable Series II ------------------------------------------------------------------- Scudder Scudder Scudder Global Government Contrarian Value Blue Chip Securities Scudder Growth Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------- OPERATIONS Net investment income (loss) 16,160 (52) 3,627 42,274 Net realized gain (loss) on sale of investments (9,434) 186 (948) 27,025 Change in unrealized appreciation (depreciation) of investments 3,218 (439) 3,103 (177,074) ------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 9,944 (305) 5,782 (107,775) ------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 8,165 4,300 6,590 30,406 Net transfer (to) from affiliate and subaccounts (9,409) 2,779 (795) (5,086) Payments for redemptions (12,961) (365) 12,605) (67,289) ------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (14,205) 6,714 (6,810) (41,969) ------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (4,261) 6,409 (1,028) (149,744) CONTRACT OWNERS' EQUITY Beginning of period 92,274 3,883 71,709 574,033 ------------------------------------------------------------------- End of period 88,013 10,292 70,681 424,289 =================================================================== ------------------------------- Scudder High Scudder Horizon Yield 10+ Subaccount Subaccount ------------------------------- OPERATIONS Net investment income (loss) 21,732 1,236 Net realized gain (loss) on sale of investments (16,574) 219 Change in unrealized appreciation (depreciation) of investments (22,469) (2,380) ------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (17,311) (925) ------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 11,863 1,188 Net transfer (to) from affiliate and subaccounts (3,472) (621) Payments for redemptions (35,680) (1,690) ------------------------------- Net increase (decrease) from contract owners' equity transactions (27,289) (1,123) ------------------------------- Total increase (decrease) in contract owners' equity (44,600) (2,048) CONTRACT OWNERS' EQUITY Beginning of period 217,718 15,404 ------------------------------- End of period 173,118 13,356 ===============================
See accompanying notes to financial statements. 26 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2000 (in thousands)
Scudder Variable Series II ---------------------------------------------------------------------------- Scudder Scudder Scudder Scudder International Investment Scudder Money Horizon 20+ Horizon 5 Research Grade Bond Market Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 979 589 19,016 795 5,741 Net realized gain (loss) on sale of investments 206 22 4,046 (265) - Change in unrealized appreciation (depreciation) of investments (2,183) (773) (55,254) 1,193 - ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (998) (162) (32,192) 1,723 5,741 ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,062 344 8,983 3,180 84,576 Net transfer (to) from affiliate and subaccounts (510) (954) (9,132) 3,950 (51,485) Payments for redemptions (1,542) (979) (19,913) (3,255) (34,855) ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (990) (1,589) (20,062) 3,875 (1,764) ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (1,988) (1,751) (52,254) 5,598 3,977 CONTRACT OWNERS' EQUITY Beginning of period 10,311 9,188 159,552 18,880 140,367 ---------------------------------------------------------------------------- End of period 8,323 7,437 107,298 24,478 144,344 ============================================================================ ---------------------------------------------------------------------------- Scudder Scudder Scudder Scudder New Scudder Small Scudder Small Strategic Technology Total Europe Cap Growth Cap Value Income Growth Return Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (29) 16,017 (165) 10 (966) 44,883 Net realized gain (loss) on sale of investments 87 11,315 (1,011) (60) 677 19,360 Change in unrealized appreciation (depreciation) of investments (171) (58,020) 2,108 108 (36,088) (89,810) ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (113) (30,688) 932 58 (36,377) (25,567) ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,737 33,357 5,643 1,125 73,694 30,764 Net transfer (to) from affiliate and subaccounts 975 35,531 (2,248) 797 43,173 (26,068) Payments for redemptions (83) (19,336) (3,609) (279) (2,236) (91,502) ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 2,629 49,552 (214) 1,643 114,631 (86,806) ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 2,516 18,864 718 1,701 78,254 (112,373) CONTRACT OWNERS' EQUITY Beginning of period 1,226 166,056 31,604 1,513 19,583 715,808 ---------------------------------------------------------------------------- End of period 3,742 184,920 32,322 3,214 97,837 603,435 ============================================================================
See accompanying notes to financial statements. 27 KILICO Variable Annuity Separate Account Statement of Changes in Contract Owners' Equity For the year ended December 31, 2000 (in thousands)
Scudder Variable Series II ------------------------------------------------------------------------ SVS Dreman SVS Dreman High SVS Focus Value Scudder Focused Financial Services Return Equity & Growth Large Cap Growth Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------ OPERATIONS Net investment income (loss) (38) 1,930 3,703 (28) Net realized gain (loss) on sale of investments (146) (982) 2,353 (51) Change in unrealized appreciation (depreciation) of investments 3,169 11,143 (8,503) (1,017) ------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations 2,985 12,091 (2,447) (1,096) ------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 5,522 13,294 5,605 5,656 Net transfer (to) from affiliate and subaccounts 3,448 8,647 (1,192) 2,744 Payments for redemptions (417) (1,886) (6,865) (160) ------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 8,553 20,055 (2,452) 8,240 ------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 11,538 32,146 (4,899) 7,144 CONTRACT OWNERS' EQUITY Beginning of period 5,645 31,374 48,324 55 ------------------------------------------------------------------------ End of period 17,183 63,520 43,425 7,199 ======================================================================== ------------------------------------------------ Scudder Growth Scudder Growth Scudder Index and Income Opportunities 500 Subaccount (b) Subaccount (b) Subaccount ------------------------------------------------ OPERATIONS Net investment income (loss) (192) (309) (357) Net realized gain (loss) on sale of investments (9) 3 6 Change in unrealized appreciation (depreciation) of investments (2,780) (7,216) (3,555) ------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (2,981) (7,522) (3,906) ------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 28,430 43,801 21,147 Net transfer (to) from affiliate and subaccounts 8,947 10,899 19,489 Payments for redemptions (193) (383) (639) ------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 37,184 54,317 39,997 ------------------------------------------------ Total increase (decrease) in contract owners' equity 34,203 46,795 36,091 CONTRACT OWNERS' EQUITY Beginning of period - - 6,793 ------------------------------------------------ End of period 34,203 46,795 42,884 ================================================
See accompanying notes to financial statements. (b) For the period (commencement of operations): May 3, 2000 - Scudder Growth Opportunities Subaccount; May 4, 2000 - 28 KILICO Variable Annuity Separate Account Notes to Financial Statements (1) General Information and Significant Accounting Policies Organization KILICO Variable Annuity Separate Account (the "Separate Account") is a unit investment trust registered under the Investment Company Act of 1940, as amended, established by Kemper Investors Life Insurance Company ("KILICO"). KILICO is a wholly-owned subsidiary of Zurich Group Holding ("ZGH") and an indirect wholly-owned subsidiary of Zurich Financial Services ("ZFS"), both of which are Swiss holding companies. The Separate Account is used to fund contracts or certificates (collectively referred to as "Contracts") for Kemper Advantage III periodic and flexible payment variable annuity contracts ("Kemper Advantage III"), Scudder Passport individual and group variable, fixed and market value adjusted deferred annuity contracts ("Scudder Passport"), Scudder Destinations individual and group variable, fixed and market value adjusted deferred annuity contracts ("Scudder Destinations"), Farmers Variable Annuity I individual and group variable, fixed and market value adjusted deferred annuity contracts ("Farmers Variable Annuity I"), Zurich Preferred individual and group variable and market value adjusted deferred annuity contracts ("Zurich Preferred") and Zurich Preferred Plus individual and group variable and market value adjusted deferred annuity contracts ("Zurich Preferred Plus"). The Separate Account is divided into a total of sixty-four subaccounts with various subaccount options available to contract owners depending upon their respective Contracts. The Kemper Advantage III contracts have thirty-four subaccount options available to contract owners and each subaccount invests exclusively in the shares of a corresponding portfolio in The Alger American Fund, the American Century Variable Portfolios, Inc., the Credit Suisse Funds, The Dreyfus Socially Responsible Growth Fund, Inc., the Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance Products Fund II, the Janus Aspen Series, the J.P. Morgan Series Trust II, the Pilgrim Emerging Markets Fund, Inc., the Pilgrim Natural Resources Trust, the Scudder Variable Series I, and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Scudder Passport contracts have thirteen subaccount options available to the contract owners and each subaccount invests exclusively in the shares of a corresponding portfolio in the Scudder Variable Series II, an open-end diversified management investment company. The Scudder Destinations contracts have forty-two subaccount options available to the contract owners and each subaccount invests exclusively in the shares of a corresponding portfolio in The Alger American Fund, the Credit Suisse Funds, the Dreyfus Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc., the INVESCO Variable Investment Funds, Inc., the Janus Aspen Series, the Scudder Variable Series I and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Farmers Variable Annuity I contracts have twelve subaccount options available to the contract owners and each subaccount invests exclusively in the shares of a corresponding portfolio in the Franklin Templeton Variable Insurance Products Trust, the Janus Aspen Series, the PIMCO Variable Insurance Trust, the Scudder Variable Series I and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Zurich Preferred contracts have twenty-seven subaccount options available to the contract owners and each subaccount invests exclusively in the shares of a corresponding portfolio in The Alger American Fund, the American Century Variable Portfolios, Inc., the Credit Suisse Funds, The Dreyfus Socially Responsible Growth Fund, Inc., the Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance Products Fund II, the Janus Aspen Series, the J.P. Morgan Series Trust II, the Scudder Variable Series I and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Zurich Preferred Plus contracts have twenty-seven subaccount options available to the contract owners and each subaccount invests exclusively in the shares of a corresponding portfolio in The Alger American Fund, the American Century Variable Portfolios, Inc., the Credit Suisse Funds, The Dreyfus Socially Responsible Growth Fund, Inc., the Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance Products Fund II, the Janus Aspen Series, the J.P. Morgan Series Trust II, the 29 Scudder Variable Series I and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Scudder Horizon 5, Scudder Horizon 10+ and the Scudder Horizon 20+ funds were closed by the investment manager of the Scudder Variable Series II effective May 1, 2001. All monies not reallocated by contract owners by this date were transferred to Scudder Total Return subaccount. Security valuation The investments are stated at current market value, which is based on the closing net asset value at December 31, 2001. Security transactions and investment income Security transactions are generally accounted for on the trade date (date the order to buy or sell is executed). Dividend income, which includes capital gain distributions is recorded as income on the ex-dividend date. Realized gains and losses from sales of investment shares are generally reported on a first in, first out (FIFO) cost basis. Traditionally, the Statement of Operations should consist only of transactions that directly impact the unit value calculation: in other words, transactions that impact contractholders equally. The unit value, which is the value of a share of the division, is generally only impacted by investment income and mortality and expense risk. Accumulation unit valuation On each day the New York Stock Exchange (the "Exchange") is open for trading, the accumulation unit value is determined as of the earlier of 3:00 p.m. (CST) or the close of the Exchange by dividing the total value of each subaccount's investments and other assets, less liabilities, by the number of accumulation units outstanding in the respective subaccount. Federal income taxes The operations of the Separate Account are included in the federal income tax return of KILICO. Under existing federal income tax law, investment income and realized capital gains and losses of the Separate Account increase liabilities under the contract and are, therefore, not taxed. Thus the Separate Account may realize net investment income and capital gains and losses without federal income tax consequences. Net transfers (to) from affiliate or subaccounts Net transfers (to) from affiliate or subaccounts include transfers of all or part of the contract owners interest to or from another eligible subaccount or to the general account of KILICO. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities as well as the disclosure of contingent amounts at the date of the financial statements. Actual results could differ from these estimates. 30 (2) Financial Highlights The following table represents certain highlights as follows:
At December 31, 2001 --------------------------------------------------- Net Units Unit Fair Value Assets Investment --------------- Income (000s) Lowest Highest (000s) Ratio (a) ------ ------ ------- ------ --------- The Alger American Fund: Alger American Balanced Subaccount 8,205 $10.240 $10.240 $84,021 1.99% Alger American Growth Subaccount 423 40.912 52.093 21,732 14.04% Alger American Leveraged AllCap Subaccount 9,057 8.103 8.103 73,387 3.24% Alger American MidCap Growth Subaccount 173 28.092 28.342 4,678 33.96% Alger American Small Capitalization Subaccount 119 16.250 31.513 3,635 0.05% American Century Variable Portfolios, Inc.: American Century VP Income & Growth Subaccount 853 6.323 6.395 5,410 0.83% American Century VP Value Subaccount 3,071 7.350 7.723 23,380 0.53% Credit Suisse Trust: Credit Suisse Trust Emerging Markets Subaccount 1,937 8.326 8.611 16,663 N/A Credit Suisse Trust Global Post-Venture Capital Subaccount 1,586 8.818 8.818 13,982 N/A The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund Subaccount 1,620 7.563 27.119 15,699 0.07% Dreyfus Investment Portfolios: Dreyfus I.P. Mid Cap Stock Subaccount 7,541 11.199 11.199 84,453 0.27% Fidelity Variable Insurance Products Fund: Fidelity VIP Equity Income Subaccount 1,659 22.475 31.143 50,216 5.91% Fidelity VIP Growth Subaccount 1,643 33.204 51.078 81,527 6.97% Fidelity Variable Insurance Products Fund II: Fidelity VIP II Asset Manager Subaccount 323 22.326 22.736 7,226 5.70% Fidelity VIP II Contrafund Subaccount 2,475 19.897 25.714 62,588 3.63% Fidelity VIP II Index 500 Subaccount 1,087 127.922 137.84 146,877 1.10% Franklin Templeton Variable Insurance Products Trust: Templeton Developing Markets Securities Subaccount 3 8.860 8.860 30 N/A INVESCO Variable Investment Funds, Inc.: INVESCO VIF Utilities Subaccount 1,004 6.796 6.796 6,825 0.92% Janus Aspen Series: Janus Aspen Aggressive Growth Subaccount 3,396 21.725 24.518 81,659 N/A Janus Aspen Balanced Subaccount 5,930 22.896 27.744 161,184 2.59% Janus Aspen Capital Appreciation Subaccount 242 8.459 8.459 2,043 1.17% Janus Aspen Growth Subaccount 12,249 10.607 23.504 189,564 0.25% Janus Aspen Growth and Income Subaccount 4,984 14.953 14.953 74,529 1.32% Janus Aspen Worldwide Growth Subaccount 6,855 28.344 31.533 212,598 0.45% For the year ended December 31, 2001 ---------------------------------------- Expense Ratio (b) Total Return (c) ----------------- ---------------- Lowest Highest Lowest Highest ------ ------- ------ ------- The Alger American Fund: Alger American Balanced Subaccount 1.40% 1.40% -3.29% -3.29% Alger American Growth Subaccount 1.00% 3.00% -12.95% 13.13% Alger American Leveraged AllCap Subaccount 1.40% 1.40% -17.09% -17.09% Alger American MidCap Growth Subaccount 1.00% 3.00% -8.01% -4.13% Alger American Small Capitalization Subaccount 1.00% 3.00% -30.78% -13.54% American Century Variable Portfolios, Inc.: American Century VP Income & Growth Subaccount 1.00% 3.00% -9.82% -8.37% American Century VP Value Subaccount 1.00% 3.00% 7.38% 11.70% Credit Suisse Trust: Credit Suisse Trust Emerging Markets Subaccount 1.00% 3.00% -11.37% -10.51% Credit Suisse Trust Global Post-Venture Capital Subaccount 1.40% 1.40% -29.62% -29.62% The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund Subaccount 1.00% 3.00% -23.91% -16.84% Dreyfus Investment Portfolios: Dreyfus I.P. Mid Cap Stock Subaccount 1.40% 1.40% -4.60% -4.60% Fidelity Variable Insurance Products Fund: Fidelity VIP Equity Income Subaccount 1.00% 3.00% -6.46% -5.90% Fidelity VIP Growth Subaccount 1.00% 3.00% -19.03% -13.14% Fidelity Variable Insurance Products Fund II: Fidelity VIP II Asset Manager Subaccount 1.00% 2.80% -5.40% -5.05% Fidelity VIP II Contrafund Subaccount 1.00% 3.00% -13.68% -5.32% Fidelity VIP II Index 500 Subaccount 1.00% 3.00% -13.75% -9.67% Franklin Templeton Variable Insurance Products Trust: Templeton Developing Markets Securities Subaccount 1.40% 1.40% -12.68% -12.68% INVESCO Variable Investment Funds, Inc.: INVESCO VIF Utilities Subaccount 1.40% 1.40% -32.30% -32.30% (d) Janus Aspen Series: Janus Aspen Aggressive Growth Subaccount 1.00% 3.00% -40.63% -23.00% Janus Aspen Balanced Subaccount 1.00% 3.00% -6.17% -4.07% Janus Aspen Capital Appreciation Subaccount 1.40% 1.40% -23.67% -23.67% Janus Aspen Growth Subaccount 1.00% 3.00% -26.05% -21.32% Janus Aspen Growth and Income Subaccount 1.40% 1.40% -14.57% -14.57% Janus Aspen Worldwide Growth Subaccount 1.00% 3.00% -23.77% -16.33%
31 (2) Financial Highlights (continued)
At December 31, 2001 For the year ended December 31, 2001 -------------------------------- ----------------------------------------------- Net Units Unit Fair Value Assets Investment Expense Ratio (b) Total Return (c) --------------- ----------------- ---------------- Income (000s) Lowest Highest (000s) Ratio (a) Lowest Highest Lowest Highest ------ ------ ------- ------ --------- ------ ------- ------ ------- J.P. Morgan Series Trust II: J.P. Morgan Small Company Subaccount 803 12.972 13.584 10,764 0.03% 1.00% 3.00% -9.54% -3.47% Pilgrim Emerging Markets Fund, Inc.: Pilgrim Emerging Markets Fund Subaccount 713 7.247 7.384 5,432 21.69% 1.00% 2.80% -11.67% -11.31% Pilgrim Natural Resources Trust: Pilgrim Natural Resources Trust Subaccount 257 12.958 13.232 3,252 N/A 1.00% 2.80% -17.13% -16.77% PIMCO Variable Insurance Trust: PIMCO Foreign Bond Subaccount 35 11.099 11.099 389 4.37% 1.40% 1.40% 6.77% 6.77% PIMCO Low Duration Bond Subaccount 24 11.366 11.366 278 6.16% 1.40% 1.40% 6.73% 6.73% Scudder Variable Series I: Scudder 21st Century Growth Subaccount 4,197 6.211 6.211 26,068 N/A 1.40% 1.40% -24.15% -24.15% Scudder Bond Subaccount 1,834 7.034 11.100 13,450 3.25% 1.00% 3.00% 2.42% 5.47% Scudder Capital Growth Subaccount 4,352 10.201 20.611 45,339 9.97% 1.00% 3.00% -20.72% -14.48% Scudder Global Discovery Subaccount 6,536 11.412 11.412 74,591 1.60% 1.40% 1.40% -25.64% -25.64% Scudder Growth and Income Subaccount 5,114 8.527 8.693 43,629 2.74% 1.40% 1.40% -13.30% -12.52% Scudder Health Sciences Subaccount 4,222 10.551 10.551 44,542 N/A 1.40% 1.40% 5.51% 5.51% (d) Scudder International Subaccount 10,083 7.892 10.723 82,158 16.43% 1.00% 3.00% -32.11% -23.44% Scudder Money Market Subaccount 6 10.773 10.773 65 4.26% 1.40% 1.40% 2.41% 2.41% Scudder Variable Series II: Scudder Aggressive Growth Subaccount 3,999 10.022 10.022 40,084 0.85% 1.40% 1.40% -22.84% -22.84% Scudder Blue Chip Subaccount 16,826 1.164 9.680 97,162 0.36% 1.25% 1.40% -16.97% -16.86% Scudder Contrarian Value Subaccount 39,433 1.799 10.913 128,715 1.50% 1.00% 2.80% 0.46% 0.85% Scudder Global Blue Chip Subaccount 2,280 10.029 10.029 22,866 2.07% 1.40% 1.40% 1.40% 1.40% Scudder Government Securities Subaccount 41,648 1.218 11.896 160,645 3.48% 1.00% 3.00% 3.52% 6.64% Scudder Growth Subaccount 65,583 1.951 8.272 302,393 8.78% 1.00% 3.00% -23.67% -14.32% Scudder High Yield Subaccount 45,274 0.805 9.271 189,316 11.65% 1.00% 3.00% -2.72% 1.61% Scudder International Research Subaccount 39,653 1.547 7.918 72,774 16.11% 1.00% 2.80% -25.53% -25.18% Scudder Investment Grade Bond Subaccount 15,452 1.135 11.369 64,981 3.41% 1.00% 3.00% 2.24% 4.66% Scudder Money Market Subaccount 128,799 1.008 11.894 407,432 3.31% 1.00% 3.00% 0.94% 3.85% Scudder New Europe Subaccount 2,391 6.576 6.576 15,722 1.33% 1.40% 1.40% -30.83% -30.83% Scudder Small Cap Growth Subaccount 49,609 1.267 9.348 152,170 12.86% 1.00% 3.00% -32.12% -16.19% Scudder Small Cap Value Subaccount 33,983 1.285 10.177 113,833 N/A 1.00% 2.80% 16.04% 16.49% Scudder Strategic Income Subaccount 1,574 1.095 10.483 11,501 0.61% 1.25% 1.40% 3.78% 3.92% Scudder Technology Growth Subaccount 25,462 0.920 9.079 217,576 0.18% 1.00% 3.00% -33.63% -7.58% Scudder Total Return Subaccount 99,886 1.939 10.615 566,841 6.75% 1.00% 3.00% -7.39% -5.62% SVS Dreman Financial Services Subaccount 4,691 11.006 11.006 51,630 0.97% 1.40% 1.40% -6.17% -6.17% SVS Dreman High Return Equity Subaccount 23,638 11.674 11.865 280,450 0.60% 1.40% 1.40% -0.34% 0.29% SVS Dynamic Growth Subaccount 2,256 8.718 8.718 19,666 N/A 1.40% 1.40% -12.82% -12.82% (d) SVS Focus Value + Growth Subaccount 18,875 1.538 9.839 51,767 6.41% 1.00% 2.80% -15.56% -15.21% SVS Focused Large Cap Growth Subaccount 4,046 9.367 9.367 37,898 N/A 1.40% 1.40% -18.10% -18.10% SVS Growth and Income Subaccount 13,923 7.597 7.597 105,768 0.42% 1.40% 1.40% -13.50% -13.50%
32 (2) Financial Highlights (continued)
At December 31, 2001 For the year ended December 31, 2001 -------------------------------- ----------------------------------------------- Net Units Unit Fair Value Assets Investment Expense Ratio (b) Total Return (c) --------------- ----------------- ---------------- Income (000s) Lowest Highest (000s) Ratio (a) Lowest Highest Lowest Highest ------ ------ ------- ------ --------- ------ ------- ------ ------- SVS Growth Opportunities Subaccount 15,117 6.219 6.219 94,012 N/A 1.40% 1.40% -24.75% -24.75% SVS Index 500 Subaccount 17,576 8.270 8.270 145,352 0.29% 1.40% 1.40% -13.27% -13.27% SVS Mid Cap Growth Subaccount 4,649 8.748 8.748 40,665 N/A 1.40% 1.40% -12.52% -12.52% (d) SVS Strategic Equity Subaccount 4,707 7.529 7.529 35,442 N/A 1.40% 1.40% -24.71% -24.71% (d) SVS Venture Value Subaccount 9,293 9.412 9.412 87,458 N/A 1.40% 1.40% -5.88% -5.88% (d)
(a.) This ratio represents dividends recorded by the subaccount from the underlying mutual fund divided by the average net assets. This ratio excludes the Expense Ratio. N/A is noted if the fund did not pay any dividends. (b.) This ratio represents the annualized contract expenses of the separate account, resulting in a direct reduction of unit values, consisting primarily of mortality and expense charges. Charges that require redemption of contract owner units are excluded. (c.) Total return is calculated using the beginning and ending unit value, which reflects the changes in the underlying fund values and reductions related to the Expense Ratio, for the period indicated. (d.) Total Return is calculated for the period of May 1, 2001 to December 31, 2001. (3) Summary of Investments Investments, at cost, at December 31, 2001, are as follows (in thousands, differences are due to rounding):
Shares Owned Cost ----------------------- The Alger American Fund: Alger American Balanced Fund ..................................................... 6,424 $ 85,681 Alger American Growth Fund ....................................................... 591 24,527 Alger American Leveraged AllCap Fund ............................................. 2,326 90,210 Alger American MidCap Growth Fund ................................................ 265 4,567 Alger American Small Capitalization Fund ......................................... 220 3,701 American Century Variable Portfolios, Inc.: American Century VP Income & Growth Fund ......................................... 838 5,757 American Century VP Value Fund ................................................... 3,142 21,874 Credit Suisse Trust: Credit Suisse Trust Emerging Markets Fund ........................................ 1,977 19,683 Credit Suisse Trust Global Post-Venture Capital Fund ............................. 1,438 19,307 The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund ......................................... 589 19,123 Dreyfus Investment Portfolios: Dreyfus I.P. Mid Cap Stock Fund .................................................. 6,120 82,912
33 (3) Summary of Investments (continued)
Shares Owned Cost --------------------------- Fidelity Variable Insurance Products Fund: Fidelity VIP Equity Income Fund ................................ 2,207 $ 50,759 Fidelity VIP Growth Fund ....................................... 2,426 91,929 Fidelity Variable Insurance Products Fund II: Fidelity VIP II Asset Manager Fund ............................. 498 7,486 Fidelity VIP II Contrafund Fund ................................ 3,109 65,866 Fidelity VIP II Index 500 Fund ................................. 1,129 151,131 Franklin Templeton Variable Insurance Products Trust: Templeton Developing Markets Securities Fund ................... 6 38 INVESCO Variable Investment Funds, Inc.: INVESCO VIF Utilities Fund ..................................... 485 6,979 Janus Aspen Series: Janus Aspen Aggressive Growth Fund ............................. 3,715 115,814 Janus Aspen Balanced Fund ...................................... 7,142 166,669 Janus Aspen Capital Appreciation Fund .......................... 99 2,992 Janus Aspen Growth Fund ........................................ 9,535 256,437 Janus Aspen Growth and Income Fund ............................. 5,012 94,283 Janus Aspen Worldwide Growth Fund .............................. 7,449 227,433 J.P. Morgan Series Trust II: J.P. Morgan Small Company Fund ................................. 814 10,303 Pilgrim Emerging Markets Fund, Inc.: Pilgrim Emerging Markets Fund .................................. 1,102 6,657 Pilgrim Natural Resources Trust: Pilgrim Natural Resources Trust Fund ........................... 262 3,376 PIMCO Variable Insurance Trust: PIMCO Foreign Bond Fund ........................................ 40 379 PIMCO Low Duration Bond Fund ................................... 28 272 Scudder Variable Series I: Scudder 21/st/ Century Growth Fund ............................. 4,184 27,542 Scudder Bond Fund .............................................. 1,949 13,421 Scudder Capital Growth Fund .................................... 2,771 56,916 Scudder Global Discovery Fund .................................. 8,574 93,459 Scudder Growth and Income Fund ................................. 4,902 47,649 Scudder Health Sciences Fund ................................... 4,182 42,936 Scudder International Fund ..................................... 10,206 85,034 Scudder Money Market Fund ...................................... 65 65 Scudder Variable Series II: Scudder Aggressive Growth Fund ................................. 3,922 49,044 Scudder Blue Chip Fund ......................................... 8,050 109,830 Scudder Contrarian Value Fund .................................. 9,606 129,213 Scudder Global Blue Chip Fund .................................. 2,369 24,981 Scudder Government Securities Fund ............................. 13,029 157,410 Scudder Growth Fund ............................................ 14,365 373,073
34 (3) Summary of Investments (continued)
Shares Owned Cost --------------------------- Scudder Variable Series II (continued): Scudder International Research Fund ............................ 7,876 $ 94,008 Scudder Investment Grade Bond Fund ............................. 5,655 64,404 Scudder Money Market Fund ...................................... 407,432 407,432 Scudder New Europe Fund ........................................ 2,382 17,047 Scudder Small Cap Growth Fund .................................. 11,870 201,818 Scudder Small Cap Value Fund ................................... 8,617 103,320 Scudder Strategic Income Fund .................................. 1,120 11,422 Scudder Technology Growth Fund ................................. 23,245 310,182 Scudder Total Return Fund ...................................... 25,115 605,064 SVS Dreman Financial Services Fund ............................. 4,789 50,688 SVS Dreman High Return Equity Fund ............................. 25,944 271,707 SVS Dynamic Growth Fund ........................................ 2,235 18,538 SVS Focus Value + Growth Fund .................................. 3,958 59,520 SVS Focused Large Cap Growth Fund .............................. 4,002 40,028 SVS Growth and Income Fund ..................................... 11,687 114,059 SVS Growth Opportunities Fund .................................. 11,946 117,405 SVS Index 500 Fund ............................................. 17,000 152,219 SVS Mid Cap Growth Fund ........................................ 4,605 39,196 SVS Strategic Equity Fund ...................................... 4,663 34,841 SVS Venture Value Fund ......................................... 9,206 85,062 ------------ Total Investments at Cost ............................ $ 5,851,458 ============
(4) Transactions with Affiliates KILICO assumes mortality risks associated with the annuity contracts as benefits paid to the contract owner or beneficiary may exceed contract value. KILICO also incurs all expenses involving administration and maintenance of the contracts, which may exceed charges assessed. In return, KILICO assesses that portion of each subaccount representing assets under the Kemper Advantage III flexible payment contracts with a daily charge for mortality and expense risk and administrative costs which amounts to an aggregate of one percent (1.00%) per annum. KILICO also assesses that portion of each subaccount representing assets under the Kemper Advantage III periodic payment contracts with a daily asset charge for mortality and expense risk and administrative costs which amounts to an aggregate of one and three-tenths percent (1.30%) per annum. KILICO assesses that portion of each subaccount representing assets under the Scudder Passport contracts with a daily asset charge for mortality and expense risk and administrative costs which amounts to an aggregate of one and one-quarter percent (1.25%) per annum. KILICO assesses that portion of each subaccount representing assets under the Scudder Destinations contracts with a daily asset charge for mortality and expense risk and administrative costs, which amounts to an aggregate of one and four-tenths percent (1.40%) per annum. KILICO assesses that portion of each subaccount representing assets under the Farmers Variable Annuity I contracts with a daily asset charge for mortality and expense risk and administrative costs which amounts to an aggregate of one and four-tenths percent (1.40%) per annum. KILICO assesses that portion of each subaccount representing assets under the Zurich Preferred contracts with a daily asset charge for mortality and expense risk and administrative costs which amounts to an aggregate of one and one-quarter percent (1.25%) per annum. KILICO assesses that portion of each subaccount representing assets under the Zurich Preferred Plus contracts with a daily asset charge for mortality and expense risk and administrative costs which amounts to an aggregate of one and one-half percent (1.50%) per annum. The Scudder Passport and Scudder Destinations contracts offer the dollar cost averaging (DCA) program through the Money Market Subaccount and have no daily asset charge deduction. KILICO also assesses each Kemper Advantage III contract participating in one or more of the subaccounts at any time during the year a records maintenance charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is assessed on December 31st of each calendar year. For contracts purchased June 1, 1993 and subsequent, the charge is a maximum of $30 per year and is assessed ratably every quarter of each calendar year, except in those states which have yet to approve these contract charges. The charge is assessed whether or not any purchase payments have been made during the year. 35 KILICO also assesses against each Scudder Passport, Scudder Destinations and Farmers Variable Annuity I contract participating in one or more of the subaccounts a records maintenance charge of $30, generally taken at the end of each contract year. KILICO assesses each Zurich Preferred and Zurich Preferred Plus contract participating in one or more of the subaccounts a records maintenance charge of $7.50 quarterly for contracts with contract value under $25,000, $3.75 quarterly for contracts with contract value between $25,000 and $50,000. The records maintenance charge for Kemper Advantage III, Scudder Passport, Scudder Destinations, Farmers Variable Annuity I, Zurich Preferred and Zurich Preferred Plus contracts are waived for all individual contracts whose investment value exceeds $50,000 on the date of assessment. For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse each of the Kemper Advantage III contract owners participating in the Scudder Money Market, Scudder Total Return, Scudder High Yield and Scudder Growth Subaccounts, whose direct and indirect operating expenses exceed eighty hundredths of one percent (.80%) of average daily net assets. In determining reimbursement of direct and indirect operating expenses, for each subaccount, charges for mortality and expense risks and administrative expenses, and records maintenance charges are excluded and, for each subaccount, charges for taxes, extraordinary expenses, and brokerage and transaction costs are excluded. During the year ended December 31, 2001, no such payment was required. KILICO assesses an annual charge for the Guaranteed Retirement Income Benefit ("GRIB") option, related to the Scudder Destinations and Farmers Variable Annuity I contracts. GRIB guarantees the minimum benefit value that will be applied to purchase an annuity option. The annual charge of .25% of contract value, if taken, will be deducted pro rata from each invested subaccount quarterly. Proceeds payable on the redemption of units are reduced by the amount of any applicable contingent deferred sales charge due to KILICO. Zurich Scudder Investments, Inc., an affiliated company, is the investment manager of the Scudder Variable Series I and the Scudder Variable Series II series of funds. On December 4, 2001, Deutsche Bank and ZFS announced that they have signed a definitive agreement under which Deutsche Bank will acquire 100% of ZSI, with the exception of ZSI's UK operations, Threadneedle Investments. The transaction is expected to be completed, subject to regulatory approval and satisfaction of other conditions, in the first half of 2002. Investors Brokerage Services, Inc. and PMG Securities, Inc., wholly-owned subsidiaries of KILICO, are the principal underwriters for the Separate Account. (5) Contract Owners' Equity The contract owners' equity is affected by the investment results of, and contract charges to, each subaccount. The accompanying financial statements include only contract owners' payments pertaining to the variable portions of their contracts and exclude any payments for the market value adjusted or fixed portions, the latter being included in the general account of KILICO. Contract owners may elect to annuitize the contract under one of the several annuity options, as specified in the prospectus. Included in the following table of contract owners' equity is approximately $11,670 thousand, $3,896 thousand and $1,050 thousand of annuitized contracts for the Kemper Advantage III, Kemper Passport and Scudder Destinations, respectively. Contract owners' equity at December 31, 2001 is as follows (in thousands, except unit value; differences are due to rounding):
Contract Owners' Number of Units Unit Value Equity --------------- ---------- ---------------- FARMERS VARIABLE ANNUITY I CONTRACTS Franklin Templeton Variable Insurance Products Trust: Templeton Developing Markets Securities Subaccount 3 $8.860 $ 30 Janus Aspen Series: Janus Aspen Capital Appreciation Subaccount 242 8.459 2,044
36 (5) Contract Owners' Equity (continued)
Contract Owners' Number of Units Unit Value Equity --------------- ------------------ ------------------ PIMCO Variable Insurance Trust: PIMCO Foreign Bond Subaccount 35 $ 11.099 $ 388 PIMCO Low Duration Bond Subaccount 24 11.366 278 Scudder Variable Series I: Scudder Bond Subaccount 25 11.100 276 Scudder Growth and Income Subaccount 132 8.693 1,149 Scudder International Subaccount 18 7.917 146 Scudder Money Market Subaccount 6 10.773 65 Scudder Variable Series II: Scudder Government Securities Subaccount 58 11.508 673 Scudder High Yield Subaccount 4 9.271 33 Scudder Small Cap Growth Subaccount 19 9.348 179 SVS Dreman High Return Equity Subaccount 90 11.674 1,054 ---------- Total Farmers Variable Annuity I Contract Owners' Equity $ 6,316 ---------- KEMPER ADVANTAGE III CONTRACTS The Alger American Fund: Alger American Growth Subaccount 418 51.718* 21,602 Alger American MidCap Growth Subaccount 150 28.262* 4,242 Alger American Small Capitalization Subaccount 113 31.314* 3,540 American Century Variable Portfolios, Inc.: American Century VP Income & Growth Subaccount 816 6.340* 5,166 American Century VP Value Subaccount 2,835 7.670* 21,722 Credit Suisse Trust: Credit Suisse Trust Emerging Markets Subaccount 18 8.338* 152 The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund Subaccount 171 26.966* 4,601 Fidelity Variable Insurance Products Fund: Fidelity VIP Equity Income Subaccount 1,573 30.685* 48,166 Fidelity VIP Growth Subaccount 1,582 50.324* 79,474 Fidelity Variable Insurance Products Fund II: Fidelity VIP II Asset Manager Subaccount 323 22.419* 7,230 Fidelity VIP II Contrafund Subaccount 2,463 25.377* 62,286 Fidelity VIP II Index 500 Subaccount 1,083 135.688* 146,729 Janus Aspen Series: Janus Aspen Aggressive Growth Subaccount 3,382 24.135* 81,392 Janus Aspen Balanced Subaccount 5,900 27.281* 160,687 Janus Aspen Growth Subaccount 4,776 23.120* 110,200 Janus Aspen Worldwide Growth Subaccount 6,828 31.014* 211,344 J.P. Morgan Series Trust II: J.P. Morgan Small Company Subaccount 605 13.491* 8,159 Pilgrim Emerging Markets Fund, Inc.: Pilgrim Emerging Markets Fund Subaccount 713 7.315* 5,167 Pilgrim Natural Resources Trust: Pilgrim Natural Resources Trust Subaccount 257 13.054* 3,337
37 (5) Contract Owners' Equity (continued)
Contract Owners' Number of Units Unit Value Equity --------------- ------------------ ------------------ Scudder Variable Series I: Scudder Bond Subaccount 1,484 $ 7.342* $ 10,880 Scudder Capital Growth Subaccount 90 20.493* 1,845 Scudder International Subaccount 858 10.649* 9,131 Scudder Variable Series II: Scudder Contrarian Value Subaccount 20,161 1.805* 36,321 Scudder Government Securities Subaccount 24,060 2.068* 49,519 Scudder Growth Subaccount 35,987 5.909* 207,401 Scudder High Yield Subaccount 16,678 5.626* 92,525 Scudder International Research Subaccount 26,612 1.559* 41,232 Scudder Investment Grade Bond Subaccount 6,516 1.294* 8,409 Scudder Money Market Subaccount 25,501 2.672* 67,596 Scudder Small Cap Growth Subaccount 36,084 2.142* 76,900 Scudder Small Cap Value Subaccount 18,550 1.289* 23,883 Scudder Technology Growth Subaccount 1,524 0.926* 1,411 Scudder Total Return Subaccount 55,399 7.094* 391,352 SVS Focus Value + Growth Subaccount 7,886 1.548* 12,145 ----------- Total Kemper Advantage III Contract Owners' Equity $2,015,747 ----------- SCUDDER DESTINATIONS CONTRACTS The Alger American Fund: Alger American Balanced Subaccount 8,205 10.240 84,021 Alger American Leveraged AllCap Subaccount 9,057 8.103 73,387 Credit Suisse Trust: Credit Suisse Trust Emerging Markets Subaccount 1,918 8.602 16,502 Credit Suisse Trust Global Post-Venture Capital Subaccount 1,586 8.818 13,982 The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund Subaccount 1,444 7.563 10,920 Dreyfus Investment Portfolios Dreyfus I.P. Mid Cap Stock Subaccount 7,541 11.199 84,452 INVESCO Variable Investment Funds, Inc.: INVESCO VIF Utilities Subaccount 1,004 6.796 6,825 Janus Aspen Series: Janus Aspen Growth Subaccount 7,453 10.607 79,051 Janus Aspen Growth and Income Subaccount 4,984 14.953 74,528 Scudder Variable Series I: Scudder 21st Century Growth Subaccount 4,197 6.211 26,068 Scudder Capital Growth Subaccount 4,261 10.201 43,467 Scudder Global Discovery Subaccount 6,536 11.412 74,591 Scudder Growth and Income Subaccount 4,982 8.527 42,480 Scudder Health Sciences Subaccount 4,222 10.551 44,543 Scudder International Subaccount 9,022 7.892 71,201 Scudder Variable Series II: Scudder Aggressive Growth Subaccount 3,999 10.022 40,084 Scudder Blue Chip Subaccount 9,110 9.680 88,177 Scudder Contrarian Value Subaccount 6,319 10.913 68,955 Scudder Global Blue Chip Subaccount 2,280 10.029 22,866 Scudder Government Securities Subaccount 7,960 11.896 94,689 Scudder Growth Subaccount 5,824 8.272 48,180
38 (5) Contract Owners' Equity (continued)
Contract Owners' Number of Units Unit Value Equity --------------- -------------- ----------------- Scudder Variable Series II (continued): Scudder High Yield Subaccount 6,665 $8.857 $59,037 Scudder International Research Subaccount 1,829 7.918 14,484 Scudder Investment Grade Bond Subaccount 4,482 11.369 50,963 Scudder Money Market Subaccount 22,020 11.605 251,330 Scudder New Europe Subaccount 2,391 6.576 15,722 Scudder Small Cap Growth Subaccount 6,740 9.082 61,213 Scudder Small Cap Value Subaccount 7,886 10.177 80,256 Scudder Strategic Income Subaccount 1,041 10.483 10,914 Scudder Technology Growth Subaccount 23,797 9.079 216,049 Scudder Total Return Subaccount 10,298 10.615 109,313 SVS Dreman Financial Services Subaccount 4,691 11.006 51,630 SVS Dreman High Return Equity Subaccount 23,548 11.865 279,395 SVS Dynamic Growth Subaccount 2,256 8.718 19,666 SVS Focus Value + Growth Subaccount 2,736 9.839 26,920 SVS Focused Large Cap Growth Subaccount 4,046 9.367 37,898 SVS Growth and Income Subaccount 13,923 7.597 105,768 SVS Growth Opportunities Subaccount 15,117 6.219 94,013 SVS Index 500 Subaccount 17,576 8.270 145,352 SVS Mid Cap Growth Subaccount 4,649 8.748 40,665 SVS Strategic Equity Subaccount 4,707 7.529 35,442 SVS Venture Value Subaccount 9,293 9.412 87,458 ---------- Total Scudder Destinations Contract Owners' Equity $2,902,459 ---------- SCUDDER PASSPORT CONTRACTS Scudder Variable Series II: Scudder Blue Chip Subaccount 7,716 1.164 8,985 Scudder Contrarian Value Subaccount 12,953 1.806 23,399 Scudder Government Securities Subaccount 9,259 1.661 15,383 Scudder Growth Subaccount 23,754 1.951 46,333 Scudder High Yield Subaccount 21,690 1.740 37,740 Scudder International Research Subaccount 11,212 1.556 17,451 Scudder Investment Grade Bond Subaccount 4,061 1.293 5,249 Scudder Money Market Subaccount 9,724 1.476 13,486 Scudder Small Cap Growth Subaccount 6,477 2.139 13,851 Scudder Small Cap Value Subaccount 7,547 1.291 9,742 Scudder Strategic Income Subaccount 533 1.095 584 Scudder Total Return Subaccount 34,091 1.939 66,089 SVS Focus Value + Growth Subaccount 8,253 1.544 12,745 -------- Total Scudder Passport Contract Owners' Equity $271,037 -------- ZURICH PREFERRED CONTRACTS The Alger American Fund: Alger American Growth Subaccount 2 40.912 75 Alger American MidCap Growth Subaccount 4 28.092 103 Alger American Small Capitalization Subaccount 1 16.250 15 American Century Variable Portfolios, Inc.: American Century VP Income & Growth Subaccount 8 6.395 53 American Century VP Value Subaccount 85 7.377* 625 Credit Suisse Trust: Credit Suisse Trust Emerging Markets Subaccount 1 8.611 5
39 (5) Contract Owners' Equity (continued)
Contract Owners' Number of Units Unit Value Equity --------------- --------------- ------------------ The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund Subaccount 1 $ 26.410 $ 32 Fidelity Variable Insurance Products Fund: Fidelity VIP Equity Income Subaccount 24 23.778* 564 Fidelity VIP Growth Subaccount 23 35.238* 825 Fidelity Variable Insurance Products Fund II: Fidelity VIP II Contrafund Subaccount 4 20.447 73 Fidelity VIP II Index 500 Subaccount 1 128.376 120 Janus Aspen Series: Janus Aspen Aggressive Growth Subaccount 7 22.258* 147 Janus Aspen Balanced Subaccount 10 23.897 245 Janus Aspen Growth Subaccount 8 20.408 155 Janus Aspen Worldwide Growth Subaccount 12 30.210 363 J.P. Morgan Series Trust II: J.P. Morgan Small Company Subaccount 128 12.981* 1,664 Scudder Variable Series I: Scudder Bond Subaccount 121 7.039* 856 Scudder Capital Growth Subaccount 1 18.260 21 Scudder International Subaccount 74 9.666* 715 Scudder Variable Series II: Scudder Government Securities Subaccount 131 1.262 166 Scudder Growth Subaccount 15 2.296 33 Scudder High Yield Subaccount 53 0.923 49 Scudder Investment Grade Bond Subaccount 265 1.188 314 Scudder Money Market Subaccount 70,525 1.049* 74,061 Scudder Small Cap Growth Subaccount 107 1.512 162 Scudder Technology Growth Subaccount 78 0.920 71 Scudder Total Return Subaccount 38 2.388 92 -------- Total Zurich Preferred Contract Owners' Equity $ 81,600 -------- ZURICH PREFERRED PLUS CONTRACTS The Alger American Fund: Alger American Growth Subaccount 3 41.218* 126 Alger American MidCap Growth Subaccount 19 28.301* 531 Alger American Small Capitalization Subaccount 5 16.379* 82 American Century Variable Portfolios, Inc.: American Century VP Income & Growth Subaccount 29 6.389* 184 American Century VP Value Subaccount 151 7.356* 1,108 Credit Suisse Trust: Credit Suisse Trust Emerging Markets Subaccount 0 8.347 3 The Dreyfus Socially Responsible Growth Fund, Inc.: Dreyfus Socially Responsible Growth Fund Subaccount 4 26.394* 103 Fidelity Variable Insurance Products Fund: Fidelity VIP Equity Income Subaccount 62 22.494* 1,400 Fidelity VIP Growth Subaccount 38 33.231* 1,257 Fidelity Variable Insurance Products Fund II: Fidelity VIP II Contrafund Subaccount 8 19.910* 155 Fidelity VIP II Index 500 Subaccount 3 128.025* 410
40 (5) Contract Owners' Equity (continued)
Contract Owners' Number of Units Unit Value Equity --------------- ---------------- ------------------- Janus Aspen Series: Janus Aspen Aggressive Growth Subaccount 7 $21.740* $ 159 Janus Aspen Balanced Subaccount 20 22.916* 450 Janus Aspen Growth Subaccount 12 19.713* 231 Janus Aspen Worldwide Growth Subaccount 15 28.361* 433 J.P. Morgan Series Trust II: J.P. Morgan Small Company Subaccount 70 13.071* 914 Scudder Variable Series I: Scudder Bond Subaccount 204 7.099* 1,446 Scudder Capital Growth Subaccount 0 18.414 0 Scudder International Subaccount 111 9.749* 1,078 Scudder Variable Series II: Scudder Government Securities Subaccount 180 1.219* 219 Scudder Growth Subaccount 3 2.084 6 Scudder High Yield Subaccount 184 0.806* 148 Scudder Investment Grade Bond Subaccount 128 1.137* 146 Scudder Money Market Subaccount 1,029 1.009* 1,039 Scudder Small Cap Growth Subaccount 182 1.268* 230 Scudder Technology Growth Subaccount 63 0.926* 58 Scudder Total Return Subaccount 60 2.232* 134 ---------- Total Zurich Preferred Plus Contract Owners' Equity $ 12,051 ---------- Total KILICO Variable Annuity Separate Account $5,289,210 ==========
* Average unit value 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Kemper Investors Life Insurance Company: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and its subsidiaries (the ''Company'') at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 22, 2002 42 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, December 31, 2001 2000 ------------ ------------ Assets Fixed maturity securities available for sale, at fair value (amortized cost: December 31, 2001, $3,057,139; December 31, 2000, $3,189,719).............. $ 3,094,560 $ 3,157,169 Equity securities, at fair value (cost: December 31, 2001 and December 31, 2000, $65,473)................................................ 67,731 63,879 Short-term investments....................................................... 159,105 15,900 Joint venture mortgage loans................................................. 104,303 67,473 Third-party mortgage loans................................................... 63,897 63,476 Other real estate-related investments........................................ 8,240 9,468 Policy loans................................................................. 239,787 256,226 Other invested assets........................................................ 20,799 21,792 ----------- ----------- Total investments........................................................ 3,758,422 3,655,383 Cash......................................................................... 57,374 34,101 Accrued investment income.................................................... 140,762 134,585 Reinsurance recoverable...................................................... 240,536 310,183 Deferred insurance acquisition costs......................................... 381,506 240,801 Value of business acquired................................................... 75,806 95,621 Goodwill..................................................................... 178,418 191,163 Other intangible assets...................................................... 6,261 4,531 Deferred income taxes........................................................ 95,688 120,781 Federal income tax receivable................................................ 13,866 8,803 Receivable on sales of securities............................................ 2,100 8,286 Other assets and receivables................................................. 30,336 22,766 Assets held in separate accounts............................................. 13,108,753 11,179,639 ----------- ----------- Total assets............................................................. $18,089,828 $16,006,643 =========== =========== Liabilities Future policy benefits....................................................... $ 3,634,161 $ 3,588,140 Other policyholder benefits and funds payable................................ 436,449 399,585 Other accounts payable and liabilities....................................... 92,472 109,152 Liabilities related to separate accounts..................................... 13,108,753 11,179,639 ----------- ----------- Total liabilities........................................................ 17,271,835 15,276,516 ----------- ----------- Commitments and contingent liabilities Stockholder's equity Capital stock--$10 par value, authorized 300,000 shares; outstanding 250,000 shares..................................................................... 2,500 2,500 Additional paid-in capital................................................... 804,347 804,347 Accumulated other comprehensive income (loss)................................ 16,551 (32,718) Retained deficit............................................................. (5,405) (44,002) ----------- ----------- Total stockholder's equity............................................... 817,993 730,127 ----------- ----------- Total liabilities and stockholder's equity............................... $18,089,828 $16,006,643 =========== ===========
See accompanying notes to consolidated financial statements. 43 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Year Ended December 31, ------------------------------ 2001 2000 1999 --------- --------- -------- Revenue Net investment income........................... $ 269,419 $ 257,470 $264,640 Realized investment gains (losses).............. 20,660 (8,277) (9,549) Premium income.................................. 486 8,394 21,990 Separate account fees and charges............... 70,993 68,293 74,715 Other income.................................... 36,739 35,030 11,623 --------- --------- -------- Total revenue............................... 398,297 360,910 363,419 --------- --------- -------- Benefits and Expenses Interest credited to policyholders.............. 159,127 152,289 162,243 Claims incurred and other policyholder benefits. 21,933 13,718 18,185 Taxes, licenses and fees........................ 10,714 17,861 30,234 Commissions..................................... 179,585 114,162 67,555 Operating expenses.............................. 66,026 61,671 45,989 Deferral of insurance acquisition costs......... (166,202) (104,608) (69,814) Amortization of insurance acquisition costs..... 18,052 23,231 5,524 Amortization of value of business acquired...... 15,606 19,926 12,955 Amortization of goodwill........................ 12,744 12,744 12,744 Amortization of other intangible assets......... 961 368 -- --------- --------- -------- Total benefits and expenses................. 318,546 311,362 285,615 --------- --------- -------- Income before income tax expense................ 79,751 49,548 77,804 Income tax expense.............................. 28,154 1,247 32,864 --------- --------- -------- Net income.................................. $ 51,597 $ 48,301 $ 44,940 ========= ========= ========
See accompanying notes to consolidated financial statements. 47 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
Year Ended December 31, ----------------------------- 2001 2000 1999 -------- -------- --------- Net income.................................................................... $ 51,597 $ 48,301 $ 44,940 -------- -------- --------- Other comprehensive income (loss), before tax: Unrealized holding gains (losses) on investments arising during period: Unrealized holding gains (losses) on investments........................... 54,155 61,487 (180,267) Adjustment to value of business acquired................................... (5,914) (3,400) 12,811 Adjustment to deferred insurance acquisition costs......................... (1,050) (230) 5,726 -------- -------- --------- Total unrealized holding gains (losses) on investments arising during period........................................................ 47,191 57,857 (161,730) -------- -------- --------- Less reclassification adjustments for items included in net income: Adjustment for (gains) losses included in realized investment gains (losses)................................................................. (9,203) (24,583) 16,651 Adjustment for amortization of premium on fixed maturity securities included in net investment income........................................ (5,732) (4,538) (10,533) Adjustment for (gains) losses included in amortization of value of business acquired........................................................ (1,705) 214 (454) Adjustment for losses included in amortization of insurance acquisition costs.................................................................... 6,395 13 1,892 -------- -------- --------- Total reclassification adjustments for items included in net income............................................................ (10,245) (28,894) 7,556 -------- -------- --------- Other comprehensive income (loss), before related income tax expense (benefit)................................................................... 57,436 86,751 (169,286) Related income tax expense (benefit).......................................... 8,167 (1,350) (15,492) -------- -------- --------- Other comprehensive income (loss), net of tax....................... 49,269 88,101 (153,794) -------- -------- --------- Comprehensive income (loss)......................................... $100,866 $136,402 $(108,854) ======== ======== =========
See accompanying notes to consolidated financial statements. 45 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
Year Ended December 31, ------------------------------ 2001 2000 1999 -------- --------- --------- Capital stock, beginning and end of period........................ $ 2,500 $ 2,500 $ 2,500 -------- --------- --------- Additional paid-in capital, beginning and end of period........... 804,347 804,347 804,347 -------- --------- --------- Accumulated other comprehensive income (loss), beginning of period (32,718) (120,819) 32,975 Other comprehensive income (loss), net of tax..................... 49,269 88,101 (153,794) -------- --------- --------- End of period.................................................. 16,551 (32,718) (120,819) -------- --------- --------- Retained earnings (deficit), beginning of period.................. (44,002) (56,023) 14,037 Net income........................................................ 51,597 48,301 44,940 Dividends to parent............................................... (13,000) (36,280) (115,000) -------- --------- --------- End of period.................................................. (5,405) (44,002) (56,023) -------- --------- --------- Total stockholder's equity................................. $817,993 $ 730,127 $ 630,005 ======== ========= =========
See accompanying notes to consolidated financial statements. 46 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ----------------------------------- 2001 2000 1999 ----------- --------- ----------- Cash flows from operating activities Net income.......................................................... $ 51,597 $ 48,301 $ 44,940 Reconciliation of net income to net cash from operating activities: Realized investment (gains) losses.............................. (20,660) 8,277 9,549 Net change in trading account securities........................ -- -- (51,239) Interest credited and other charges............................. 169,084 142,344 158,557 Deferred insurance acquisition costs, net....................... (148,150) (81,377) (64,290) Amortization of value of business acquired...................... 15,606 19,926 12,955 Amortization of goodwill........................................ 12,744 12,744 12,744 Amortization of discount and premium on investments............. 5,731 4,538 11,157 Amortization of other intangible assets......................... 961 368 -- Deferred income taxes........................................... 16,927 (25,930) (42,952) Net change in current federal income taxes...................... (5,063) (18,593) (10,594) Benefits and premium taxes due related to separate account business-owned life insurance................................. (6,392) (61,476) 149,477 Other, net...................................................... 5,120 42,377 (11,901) ----------- --------- ----------- Net cash flow from operating activities...................... 97,505 91,499 218,403 ----------- --------- ----------- Cash flows from investing activities Cash from investments sold or matured: Fixed maturity securities held to maturity...................... 281,664 170,465 335,735 Fixed maturity securities sold prior to maturity................ 1,331,168 589,933 1,269,290 Equity securities............................................... -- 1,271 11,379 Mortgage loans, policy loans and other invested assets.......... 60,495 73,177 75,389 Cost of investments purchased or loans originated: Fixed maturity securities....................................... (1,481,699) (569,652) (1,455,496) Equity securities............................................... -- (1,264) (8,703) Mortgage loans, policy loans and other invested assets.......... (41,395) (47,109) (43,665) Investment in subsidiaries...................................... (2,690) (4,899) -- Short-term investments, net......................................... (143,205) 26,491 15,943 Net change in receivable and payable for securities transactions.... 6,186 (4,786) -- Net change in other assets.......................................... 2,248 (5,141) (2,725) ----------- --------- ----------- Net cash from investing activities........................... 12,772 228,486 197,147 ----------- --------- ----------- Cash flows from financing activities Policyholder account balances: Deposits........................................................ 680,106 608,363 383,874 Withdrawals..................................................... (733,521) (881,888) (694,848) Dividends to parent................................................. (13,000) (36,280) (115,000) Cash overdrafts..................................................... (20,589) 11,906 8,953 ----------- --------- ----------- Net cash from financing activities........................... (87,004) (297,899) (417,021) ----------- --------- ----------- Net increase (decrease) in cash.............................. 23,273 22,086 (1,471) Cash, beginning of period.............................................. 34,101 12,015 13,486 ----------- --------- ----------- Cash, end of period.................................................... $ 57,374 $ 34,101 $ 12,015 =========== ========= ===========
See accompanying notes to consolidated financial statements. 47 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Basis of presentation Kemper Investors Life Insurance Company and its subsidiaries (''the Company'') issue fixed and variable annuity products, variable life, term life and interest-sensitive life insurance products marketed primarily through a network of financial institutions, securities brokerage firms, insurance agents and financial planners. The Company is licensed in the District of Columbia and all states except New York. Zurich Kemper Life Insurance Company of New York ("ZKLICONY"), a newly formed, wholly-owned subsidiary, received its license from the state of New York early in 2001 and began writing business in May of 2001. The Company is a wholly-owned subsidiary of Kemper Corporation (''Kemper''), a non-operating holding company. Kemper is a wholly-owned subsidiary of Zurich Group Holding (''ZGH'' or ''Zurich''), a Swiss holding company. ZGH is wholly-owned by Zurich Financial Services (''ZFS''), a Swiss holding company. The financial statements include the accounts of the Company on a consolidated basis. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements in order for them to conform to the 2001 presentation. The accompanying consolidated financial statements of the Company as of and for the years ended December 31, 2001, 2000 and 1999, have been prepared in conformity with accounting principles generally accepted in the United States of America. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets or liabilities at the date of the financial statements. As a result, actual results reported as revenue and expenses could differ from the estimates reported in the accompanying financial statements. As further discussed in the accompanying notes to the consolidated financial statements, significant estimates and assumptions affect goodwill, deferred insurance acquisition costs, the value of business acquired, provisions for real estate-related losses and reserves, other-than-temporary declines in values for fixed maturity securities, the valuation allowance for deferred income taxes and the calculation of fair value disclosures for certain financial instruments. Goodwill and other intangibles The Company reviews goodwill and other intangibles (''intangible assets'') to determine if events or changes in circumstances may have affected the recoverability of the outstanding intangible assets as of each reporting period. In the event that the Company determines that the intangible assets are not recoverable, it would amortize such amounts as additional amortization expense in the accompanying financial statements. As of December 31, 2001, the Company believes that no such adjustment is necessary. During 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 141 (''SFAS 141''), Business Combinations and Statement of Financial Accounting Standard 142 ("SFAS 142"), Goodwill and Other Intangible Assets in July 2001. SFAS 141 requires that the purchase method of accounting must be used for all business combinations initiated after June 30, 2001. SFAS 142 primarily addresses the accounting that must be applied to goodwill and other intangible assets subsequent to their acquisition. The Company intends to adopt SFAS 141 and SFAS 142 in the first quarter of 2002, however they are not expected to have a material impact on the Company's 2002 financial results. The difference between ZFS's cost of acquiring the Company and the net fair value of the assets and liabilities as of January 4, 1996 was recorded as goodwill. Goodwill is amortized on a straight-line basis over a 48 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) twenty-year period. Other intangible assets of $7.6 million, recorded in 2001 and 2000 in connection with the purchase of PMG, are being amortized on a straight-line basis over a ten-year period. Value of business acquired The value of business acquired reflects the estimated fair value of the Company's life insurance business in force and represents the portion of the cost to acquire the Company that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition, January 4, 1996. Such value is the present value of the actuarially determined projected cash flows for the acquired policies. The value of the business acquired is amortized over the estimated contract life of the business acquired in relation to the present value of estimated gross profits using current assumptions based on an interest rate equal to the liability or contract rate on the value of business acquired. The estimated amortization and accretion of interest for the value of business acquired for each of the years through December 31, 2006 are as follows:
Projected Accretion Beginning Of Ending Year Ended December 31, Balance Amortization Interest Balance ----------------------- --------- ------------ --------- -------- (in thousands) 1999 (actual)..... $126,066 $(20,891) $7,936 $113,111 2000 (actual)..... 113,111 (26,805) 6,879 93,185 2001 (actual)..... 93,185 (21,394) 5,788 77,579 2002.............. 77,579 (17,308) 4,548 64,819 2003.............. 64,819 (15,003) 3,812 53,628 2004.............. 53,628 (13,464) 3,142 43,306 2005.............. 43,306 (11,686) 2,527 34,147 2006.............. 34,147 (10,191) 1,971 25,927
The projected ending balance of the value of business acquired will be further adjusted to reflect the impact of unrealized gains or losses on fixed maturity securities held as available for sale in the investment portfolio. Such adjustments are not recorded in the Company's net income but rather are recorded as a credit or charge to accumulated other comprehensive income, net of income tax. This adjustment decreased the value of business acquired by $1.8 million as of December 31, 2001 and increased the value of business acquired by $2.4 million and $6.0 million as of December 31, 2000 and 1999, respectively. Accumulated other comprehensive income decreased by approximately $1.2 million as of December 31, 2001 due to this adjustment and increased accumulated other comprehensive income by approximately $1.6 million and $3.9 million as of December 31, 2000 and 1999, respectively. Life insurance revenue and expenses Revenue for annuities, variable life insurance and interest-sensitive life insurance products consists of investment income, and policy charges such as mortality, expense and surrender charges and expense loads for premium taxes on certain contracts. Expenses consist of benefits and interest credited to contracts, policy maintenance costs and amortization of deferred insurance acquisition costs. Premiums for term life policies are reported as earned when due. Profits for such policies are recognized over the duration of the insurance policies by matching benefits and expenses to premium income. Reinsurance In the ordinary course of business, the Company enters into reinsurance agreements to diversify risk and limit its overall financial exposure to certain blocks of annuities and to individual death claims. Although these 49 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) reinsurance agreements contractually obligate the reinsurers to reimburse the Company, they do not discharge the Company from its primary liabilities and obligations to policyholders. As such, these amounts paid or deemed to have been paid are recorded on the Company's consolidated balance sheet as reinsurance recoverables and ceded future policy benefits. Deferred insurance acquisition costs The costs of acquiring new business, principally commission expense and certain policy issuance and underwriting expenses, have been deferred to the extent they are recoverable from estimated future gross profits on the related contracts and policies. The deferred insurance acquisition costs for annuities, separate account business and interest-sensitive life insurance products are being amortized over the estimated contract life in relation to the present value of estimated gross profits. Deferred insurance acquisition costs related to such interest-sensitive products also reflect the estimated impact of unrealized gains or losses on fixed maturity securities held as available for sale in the investment portfolio, through a charge or credit to accumulated other comprehensive income, net of income tax. The deferred insurance acquisition costs for term-life insurance products are being amortized over the premium paying period of the policies. Future policy benefits Liabilities for future policy benefits related to annuities and interest-sensitive life contracts reflect net premiums received plus interest credited during the contract accumulation period and the present value of future payments for contracts that have annuitized. A liability has been established for guaranteed death benefits in excess of account values. The guaranteed retirement income benefit ("GRIB") is an optional benefit to the DESTINATIONS/SM/ variable annuity, for an additional asset-based fee. It allows for a proxy account value, called the GRIB Base, to be applied to the guaranteed annuity factors (settlement option purchase rates) in the contract. The GRIB Base prior to attained age 80 is the greatest of: . the contract value (account value) . the greatest anniversary value before the exercise (annuitization) date, or . purchase payments minus previous withdrawals, accumulated at 5 percent interest per year to the annuitization date. GRIB reserves have been established for policies that have withdrawn a substantial portion of their contract values, exposing a proportionately large GRIB benefit in relation to the account value. These policies were deemed to have elected annuitization and a reserve has been established to cover the present value of future benefits. No additional liabilities for future policy benefits related to guaranteed living benefits have been established. Had such a benefit been established, total liabilities would have been increased by $7.8 million. Current interest rates credited during the contract accumulation period range from 3.0 percent to 10.0 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent. For contracts that have annuitized, interest rates used in determining the present value of future payments range principally from 2.5 percent to 12.0 percent. Liabilities for future term life policy benefits have been computed principally by a net level premium method. Anticipated rates of mortality are based on the 1975-1980 Select and Ultimate Table modified by Company experience, including withdrawals. Assumed investment yields are by policy duration and range from 7.3 percent to 6.0 percent over 20 years. 50 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Guaranty fund assessments The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 2001 and prior. The Company's financial statements include provisions for all known assessments that are expected to be levied against the Company as well as an estimate of amounts (net of estimated future premium tax recoveries) that the Company believes it will be assessed in the future for which the life insurance industry has estimated the cost to cover losses to policyholders. Invested assets and related income Investments in fixed maturity securities and equity securities are carried at fair value. Short-term investments are carried at cost, which approximates fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed and asset-backed securities, over the estimated life of the security. Such amortization is included in net investment income. Amortization of the discount or premium from mortgage-backed and asset-backed securities is recognized using a level effective yield method which considers the estimated timing and amount of prepayments of the underlying loans and is adjusted to reflect differences which arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. To the extent that the estimated lives of such securities change as a result of changes in prepayment rates, the adjustment is also included in net investment income. The Company does not accrue interest income on fixed maturity securites deemed to be impaired on an other-than-temporary basis, or on mortgage loans and other real estate loans where the likelihood of collection of interest is doubtful. Mortgage loans are carried at their unpaid balance, net of unamortized discount and any applicable reserves or write-downs. Other real estate-related investments, net of any applicable reserves and write-downs, include notes receivable from real estate ventures and investments in real estate ventures, adjusted for the equity in the operating income or loss of such ventures. Real estate reserves are established when declines in collateral values, estimated in light of current economic conditions, indicate a likelihood of loss. Investments in policy loans and other invested assets, consisting primarily of venture capital investments and a leveraged lease, are carried primarily at cost. Realized gains or losses on sales of investments, determined on the basis of identifiable cost on the disposition of the respective investment, recognition of other-than-temporary declines in value and changes in real estate-related reserves and write-downs are included in revenue. Net unrealized gains or losses on revaluation of investments are credited or charged to accumulated other comprehensive income (loss). Such unrealized gains are recorded net of deferred income tax expense, while unrealized losses are not tax benefited. Derivative instruments The Company is party to an interest rate swap agreement with Zurich Capital Markets, Inc. ("ZCM"), an affiliated counterparty. The Company uses interest rate swaps to hedge against interest rate exposures arising from mismatches between assets and liabilities. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. No cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is made by one counterparty at each due date. In 2001, the Company paid $0.9 million as settlement for the difference between the fixed-rate and floating-rate interest. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect its counterparty to fail to meet its obligations given its high credit ratings. The credit exposure of interest rate swaps is represented by the fair value (market value) of contracts. At 51 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, an open swap agreement with a notional value of $100.0 million and an expiration date of November 2004, had a negative market value of $5.0 million. The negative market value was included as a component of other accounts payable and liabilities in the accompanying consolidated balance sheets. Separate account business The assets and liabilities of the separate accounts represent segregated funds administered and invested by the Company for purposes of funding variable annuity and variable life insurance contracts for the exclusive benefit of variable annuity and variable life insurance contractholders. The Company receives administrative fees from the separate account and retains varying amounts of withdrawal charges to cover expenses in the event of early withdrawals by contractholders. The assets and liabilities of the separate accounts are carried at fair value. Income tax The Company files a separate Federal income tax return. Deferred taxes are provided on the temporary differences between the tax and financial statement basis of assets and liabilities. (2) Cash Flow Information The Company defines cash as cash in banks and money market accounts. The Company paid federal income taxes of $19.8 million, $43.9 million and $83.8 million directly to the United States Treasury Department during 2001, 2000 and 1999, respectively. (3) Invested Assets and Related Income The Company is carrying its fixed maturity investment portfolio at estimated fair value as fixed maturity securities are considered available for sale. The carrying value of fixed maturity securities compared with amortized cost, adjusted for other-than-temporary declines in value and estimated unrealized gains and losses, were as follows:
Estimated Unrealized Carrying Amortized ------------------- Value Cost Gains Losses ---------- ---------- ------- -------- (in thousands) December 31, 2001 U.S. treasury securities and obligations of U.S. government agencies and authorities............. $ 21,354 $ 21,286 $ 254 $ (186) Obligations of states and political subdivisions, special revenue and nonguaranteed............... 13,488 13,292 196 -- Debt securities issued by foreign governments..... 4,537 4,508 29 -- Corporate securities.............................. 1,945,006 1,926,160 45,602 (26,756) Mortgage and asset-backed securities.............. 1,110,175 1,091,893 24,795 (6,513) ---------- ---------- ------- -------- Total fixed maturity securities............... $3,094,560 $3,057,139 $70,876 $(33,455) ========== ========== ======= ======== December 31, 2000 U.S. treasury securities and obligations of U.S. government agencies and authorities............. $ 11,822 $ 11,777 $ 69 $ (24) Obligations of states and political subdivisions, special revenue and nonguaranteed............... 24,021 24,207 -- (186) Debt securities issued by foreign governments..... 21,812 21,893 90 (171) Corporate securities.............................. 2,060,679 2,093,916 12,634 (45,871) Mortgage and asset-backed securities.............. 1,038,835 1,037,926 7,495 (6,586) ---------- ---------- ------- -------- Total fixed maturity securities............... $3,157,169 $3,189,719 $20,288 $(52,838) ========== ========== ======= ========
52 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The carrying value and amortized cost of fixed maturity investments, by contractual maturity at December 31, 2001, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because mortgage-backed and asset-backed securities provide for periodic payments throughout their life.
Carrying Amortized Value Cost ---------- ---------- (in thousands) One year or less................................................................. $ 38,884 $ 38,175 Over one year through five years................................................. 836,094 814,386 Over five years through ten years................................................ 880,118 874,543 Over ten years................................................................... 229,289 238,142 Securities not due at a single maturity date, primarily mortgage and asset-backed securities(1).................................................................. 1,110,175 1,091,893 ---------- ---------- Total fixed maturity securities........................................... $3,094,560 $3,057,139 ========== ==========
-------- (1) Weighted average maturity of 4.5 years. Proceeds from sales of investments in fixed maturity securities prior to maturity were $1,331.2 million, $589.9 million and $1,269.3 million during 2001, 2000 and 1999, respectively. Gross gains of $32.9 million, $8.6 million and $7.9 million and gross losses, including write-downs of fixed maturity securities for other-than-temporary declines in value, of $28.6 million, $20.8 million and $17.7 million were realized on sales and maturities in 2001, 2000 and 1999, respectively. Pre-tax write-downs due to other-than-temporary declines in value amounted to $15.5 million, $11.4 million and $0.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. At December 31, 2001 the Company held a $92.5 million mortgage loan investment in Delta Wetlands which exceeded 10 percent of the Company's stockholder's equity at December 31, 2001. Excluding agencies of the U.S. government, no other individual investment exceeded 10 percent of the Company's stockholder's equity at December 31, 2001. At December 31, 2001, securities carried at approximately $6.6 million were on deposit with governmental agencies as required by law. For its securitized financial assets, the Company recognizes an impairment loss if the fair value of the security is below book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. These impairment losses are included as part of the write-downs for other-than-temporary declines in value discussed above. Upon default or indication of potential default by an issuer of fixed maturity securities other than securitized financial assets, the issue(s) of such issuer would be placed on nonaccrual status and, since declines in fair value would no longer be considered by the Company to be temporary, would be analyzed for possible write-down. Any such issue would be written down to its net realizable value during the fiscal quarter in which the impairment was determined to have become other than temporary. Thereafter, each issue on nonaccrual status is regularly reviewed, and additional write-downs may be taken in light of later developments. The Company's computation of net realizable value involves judgments and estimates, so such value should be used with care. Such value determination considers such factors as the existence and value of any collateral security; the capital structure of the issuer; the level of actual and expected market interest rates; where the issue ranks in comparison with other debt of the issuer; the economic and competitive environment of the issuer and its 53 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) business; the Company's view on the likelihood of success of any proposed issuer restructuring plan; and the timing, type and amount of any restructured securities that the Company anticipates it will receive. The Company's $176.4 million real estate portfolio at December 31, 2001 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 2001 and 2000, total impaired real estate-related loans were as follows:
December 31, December 31, 2001 2000 ------------ ------------ (in millions) Impaired loans without reserves--gross $ 7.3 $ 62.6 Impaired loans with reserves--gross... 11.3 23.7 ----- ------ Total gross impaired loans..... 18.6 86.3 Reserves related to impaired loans.... (2.7) (18.5) Write-downs related to impaired loans. (3.5) (3.5) ----- ------ Net impaired loans............. $12.4 $ 64.3 ===== ======
The Company had an average balance of $65.3 million and $90.2 million in impaired loans for 2001 and 2000, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 2001 and 2000, loans on nonaccrual status, before reserves and write-downs, amounted to $13.0 million and $86.3 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. Net Investment Income During 2001, a change in circumstances surrounding a water development project located in California's Sacramento River Valley led to a decision to reclassify the related mortgage loans to accrual status and release the general reserve allowance originally set up for these loans. These changes included the State of California's State Water Resources Control Board ("SWRCB") approval of the project's water right permit as well as the completion of a third-party appraisal of the project, subsequent to the SWRCB's approval of the permit. Taken together, these facts support, in management's best judgment, not only the level of existing debt on the project but also the accrual of interest as specified in the terms of the loans. As a result, interest income was recorded in the fourth quarter of 2001 in the amount of $24.9 million, representing interest earned in 2001 as well as recaptured interest from 2000 and 1999, the years in which these loans were on non-accrual status. The release of the general reserve allowance generated a realized gain of $16.4 million in 2001. 57 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The sources of net investment income were as follows: 2001 2000 1999 -------- -------- -------- (in thousands) Interest on fixed maturity securities............ $214,505 $223,964 $231,176 Dividends on equity securities................... 4,598 4,573 4,618 Income from short-term investments............... 2,332 3,433 3,568 Income from mortgage loans....................... 30,771 6,091 6,296 Income from policy loans......................... 19,394 20,088 20,131 Income from other real estate-related investments 27 99 155 Income from other loans and investments.......... 646 2,455 2,033 -------- -------- -------- Total investment income................... 272,273 260,703 267,977 Investment expense............................... 2,854 3,233 3,337 -------- -------- -------- Net investment income..................... $269,419 $257,470 $264,640 ======== ======== ======== Net Realized Investment Gains (Losses) Net realized investment gains (losses) for the years ended December 31, 2001, 2000 and 1999, were as follows:
2001 2000 1999 ------- -------- ------- (in thousands) Real estate-related......................................... $16,081 $ 1,711 $ 4,201 Fixed maturity securities................................... 4,284 (12,185) (9,755) Trading account securities--gross gains..................... -- -- 491 Trading account securities--gross losses.................... -- -- (7,794) Equity securities........................................... 262 245 1,039 Other....................................................... 33 1,952 2,269 ------- -------- ------- Realized investment gains (losses) before income tax expense (benefit).............................. 20,660 (8,277) (9,549) Income tax expense (benefit)................................ 7,231 (2,897) (3,342) ------- -------- ------- Net realized investment gains (losses)............... $13,429 $ (5,380) $(6,207) ======= ======== =======
Unrealized gains (losses) are computed below as follows: fixed maturity securities--the difference between fair value and amortized cost, adjusted for other-than-temporary declines in value; equity and other securities--the difference between fair value and cost. The change in net unrealized investment gains (losses) by class of investment for the years ended December 31, 2001, 2000 and 1999 were as follows:
December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ (in thousands) Fixed maturity securities..................................... $69,970 $89,421 $(182,456) Equity and other securities................................... (879) 1,187 (3,929) Adjustment to deferred insurance acquisition costs............ (7,446) (243) 3,834 Adjustment to value of business acquired...................... (4,209) (3,614) 13,265 ------- ------- --------- Unrealized gain (loss) before income tax expense (benefit). 57,436 86,751 (169,286) Income tax expense (benefit).................................. 8,167 (1,350) (15,492) ------- ------- --------- Net unrealized gain (loss) on investments.............. $49,269 $88,101 $(153,794) ======= ======= =========
55 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Unconsolidated Investees At December 31, 2001 and 2000 the Company, along with other Kemper subsidiaries, directly held partnership interests in a number of real estate joint ventures. The Company's direct and indirect real estate joint venture investments are accounted for utilizing the equity method, with the Company recording its share of the operating results of the respective partnerships. The Company, as an equity owner, has the ability to fund, and historically has elected to fund, operating requirements of certain of the joint ventures. Consolidation accounting methods are not utilized as the Company, in most instances, does not own more than 50 percent in the aggregate, and in any event, major decisions of the partnership must be made jointly by all partners. As of December 31, 2001 and 2000, the Company's net equity investment in unconsolidated investees amounted to $0.9 million and $1.0 million, respectively. The Company's share of net income related to such unconsolidated investees amounted to $27 thousand, $99 thousand and $155 thousand in 2001, 2000 and 1999, respectively. (5) Concentration of Credit Risk The Company generally strives to maintain a diversified invested asset portfolio; however, certain concentrations of credit risk exist in mortgage and asset-backed securities and real estate. Approximately 22.0 percent of the investment-grade fixed maturity securities at December 31, 2001 were mortgage-backed securities, up from 18.9 percent at December 31, 2000. These investments consist primarily of marketable mortgage pass-through securities issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and other investment-grade securities collateralized by mortgage pass-through securities issued by these entities. The Company has not made any investments in interest-only or other similarly volatile tranches of mortgage-backed securities. The Company's mortgage-backed investments are generally of AAA credit quality, and the markets for these investments have been and are expected to remain liquid. Approximately 15.3 percent and 15.1 percent of the investment-grade fixed maturity securities at December 31, 2001 and 2000, respectively, consisted of corporate asset-backed securities. The majority of investments in asset-backed securities were backed by commercial mortgage-backed securities (36.5%), home equity loans (22.9%), collateralized loan and bond obligations (12.1%), manufactured housing loans (11.7%), and other commercial assets (5.5%). The Company's real estate portfolio is distributed by geographic location and property type. The geographic distribution of a majority of the real estate portfolio as of December 31, 2001 was as follows: California (52.9%), Washington (9.8%), Colorado (8.1%) and Illinois (6.7%). The property type distribution of a majority of the real estate portfolio as of December 31, 2001 was as follows: land (51.9%), hotels (32.4%) and office (7.8%). To maximize the value of certain land and other projects, additional development has been proceeding or has been planned. Such development of existing projects would continue to require funding, either from the Company or third parties. In the present real estate markets, third-party financing can require credit enhancing arrangements (e.g., standby financing arrangements and loan commitments) from the Company. The values of development projects are dependent on a number of factors, including Kemper's and the Company's plans with respect thereto, obtaining necessary construction and zoning permits and market demand for the permitted use of the property. There can be no assurance that such permits will be obtained as planned or at all, nor that such expenditures will occur as scheduled, nor that Kemper's or the Company's plans with respect to such projects may not change substantially. More than half of the Company's real estate mortgage loans are on properties or projects where the Company, Kemper, or their affiliates have taken ownership positions in joint ventures with a small number of partners. 56 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2001 loans to a master limited partnership (the ''MLP'') between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company, a former affiliate, constituted approximately $92.5 million, or 52.4 percent, of the Company's real estate portfolio. Kemper's interest in the MLP is 75.0 percent at December 31, 2001. Loans to the MLP were placed on non-accrual status at the beginning of 1999 due to management's desire not to increase book value of the MLP over net realizable value, as interest on these loans has historically been added to principal. During 2001, a change in circumstances surrounding the water development project related to these loans led to the reclassification of these loans to accrual status. As a result, interest income was recorded in the fourth quarter of 2001 and the general reserve allowance related to these loans was released. At December 31, 2001, MLP-related commitments accounted for approximately $0.2 million of the Company's off-balance-sheet legal commitments. At December 31, 2001, loans to and investments in joint ventures in which Patrick M. Nesbitt or his affiliates (''Nesbitt''), a third-party real estate developer, have ownership interests constituted approximately $63.9 million, or 6.2 percent, of the Company's real estate portfolio. The Nesbitt ventures consist of nine hotel properties, one office building and one retail property. At December 31, 2001, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. In the fourth quarter of 2001, a valuation reserve of $600 thousand was recorded for one of these properties as its estimated fair value decreased below the debt supported by the property. At December 31, 2001, a loan to a joint venture amounted to $11.8 million. This affiliated mortgage loan was on an office property located in Illinois. At December 31, 2001, the Company did not have any off-balance-sheet legal funding commitments outstanding related to this investment. The remaining real estate-related investment amounted to $7.4 million at December 31, 2001 and consisted of various unzoned residential and commercial lots located in Hawaii. Due to certain negative zoning restriction developments in January 1997 and a continuing economic slump in Hawaii, these real estate-related investments were placed on nonaccrual status. All zoned properties were sold by March of 2001. We are currently pursuing an out of court settlement against the city of Honolulu for the downzoning of certain unzoned properties. If a settlement is not reached, trial will begin this year. We are holding the unzoned properties for future zoning and sales. However, due to the state of Hawaii's economy, which has lagged behind the economic expansion of most of the rest of the United States, it is anticipated that it could be several additional years until the Company completely disposes of all investments in Hawaii. At December 31, 2001, off-balance-sheet legal commitments related to Hawaiian properties totaled $4.0 million. At December 31, 2001, the Company no longer had any outstanding loans or investments in projects with the Prime Group, Inc. or its affiliates, as all such investments have been sold. However, the Company continues to have Prime Group-related commitments, which accounted for $25.7 million of the Company's off-balance-sheet legal commitments at December 31, 2001. (6) Income Taxes Income tax expense (benefit) was as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------- -------- -------- (in thousands) Current.......... $11,228 $ 28,274 $ 75,816 Deferred......... 16,926 (27,027) (42,952) ------- -------- -------- Total..... $28,154 $ 1,247 $ 32,864 ======= ======== ========
57 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Additionally, the deferred income tax (benefit) expense related to items included in other comprehensive income was as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------- ------- -------- (in thousands) Unrealized gains and losses on investments $12,246 $ -- $(21,477) Value of business acquired................ (1,473) (1,265) 4,643 Deferred insurance acquisition costs...... (2,606) (85) 1,342 ------- ------- -------- Total.............................. $ 8,167 $(1,350) $(15,492) ======= ======= ========
The actual income tax expense for 2001, 2000 and 1999 differed from the ''expected'' tax expense for those years as displayed below. ''Expected'' tax expense was computed by applying the U.S. federal corporate tax rate of 35 percent in 2001, 2000, and 1999 to income before income tax expense.
2001 2000 1999 ------- -------- ------- (in thousands) Computed expected tax expense.......................... $27,913 $ 17,342 $27,232 Difference between ''expected'' and actual tax expense: State taxes......................................... (2,302) 737 1,608 Amortization of goodwill and other intangibles...... 4,797 4,589 4,460 Dividend received deduction......................... -- (1,191) -- Foreign tax credit.................................. (15) (214) (306) Change in valuation allowance....................... -- (15,201) -- Recapture of affiliated reinsurance................. -- (4,599) -- Prior year tax settlements.......................... (2,577) -- -- Other, net.......................................... 338 (216) (130) ------- -------- ------- Total actual tax expense........................ $28,154 $ 1,247 $32,864 ======= ======== =======
Deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The $4.6 million tax benefit in 2000 is due to the deferred tax effect related to the deemed dividend distribution. (See the note captioned ''Summary of Significant Accounting Policies--Reinsurance.") This deferred tax benefit was recognized in the tax provision under current accounting guidance relating to the recognition of deferred taxes. The Company only records deferred tax assets if future realization of the tax benefit is more likely than not. The Company had established a valuation allowance to reduce the deferred federal tax asset related to real estate and unrealized losses on investments to a realizable amount. This amount was based on the evidence available and management's judgment. The valuation allowance is subject to future adjustments based upon, among other items, the Company's estimates of future operating earnings and capital gains. The decrease in the valuation allowance in 2001 is related to the change in the amount of unrealized losses on investments. 58 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to significant portions of the Company's net deferred federal tax assets or liabilities were as follows:
December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ (in thousands) Deferred federal tax assets: Deferred insurance acquisition costs (''DAC Tax'')........ $135,307 $131,591 $121,723 Unrealized losses on investments.......................... -- 12,045 43,758 Life policy reserves...................................... 90,870 67,260 43,931 Unearned revenue.......................................... 55,574 58,200 59,349 Real estate-related....................................... -- 6,515 7,103 Other investment-related.................................. 12,646 5,330 928 Other..................................................... 3,349 4,329 3,133 -------- -------- -------- Total deferred federal tax assets..................... 297,746 285,270 279,925 Valuation allowance....................................... -- (12,045) (58,959) -------- -------- -------- Total deferred federal tax assets after valuation allowance........................................... 297,746 273,225 220,966 -------- -------- -------- Deferred federal tax liabilities: Value of business acquired................................ 24,608 33,467 55,884 Deferred insurance acquisition costs...................... 135,317 84,280 41,706 Depreciation and amortization............................. 21,165 21,799 19,957 Other investment-related.................................. 7,239 7,973 7,670 Unrealized gains on investments........................... 12,246 -- -- Other..................................................... 1,483 4,925 2,247 -------- -------- -------- Total deferred federal tax liabilities................ 202,058 152,444 127,464 -------- -------- -------- Net deferred federal tax assets.............................. $ 95,688 $120,781 $ 93,502 ======== ======== ========
The net deferred tax assets relate primarily to unearned revenue and the DAC Tax associated with a non-registered individual and group variable business-owned life insurance contract (''BOLI''). Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income over the ten year amortization period of the unearned revenue and DAC Tax to realize such deferred tax assets. The tax returns through the year 1996 have been examined by the Internal Revenue Service (''IRS''). Changes proposed are not material to the Company's financial position. The tax returns for the years 1997 through 1999 are currently under examination by the IRS. (7) Related-Party Transactions The Company paid cash dividends of $13.0 million, $20.0 million and $115.0 million to Kemper during 2001, 2000 and 1999, respectively. The Company reported a deemed dividend distribution of $16.3 million during 2000 related to the recapture of a reinsurance agreement with Federal Kemper Life Assurance Company ("FKLA"), an affiliated company. The Company has loans to joint ventures, consisting primarily of mortgage loans on real estate, in which the Company and/or one of its affiliates has an ownership interest. At December 31, 2001 and 2000, joint venture mortgage loans totaled $104.3 million and $67.5 million, respectively, and during 2001, 2000 and 1999, the Company earned interest income on these joint venture loans of $25.4 million, $0.8 million and $0.6 million, respectively. 59 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In February 2001, the Company sold a $60 million group variable life policy to FKLA, covering all current FKLA employees as of February 14, 2001. The transaction, as business-owned life insurance ("BOLI"), will permit FKLA to indirectly fund certain of its employee benefit obligations. All of the Company's personnel are employees of FKLA. Expenses are allocated to the Company for the utilization of FKLA employees and facilities. Expenses allocated to the Company from FKLA during 2001, 2000 and 1999 amounted to $27.4 million, $23.3 million and $18.3 million, respectively. The Company also paid to Kemper real estate subsidiaries fees of $0.5 million, $0.6 million and $1.0 million in 2001, 2000 and 1999, respectively, related to the management of the Company's real estate portfolio. The Company also has allocated expenses related to investment management services provided by Zurich Scudder Investments, Inc. (''ZSI''), (formerly Scudder Kemper Investments, Inc.), an affiliated company. The Company paid to ZSI investment management fees of $1.7 million, $1.6 million and $1.8 million during 2001, 2000 and 1999, respectively. On December 4, 2001, Deutsche Bank and ZFS announced that they had signed a definitive agreement under which Deutsche Bank will acquire 100 percent of ZSI, with the exception of ZSI's UK operations, Threadneedle Investments. The transaction is expected to be completed, subject to regulatory approval and satisfaction of other conditions, in the first half of 2002. FKLA has a formal management and services agreement with Fidelity Life Association, A Mutual Legal Reserve Company ("FLA"), which charges FLA based upon certain predetermined charges and factors. The Company shares directors, management, operations and employees with FLA. FLA is a mutual company, owned by its policyholders, and is not a member of the Zurich Holding Company System. In 2000, the Company purchased PMG Securities Corporation, PMG Asset Management, Inc., PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively ''PMG''). The total cost was $8.2 million, resulting in the recording of intangible assets in the amount of $7.6 million. The Company owns 100 percent of the stock of PMG. Also in 2000, the Company transferred $63.3 million in fixed maturity securities and cash to fund the operations of its newly formed subsidiary, Zurich Kemper Life Insurance Company of New York (''ZKLICONY''). ZKLICONY received its insurance license from the state of New York in January 2001 and began writing business in May of 2001. At December 31, 2000, the Company held a $100.0 million investment in ZSLM Trust, issued by an affiliate. On October 30, 2001, the Company sold these bonds to various Farmers insurance companies, all of which are affiliated companies. The Company held a $11.8 million real estate-related investment in an affiliated mortgage loan at December 31, 2001. As previously discussed, the Company is party to an interest rate swap agreement with ZCM, an affiliated counterparty. (See the note captioned ''Summary of Significant Accounting Policies--Derivative instruments'' above.) (8) Reinsurance As of December 31, 2001 and 2000, the reinsurance recoverable related to fixed-rate annuity liabilities ceded to FLA amounted to $230.1 million and $262.1 million, respectively. The Company cedes 90 percent of all new direct life insurance premiums to outside reinsurers. Life reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $2.1 million and $2.0 million as of December 31, 2001 and 2000, respectively. 60 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is party to a funds withheld reinsurance agreement with a ZFS affiliated company, Zurich Insurance Company, Bermuda Branch (''ZICBB''). Under the terms of this agreement, the Company cedes, on a yearly renewable term basis, 100 percent of the net amount at risk (death benefit payable to the insured less the insured's separate account cash surrender value) related to BOLI. As consideration for this reinsurance coverage, the Company cedes separate account fees (cost of insurance charges) to ZICBB and retains a portion of such funds under the terms of the reinsurance agreement in a funds withheld account ("FWA") which is included as a component of benefits and funds payable in the accompanying consolidated balance sheets. Effective December 31, 2001, the Company entered into a quota share reinsurance agreement with ZICBB. Under the terms of this agreement, the Company cedes 100 percent of the net amount at risk of the guaranteed minimum death benefit and guaranteed retirement income benefit portions of a small number of specific variable annuity contracts. As consideration for this reinsurance coverage, the Company cedes 100 percent of all charges to policyholders and all revenue sharing income received from fund managers related to such reinsured policies. In 2001, the Company received $7.9 million of ceding commissions and expense allowances, and paid $1.2 million of ceded premiums, related to this reinsurance agreement. The account values related to these policies are held in the Company's separate account during the accumulation period of the contracts. The reserve credits under this treaty are secured by a trust agreement that requires the fair market value of assets therein to at least equal 102 percent of such reserve credits. In the fourth quarter of 2000, the yearly renewable term reinsurance agreement between the Company and FKLA was terminated. Premiums and reserves were both reduced by $7.7 million. A difference in the basis of the reserves between GAAP and statutory accounting resulted in a deemed dividend distribution to Kemper of $16.3 million. Also in the fourth quarter of 2000, the Company assumed from FKLA $100.0 million in premiums related to a Funding Agreement. Funding Agreements are insurance contracts similar to structured settlements, immediate annuities and guaranteed investment contracts (''GICs''). The contracts qualify as insurance under state laws and are sold as non-surrenderable immediate annuities to a trust established by a securities firm. The securities firm sold interests in the trust to institutional investors. This Funding Agreement has a variable rate of interest based upon LIBOR, is an obligation of the Company's general account and is recorded as a future policy benefit. As previously discussed, the Company entered into an interest rate swap in 2000 to exchange the floating-rate interest payments for fixed interest payments. The following table contains amounts related to the BOLI funds withheld reinsurance agreement with ZICBB (in millions): Business Owned Life Insurance (BOLI) (in millions)
Year Ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Face amount in force........... $ 85,564 $ 85,358 $ 82,021 ======== ======== ======== Net amount at risk ceded....... $(76,283) $(78,169) $(75,979) ======== ======== ======== Cost of insurance charges ceded $ 168.1 $ 173.8 $ 166.4 ======== ======== ======== Funds withheld account......... $ 236.1 $ 228.8 $ 263.4 ======== ======== ========
The Company's FWA supports reserve credits on reinsurance ceded on the BOLI product. In 1998, to properly match revenue and expenses, the Company placed assets supporting the FWA in a segmented portion of its General Account. This portfolio was classified as ''trading'' under Statement of Financial Accounting 61 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Standards No. 115 (''SFAS 115'') at December 31, 1998 and through November 30, 1999. SFAS 115 mandates that assets held in a trading account be valued at fair value, with changes in fair value flowing through the income statement as realized capital gains and losses. The Company recorded realized capital losses of $7.3 million related to the changes in fair value of this portfolio during 1999. Due to a change in the reinsurance strategy related to the BOLI product, effective December 1, 1999, the Company no longer marked-to-market a portion of the FWA liability and therefore no longer designated the related portion of assets as ''trading''. As a result, changes in fair value to the FWA and the assets supporting the FWA no longer flow through the Company's operating results. (9) Postretirement Benefits Other Than Pensions FKLA sponsors a health and welfare benefit plan that provides insurance benefits covering substantially all eligible, active and retired employees of FKLA and their covered dependents and beneficiaries. The Company is allocated a portion of the costs of providing such benefits. The Company is self insured with respect to medical benefits, and the plan is not funded except with respect to certain disability-related medical claims. The medical plan provides for medical insurance benefits at retirement, with eligibility based upon age and the participant's number of years of participation attained at retirement. The plan is contributory for pre-Medicare retirees, and will be contributory for all retiree coverage for most current employees, with contributions generally adjusted annually. Postretirement life insurance benefits are noncontributory and are limited to $5,000 per participant retiring in 2001 and subsequent years, and $10,000 per participant retiring in years prior to 2001. The allocated accumulated postretirement benefit obligation accrued by the Company amounted to $1.3 million at both December 31, 2001 and 2000. The discount rate used in determining the allocated postretirement benefit obligation was 7.0 percent and 7.5 percent for 2001 and 2000, respectively. The assumed health care trend rate used was based on projected experience for 2001, 7.5 percent for 2002, gradually declining to 6.4 percent by the year 2006 and gradually declining thereafter. A one percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 2001 and 2000 by $142 thousand and $78 thousand, respectively. (10) Commitments and Contingent Liabilities The Company is involved in various legal actions for which it establishes liabilities where appropriate. In the opinion of the Company's management, based upon the advice of legal counsel, the resolution of such litigation is not expected to have a material adverse effect on the consolidated financial statements. Although neither the Company nor its joint venture projects have been identified as a ''potentially responsible party'' under federal environmental guidelines, inherent in the ownership of, or lending to, real estate projects is the possibility that environmental pollution conditions may exist on or near or relate to properties owned or previously owned or on properties securing loans. Where the Company has presently identified remediation costs, they have been taken into account in determining the cash flows and resulting valuations of the related real estate assets. Based on the Company's receipt and review of environmental reports on most of the projects in which it is involved, the Company believes its environmental exposure would be immaterial to its consolidated results of operations. However, the Company may be required in the future to take actions to remedy environmental exposures, and there can be no assurance that material environmental exposures will not develop or be identified in the future. The amount of future environmental costs is impossible to estimate 62 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) due to, among other factors, the unknown magnitude of possible exposures, the unknown timing and extent of corrective actions that may be required, the determination of the Company's liability in proportion to others and the extent such costs may be covered by insurance or various environmental indemnification agreements. (11) Financial Instruments--Off-Balance-Sheet Risk At December 31, 2001, the Company had future legal loan commitments and stand-by financing agreements totaling $29.9 million to support the financing needs of various real estate investments. To the extent these arrangements are called upon, amounts loaned would be collateralized by assets of the joint ventures, including first mortgage liens on the real estate. The Company's criteria in making these arrangements are the same as for its mortgage loans and other real estate investments. These commitments are included in the Company's analysis of real estate-related reserves and write-downs. The fair values of loan commitments and standby financing agreements are estimated in conjunction with and using the same methodology as the fair value estimates of mortgage loans and other real estate-related investments. (12) Fair Value of Financial Instruments Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. A significant portion of the Company's financial instruments are carried at fair value. Fair value estimates for financial instruments not carried at fair value are generally determined using discounted cash flow models and assumptions that are based on judgments regarding current and future economic conditions and the risk characteristics of the investments. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could significantly affect the estimates and such estimates should be used with care. Fair value estimates are determined for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and certain liabilities that are not considered financial instruments. Accordingly, the aggregate fair value estimates presented do not represent the underlying value of the Company. For example, the Company's subsidiaries are not considered financial instruments, and their value has not been incorporated into the fair value estimates. In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The Company used the following methods and assumptions in estimating the fair value of its financial instruments: Fixed maturity securities and equity securities: Fair values were determined by using market quotations, or independent pricing services that use prices provided by market makers or estimates of fair values obtained from yield data relating to instruments or securities with similar characteristics, or fair value as determined in good faith by the Company's portfolio manager, ZSI. Cash and short-term investments: The carrying amounts reported in the consolidated balance sheets for these instruments approximate fair values. Policy loans: The carrying value of policy loans approximates the fair value as the Company adjusts the rates to remain competitive. 63 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Mortgage loans and other real estate-related investments: Fair values were estimated based upon the investments observable market price, net of estimated costs to sell. The estimates of fair value should be used with care given the inherent difficulty in estimating the fair value of real estate due to the lack of a liquid quotable market. Mortgage loans and other real estate-related investments are stated at their aggregate unpaid balances, less a valuation allowance of $2.8 million and $18.6 million in 2001 and 2000, respectively. The real estate portfolio is monitored closely and reserves are adjusted to reflect market conditions. This results in a carrying value that approximates fair value at December 31, 2001 and 2000. Other investments: The carrying amounts reported in the consolidated balance sheets for these instruments approximate fair values. Life policy benefits: For deposit liabilities with defined maturities, the fair value was based on the discounted value of future cash flows. The discount rate was based on the rate that would be offered for similar deposits at the reporting date. For all other deposit liabilities, primarily deferred annuities and universal life contracts, the fair value was based on the amount payable on demand at the reporting date. The carrying values and estimated fair values of the Company's financial instruments at December 31, 2001 and 2000 were as follows:
December 31, 2001 December 31, 2000 --------------------- --------------------- Carrying Carrying Value Fair Value Value Fair Value ---------- ---------- ---------- ---------- (in thousands) Financial instruments recorded as assets: Fixed maturity securities........................... $3,094,560 $3,094,560 $3,157,169 $3,157,169 Cash and short-term investments..................... 216,479 216,479 50,001 50,001 Mortgage loans and other real estate-related assets. 176,440 176,440 140,417 140,417 Policy loans........................................ 239,787 239,787 256,226 256,226 Equity securities................................... 67,731 67,731 63,879 63,879 Other invested assets............................... 20,799 20,799 21,792 20,109 Financial instruments recorded as liabilities: Life policy benefits, excluding term life reserves.. 3,376,604 3,324,417 3,273,573 3,206,501 Funds withheld account.............................. 236,134 236,134 228,822 228,822
(13) Stockholder's Equity--Retained Earnings The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to shareholders without prior approval of regulatory authorities is restricted. In 2002, the Company cannot pay dividends. The Company paid cash dividends of $13.0 million, $20.0 million and $115.0 million to Kemper during 2001, 2000 and 1999, respectively. The Company reported a deemed dividend distribution of $16.3 million during 2000 related to the recapture of the reinsurance agreement with FKLA. The Company's net income (loss) and capital and surplus as determined in accordance with statutory accounting principles were as follows:
2001 2000 1999 -------- -------- -------- (in thousands) Net income (loss)............ $(71,854) $ 19,975 $ 59,116 ======== ======== ======== Statutory capital and surplus $332,598 $397,423 $394,966 ======== ======== ========
64 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's statutory net loss reflects the market downturn and its impact on reserves for guaranteed death and living benefits consistent with statutory methodology. As of January 1, 2001, the Company adopted the Codification of Statutory Accounting Principles (''Codification'') guidance. The NAIC Accounting Practices and Procedures Manual - version effective January 1, 2001 - is the National Association of Insurance Commissioners' primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The Illinois Insurance Department adopted the Codification guidance, effective January 1, 2001. The Company's statutory surplus was positively impacted by $16.7 million upon adoption as a result of the net effect of recording a deferred tax asset, of non-admitting non-operating system software, of non-admitting net affiliated receivables and other changes caused by the Codification. (14) Unaudited Interim Financial Information The following table sets forth the Company's unaudited quarterly financial information:
Quarter Ended ---------------------------------------------------- March 31 June 30 September 30 December 31 Year -------- -------- ------------ ----------- -------- (in thousands) 2001 Operating Summary Revenue.................................. $91,072 $ 98,360 $85,013 $123,852 $398,297 ======= ======== ======= ======== ======== Net operating income (loss), excluding realized gains......................... $ 8,183 $ (1,364) $(6,443) $ 37,792 $ 38,168 Net realized investment gains............ 1,375 5,257 1,206 5,591 13,429 ------- -------- ------- -------- -------- Net income (loss).................... $ 9,558 $ 3,893 $(5,237) $ 43,383 $ 51,597 ======= ======== ======= ======== ======== 2000 Operating Summary Revenue.................................. $87,648 $103,446 $94,249 $ 75,567 $360,910 ======= ======== ======= ======== ======== Net operating income, excluding realized gains (losses)......................... $12,031 $ 9,953 $ 8,710 $ 22,987 $ 53,681 Net realized investment gains (losses)... (1,378) (105) 948 (4,845) (5,380) ------- -------- ------- -------- -------- Net income........................... $10,653 $ 9,848 $ 9,658 $ 18,142 $ 48,301 ======= ======== ======= ======== ======== 1999 Operating Summary Revenue.................................. $95,646 $ 86,164 $78,301 $103,308 $363,419 ======= ======== ======= ======== ======== Net operating income, excluding realized gains (losses)......................... $11,222 $ 14,385 $11,568 $ 13,972 $ 51,147 Net realized investment gains (losses)... (627) (1,286) (5,098) 804 (6,207) ------- -------- ------- -------- -------- Net income........................... $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940 ======= ======== ======= ======== ========
65 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (15) Operating Segments and Related Information The Company, FKLA, Zurich Life Insurance Company of America, (''ZLICA''), and FLA, operate under the trade name Zurich Life ("ZL"), formerly known as Zurich Kemper Life. For purposes of this operating segment disclosure, ZL will also include the operations of Zurich Direct, Inc., an affiliated direct marketing life insurance agency and excludes FLA, as it is owned by its policyholders. ZL is segregated by Strategic Business Unit (''SBU''). The SBU concept employed by ZFS has each SBU concentrate on a specific customer market. The SBU is the focal point of ZL, because it is at the SBU level that ZL can clearly identify customer segments and then work to understand and satisfy the needs of each customer. The contributions of ZL's SBUs to consolidated revenues, operating results and certain balance sheet data pertaining thereto, are shown in the following tables on the basis of accounting principles generally accepted in the United States of America. ZL is segregated into the Life Brokerage, Financial Institutions (''Financial''), Retirement Solutions Group (''RSG'') and Direct SBUs. The SBUs are not managed at the legal entity level, but rather at the Zurich Life level. Zurich Life's SBUs cross legal entity lines, as certain similar products are sold by more than one legal entity. The vast majority of the Company's business is derived from the Financial and RSG SBUs. Each SBU's revenue is derived from geographically dispersed areas as ZL is licensed in the District of Columbia and all states. During 2001, 2000 and 1999, ZL did not derive net revenue from one customer that exceeded 10 percent of the total revenue of ZL. The principal products and markets of ZL's SBUs are as follows: Life Brokerage: The Life Brokerage SBU develops low cost term, universal life insurance and variable universal life, as well as fixed annuities, to market through independent agencies and national marketing organizations. Financial: The Financial SBU focuses on a wide range of products that provide for the accumulation, distribution and transfer of wealth and primarily includes variable and fixed annuities, variable universal life and business-owned life insurance. These products are distributed to consumers through financial intermediaries such as banks, brokerage firms and independent financial planners. RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets variable annuities to K-12 schoolteachers, administrators, and healthcare workers, along with college professors and certain employees of selected non-profit organizations. This target market is eligible for what the IRS designates as retirement-oriented savings or investment plans that qualify for special tax treatment. Direct: The Direct SBU is a direct marketer of basic, low-cost term life insurance through various marketing media. 66 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Summarized financial information for ZL's SBU's is as follows: As of and for the period ending December 31, 2001:
Income Statement -------------------------------------------------------------- Life Brokerage Financial RSG Direct Total ---------- ----------- ---------- ---------- ----------- (in thousands) Revenue Net investment income................... $ 100,201 $ 226,974 $ 96,113 $ 129 $ 423,417 Realized investment gains............... 6,393 15,148 5,878 8 27,427 Premium income.......................... 84,993 3,090 38 20,166 108,287 Fees and other income................... 69,794 42,854 62,826 40,200 215,674 ---------- ----------- ---------- ---------- ----------- Total revenue....................... 261,381 288,066 164,855 60,503 774,805 ========== =========== ========== ========== =========== Benefits and Expenses Policyholder benefits................... 121,224 166,390 60,636 7,082 355,332 Intangible asset amortization........... 44,924 11,668 18,547 -- 75,139 Net deferral of insurance acquisition costs................................. (37,375) (130,547) (17,098) (36,213) (221,233) Commissions and taxes, licenses and fees.................................. (787) 145,935 48,251 3,979 197,378 Operating expenses...................... 56,900 34,940 29,594 83,048 204,482 ---------- ----------- ---------- ---------- ----------- Total benefits and expenses......... 184,886 228,386 139,930 57,896 611,098 ---------- ----------- ---------- ---------- ----------- Income before income tax expense............ 76,495 59,680 24,925 2,607 163,707 Income tax expense.......................... 26,468 20,355 10,145 496 57,464 ---------- ----------- ---------- ---------- ----------- Net income.......................... $ 50,027 $ 39,325 $ 14,780 $ 2,111 $ 106,243 ========== =========== ========== ========== =========== Balance Sheet Future policy benefits.................. $1,916,097 $ 2,887,014 $1,468,261 $ 135,034 $ 6,406,406 ========== =========== ========== ========== =========== Liabilities related to separate accounts.............................. $ 25,549 $10,955,660 $2,127,544 $ -- $13,108,753 ========== =========== ========== ========== =========== Liabilities Future Related to Net Income Policy Separate Revenue (Loss) Benefits Accounts ----------- ---------- ---------- ----------- Total revenue, net income, future policy benefits and liabilities related to separate accounts, respectively, from above............................................. $ 774,805 $ 106,243 $6,406,406 $13,108,753 ----------- ---------- ---------- ----------- Less: Revenue, net income and selected liabilities of FKLA............................................. 277,589 46,645 2,397,798 -- Revenue, net income and selected liabilities of ZLICA............................................ 57,752 17,492 374,447 -- Revenue, net loss and selected liabilities of Zurich Direct........................................... 41,167 (9,491) -- -- ----------- ---------- ---------- ----------- Totals per the Company's consolidated financial statements..................... $ 398,297 $ 51,597 $3,634,161 $13,108,753 =========== ========== ========== ===========
67 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of and for the period ending December 31, 2000:
Income Statement ------------------------------------------------------------ Life Brokerage Financial RSG Direct Total ---------- ---------- ---------- ---------- ----------- (in thousands) Revenue Net investment income.................... $ 124,518 $ 198,322 $ 93,299 $ 2,458 $ 418,597 Realized investment losses............... (4,480) (4,130) (3,356) (88) (12,054) Premium income........................... 96,744 464 -- 12,946 110,154 Fees and other income.................... 61,976 38,869 60,210 43,916 204,971 ---------- ---------- ---------- ---------- ----------- Total revenue........................ 278,758 233,525 150,153 59,232 721,668 ---------- ---------- ---------- ---------- ----------- Benefits and Expenses Policyholder benefits.................... 118,556 131,552 63,318 1,650 315,076 Intangible asset amortization............ 55,186 12,782 20,860 -- 88,828 Net deferral of insurance acquisition costs.................................. (35,392) (67,048) (11,416) (43,259) (157,115) Commissions and taxes, licenses and fees................................... 8,260 84,232 44,431 11,264 148,187 Operating expenses....................... 48,166 32,182 29,463 94,635 204,446 ---------- ---------- ---------- ---------- ----------- Total benefits and expenses.......... 194,776 193,700 146,656 64,290 599,422 ---------- ---------- ---------- ---------- ----------- Income (loss) before income tax expense (benefit).................................. 83,982 39,825 3,497 (5,058) 122,246 Income tax expense (benefit)................. 32,873 7,982 (3,914) (1,762) 35,179 ---------- ---------- ---------- ---------- ----------- Net income (loss).................... $ 51,109 $ 31,843 $ 7,411 $ (3,296) $ 87,067 ========== ========== ========== ========== =========== Balance Sheet Future policy benefits................... $1,954,307 $2,956,326 $1,365,963 $ 75,065 $ 6,351,661 ========== ========== ========== ========== =========== Liabilities related to separate accounts. $ 23,410 $8,646,454 $2,509,775 $ -- $11,179,639 ========== ========== ========== ========== =========== Liabilities Future Related to Net Income Policy Separate Revenue (Loss) Benefits Accounts ---------- ---------- ---------- ----------- Total revenue, net income, future policy benefits and liabilities related to separate accounts, respectively, from above............................................. $ 721,668 $ 87,067 $6,351,661 $11,179,639 ---------- ---------- ---------- ----------- Less: Revenue, net income and selected liabilities of FKLA............................................. 268,198 43,922 2,427,185 -- Revenue, net income and selected liabilities of ZLICA............................................ 48,650 7,212 336,336 -- Revenue, net loss and selected liabilities of Zurich Direct........................................... 43,910 (12,368) -- -- ---------- ---------- ---------- ----------- Totals per the Company's consolidated financial statements..................... $ 360,910 $ 48,301 $3,588,140 $11,179,639 ========== ========== ========== ===========
68 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of and for the period ending December 31, 1999:
Income Statement ----------------------------------------------------------- Life Brokerage Financial RSG Direct Total ---------- ---------- ---------- ---------- ----------- (in thousands) Revenue Net investment income.................... $ 137,106 $ 175,590 $ 101,202 $ 1,297 $ 415,195 Realized investment gains (losses)....... 976 (6,980) (98) -- (6,102) Premium income........................... 145,533 410 -- 8,038 153,981 Fees and other income.................... 70,477 48,873 35,742 44,528 199,620 ---------- ---------- ---------- ---------- ---------- Total revenue........................ 354,092 217,893 136,846 53,863 762,694 ========== ========== ========== ========== ========== Benefits and Expenses Policyholder benefits.................... 200,161 112,869 68,801 3,529 385,360 Intangible asset amortization............ 54,957 12,053 13,989 -- 80,999 Net deferral of insurance acquisition costs.................................. (37,433) (43,664) (20,624) (41,412) (143,133) Commissions and taxes, licenses and fees................................... 21,881 66,702 26,700 17,411 132,694 Operating expenses....................... 56,179 25,101 23,611 71,194 176,085 ---------- ---------- ---------- ---------- ---------- Total benefits and expenses.......... 295,745 173,061 112,477 50,722 632,005 ---------- ---------- ---------- ---------- ---------- Income before income tax expense............. 58,347 44,832 24,369 3,141 130,689 Income tax expense........................... 25,707 19,235 10,966 1,114 57,022 ---------- ---------- ---------- ---------- ---------- Net income........................... $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667 ========== ========== ========== ========== ========== Balance Sheet Future policy benefits................... $2,099,940 $2,620,132 $1,577,944 $ 34,957 $6,332,973 ========== ========== ========== ========== ========== Liabilities related to separate accounts. $ 20,552 $6,916,807 $2,840,709 $ -- $9,778,068 ========== ========== ========== ========== ========== Liabilities Future Related to Net Income Policy Separate Revenue (Loss) Benefits Accounts ---------- ---------- ---------- ----------- Total revenue, net income, future policy benefits and liabilities related to separate accounts, respectively, from above............................................. $ 762,694 $ 73,667 $6,332,973 $9,778,068 ---------- ---------- ---------- ---------- Less: Revenue, net income and selected liabilities of FKLA 305,334 24,801 2,299,783 -- Revenue, net income and selected liabilities of ZLICA............................................ 49,460 8,528 314,357 -- Revenue, net loss and selected liabilities of Zurich Direct........................................... 44,481 (4,602) -- -- ---------- ---------- ---------- ---------- Totals per the Company's consolidated financial statements............................... $ 363,419 $ 44,940 $3,718,833 $9,778,068 ========== ========== ========== ==========
69 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (16) Subsequent Event In the first quarter of 2002, the Company amended its BOLI reinsurance agreement with ZICBB. Under the amended agreement, the balance in the FWA will be transferred to a trust account which will act as security for the reinsurance agreement. (17) Effects of New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard 141 ("SFAS 141"), Business Combinations. SFAS 141 supercedes Accounting Principles Board Opinion No. 16 ("APB 16"). SFAS 141 requires that the purchase method of accounting must be used for all business combinations initiated after June 30, 2001. It also requires that unrecognized negative goodwill must be written off immediately as an extraordinary gain and provides more specific guidance on how to determine the accounting acquirer, recognizing intangible assets apart from goodwill, as well as additional financial statement disclosures. The Company intends to adopt SFAS 141 in the first quarter of 2002. However, the implementation of SFAS 141 is not expected to have a material impact on the Company's 2002 financial results. Also in July 2001, the FASB issued Statement of Financial Accounting Standard 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142 primarily addresses the accounting that must be applied to goodwill and intangible assets subsequent to their acquisition. Effective January 1, 2002, SFAS 142 requires that goodwill and indefinite-lived intangible assets will no longer be amortized, but will be tested for impairment at the reporting unit level. Goodwill and indefinite-lived intangible assets will be tested for impairment at least annually and the amortization period for finite-lived intangible assets will no longer be limited to forty years. SFAS 142 also requires additional financial statement disclosure about goodwill and intangible assets. The Company intends to adopt SFAS 142 in the first quarter of 2002. The Company is currently evaluating the impact of implementing SFAS 142, however it is not expected to have a material impact on the Company's 2002 financial results. In June 2001, the FASB issued Statement of Financial Accounting Standard 143 ("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143 amends FASB Statement of Financial Accounting Standard 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002, although earlier application is encouraged. SFAS 143 clarifies and revises existing guidance on financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company intends to adopt SFAS 143 in 2002. The Company is currently evaluating the impact of implementing SFAS 143, however, it is not expected to have a material impact on the Company's 2002 financial results. In October 2001, the FASB issued Statement of Financial Accounting Standard 144 ("SFAS 144"), Accounting for Impairment or Disposal of Long-lived Assets. This Standard will generally be effective on a prospective basis, beginning January 1, 2002. SFAS 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. Significant changes include (1) establishing criteria beyond those previously specified in existing literature for determining when a long-lived is held for sale, and (2) requiring that the depreciable life of a long-lived asset to be abandoned is revised. These provisions could be expected to have the general effect of reducing or delaying recognition of future impairment losses on assets to be disposed, offset by higher depreciation during the remaining holding period. However, the Company does not expect the adoption of this Standard to have a significant impact on the Company's 2002 financial results. SFAS 144 also broadens the presentation of discontinued operations to include a component of an entity (rather than only a segment of a business). 70 APPENDIX A TABLES OF ADJUSTED ACCUMULATION UNIT VALUES (REFLECTING CURRENT CHARGES) The accumulation unit values are for the life of the Separate Account based on current recurring deductions and charges applicable to the Contracts. The Contracts were initially offered June 23, 2000. Values may vary had assets actually been allocated to the Separate Account under the Contracts. ADJUSTED ACCUMULATION UNIT VALUES (Without any optional benefits) Alger American Growth Subaccount Unit Date Values ---- ------ 01/06/89......................................................... 6.560797 12/31/89......................................................... 6.560797 12/31/90......................................................... 8.272435 12/31/91......................................................... 11.470093 12/31/92......................................................... 12.730481 12/31/93......................................................... 15.398146 12/31/94......................................................... 15.428498 12/31/95......................................................... 20.780548 12/31/96......................................................... 23.261594 12/31/97......................................................... 28.889962 12/31/98......................................................... 42.250215 12/31/99......................................................... 55.809720 12/31/00......................................................... 46.977687 12/31/01......................................................... 40.912306 Alger American MidCap Growth Subaccount Unit Date Values ---- ------ 04/30/93......................................................... 7.031208 12/31/93......................................................... 9.669240 12/31/94......................................................... 9.402954 12/31/95......................................................... 13.415203 12/31/96......................................................... 14.824614 12/31/97......................................................... 16.838745 12/31/98......................................................... 21.670086 12/31/99......................................................... 28.219022 12/31/00......................................................... 30.430907 12/31/01......................................................... 28.092038 Alger American Small Capitalization Subaccount Unit Date Values ---- ------ 09/20/88......................................................... 4.409954 12/31/88......................................................... 4.247444 12/31/89......................................................... 6.900023 12/31/90......................................................... 7.408685 12/31/91......................................................... 11.528130 12/31/92......................................................... 11.786453 12/31/93......................................................... 13.186845 12/31/94......................................................... 12.454441 12/31/95......................................................... 17.746101 12/31/96......................................................... 18.257949 12/31/97......................................................... 20.086826 12/31/98......................................................... 22.919875 12/31/99......................................................... 32.465519 12/31/00......................................................... 23.344482 12/31/01......................................................... 16.250270 American Century VP Income & Growth Subaccount Unit Date Values ---- ------ 10/30/97....................................................... 5.094206 12/31/97....................................................... 5.480019 12/31/98....................................................... 6.866480 12/31/99....................................................... 8.003817 12/31/00....................................................... 7.066093 12/31/01....................................................... 6.395409 American Century VP Value Subaccount Unit Date Values ---- ------ 05/01/96....................................................... 4.041348 12/31/96....................................................... 4.500270 12/31/97....................................................... 5.604036 12/31/98....................................................... 5.801182 12/31/99....................................................... 5.680866 12/31/00....................................................... 6.628908 12/31/01....................................................... 7.386026 Credit Suisse Trust-Emerging Markets Subaccount Unit Date Values ---- ------ 12/31/97....................................................... 9.751160 12/31/98....................................................... 7.964464 12/31/99....................................................... 14.269718 12/31/00....................................................... 9.646865 12/31/01....................................................... 8.610977 Dreyfus Socially Responsible Growth Fund Subaccount Unit Date Values ---- ------ 10/07/93....................................................... 11.081435 12/31/93....................................................... 11.860091 12/31/94....................................................... 11.884787 12/31/95....................................................... 15.786565 12/31/96....................................................... 18.891804 12/31/97....................................................... 23.954381 12/31/98....................................................... 30.600271 12/31/99....................................................... 39.306894 12/31/00....................................................... 34.539267 12/31/01....................................................... 26.409562 Fidelity VIP Equity-Income Subaccount Unit Date Values ---- ------ 10/09/86....................................................... 5.057414 12/31/86....................................................... 5.053233 12/31/87....................................................... 4.934210 12/31/88....................................................... 5.980148 12/31/89....................................................... 6.930987 12/31/90....................................................... 5.798372 12/31/91....................................................... 7.527282 12/31/92....................................................... 8.689561 12/31/93....................................................... 10.152410 12/31/94....................................................... 10.735963 12/31/95....................................................... 14.325106 12/31/96....................................................... 16.167515 12/31/97....................................................... 20.456359 12/31/98....................................................... 22.553049 12/31/99....................................................... 23.684564 12/31/00....................................................... 25.362705 12/31/01 23.806388 Fidelity VIP Growth Subaccount Unit Date Values ---- ------ 10/09/86....................................................... 5.973630 12/31/86....................................................... 5.974649 12/31/87....................................................... 6.116984 12/31/88....................................................... 6.982919 12/31/89....................................................... 9.070461 12/31/90....................................................... 7.906698 12/31/91....................................................... 11.363469 12/31/92....................................................... 12.268780 12/31/93....................................................... 14.464492 12/31/94....................................................... 14.283640 12/31/95....................................................... 19.097158 12/31/96....................................................... 21.632870 12/31/97....................................................... 26.382866 12/31/98....................................................... 36.347519 12/31/99....................................................... 49.338761 12/31/00....................................................... 43.380072 12/31/01....................................................... 35.279470 Fidelity VIP II Contrafund Subaccount Unit Date Values ---- ------ 01/03/95....................................................... 8.015394 12/31/95....................................................... 11.062863 12/31/96....................................................... 13.243570 12/31/97....................................................... 16.237918 12/31/98....................................................... 20.845518 12/31/99....................................................... 25.581843 12/31/00....................................................... 23.593346 12/31/01....................................................... 20.447270 Fidelity VIP II Index 500 SC Subaccount Unit Date Values ---- ------ 08/27/92....................................................... 44.588171 12/31/92....................................................... 47.197618 12/31/93....................................................... 51.155402 12/31/94....................................................... 51.051473 12/31/95....................................................... 69.176336 12/31/96....................................................... 83.832253 12/31/97.......................................................109.979631 12/31/98.......................................................139.369127 12/31/99.......................................................165.893307 12/31/00.......................................................148.248563 12/31/01.......................................................128.376475 Janus Aspen Aggressive Growth Subaccount Unit Date Values ---- ------ 09/14/93....................................................... 9.266992 12/31/93....................................................... 10.939575 12/31/94....................................................... 12.563174 12/31/95....................................................... 15.810894 12/31/96....................................................... 16.849043 12/31/97....................................................... 18.740626 12/31/98....................................................... 24.840268 12/31/99....................................................... 55.278973 12/31/00....................................................... 37.223932 12/31/01 22.258325 Janus Aspen Balanced Subaccount Unit Date Values ---- ------ 09/14/93....................................................... 8.748892 12/31/93....................................................... 9.342900 12/31/94....................................................... 9.302892 12/31/95....................................................... 11.460246 12/31/96....................................................... 13.144184 12/31/97....................................................... 15.844589 12/31/98....................................................... 21.007231 12/31/99....................................................... 26.295711 12/31/00....................................................... 25.381313 12/31/01....................................................... 23.896884 Janus Aspen Growth Subaccount Unit Date Values ---- ------ 09/14/93....................................................... 8.969556 12/31/93....................................................... 9.248127 12/31/94....................................................... 9.383172 12/31/95....................................................... 12.057345 12/31/96....................................................... 14.098743 12/31/97....................................................... 17.084781 12/31/98....................................................... 22.882635 12/31/99....................................................... 32.533742 12/31/00....................................................... 27.456671 12/31/01....................................................... 20.408319 Janus Aspen Worldwide Growth Subaccount Unit Date Values ---- ------ 09/14/93....................................................... 9.974708 12/31/93....................................................... 11.833588 12/31/94....................................................... 11.862620 12/31/95....................................................... 14.915690 12/31/96....................................................... 18.998262 12/31/97....................................................... 22.910558 12/31/98....................................................... 29.162063 12/31/99....................................................... 47.352076 12/31/00....................................................... 39.439333 12/31/01....................................................... 30.210355 J.P. Morgan Small Company Subaccount Unit Date Values ---- ------ 12/31/94....................................................... 6.429666 12/31/95....................................................... 8.438573 12/31/96....................................................... 10.149536 12/31/97....................................................... 12.279783 12/31/98....................................................... 11.459715 12/31/99....................................................... 16.342728 12/31/00....................................................... 14.314573 12/31/01....................................................... 12.996161 Scudder Bond Subaccount Unit Date Values ---- ------ 07/16/85....................................................... 2.533563 12/31/85....................................................... 2.708548 12/31/86....................................................... 3.001768 12/31/87....................................................... 3.000134 12/31/88....................................................... 3.123854 12/31/89....................................................... 3.443262 12/31/90....................................................... 3.673524 12/31/91....................................................... 4.265061 12/31/92....................................................... 4.506269 12/31/93....................................................... 5.000201 12/31/94....................................................... 4.702032 12/31/95....................................................... 5.486704 12/31/96....................................................... 5.570602 12/31/97....................................................... 6.001878 12/31/98....................................................... 6.316997 12/31/99....................................................... 6.179913 12/31/00....................................................... 6.748082 12/31/01....................................................... 7.047280 Scudder Capital Growth Subaccount Unit Date Values ---- ------ 07/16/85....................................................... 2.980329 12/31/85....................................................... 3.270542 12/31/86....................................................... 3.948476 12/31/87....................................................... 3.823080 12/31/88....................................................... 4.607176 12/31/89....................................................... 5.582999 12/31/90....................................................... 5.099956 12/31/91....................................................... 7.026349 12/31/92....................................................... 7.381355 12/31/93....................................................... 8.807938 12/31/94....................................................... 7.856434 12/31/95....................................................... 9.977505 12/31/96....................................................... 11.831960 12/31/97....................................................... 15.857279 12/31/98....................................................... 19.293433 12/31/99....................................................... 25.764651 12/31/00....................................................... 22.927385 12/31/01....................................................... 18.259705 Scudder International Subaccount Unit Date Values ---- ------ 05/01/87....................................................... 4.319089 12/31/87....................................................... 3.826997 12/31/88....................................................... 4.410190 12/31/89....................................................... 5.998486 12/31/90....................................................... 5.469279 12/31/91....................................................... 6.017927 12/31/92....................................................... 5.758523 12/31/93....................................................... 7.832673 12/31/94....................................................... 7.668837 12/31/95....................................................... 8.413190 12/31/96....................................................... 9.533268 12/31/97....................................................... 10.266562 12/31/98....................................................... 12.011138 12/31/99....................................................... 18.325805 12/31/00....................................................... 14.171877 12/31/01....................................................... 9.677206 Scudder Government Securities Subaccount Unit Date Values ---- ------ 09/03/87....................................................... 0.537276 12/31/87....................................................... 0.538914 12/31/88....................................................... 0.548496 12/31/89....................................................... 0.619317 12/31/90....................................................... 0.671332 12/31/91....................................................... 0.763566 12/31/92....................................................... 0.798416 12/31/93....................................................... 0.839452 12/31/94....................................................... 0.806342 12/31/95....................................................... 0.946652 12/31/96....................................................... 0.959292 12/31/97....................................................... 1.032147 12/31/98....................................................... 1.090983 12/31/99....................................................... 1.084873 12/31/00....................................................... 1.188598 12/31/01....................................................... 1.261701 Scudder Growth Subaccount Unit Date Values ---- ------ 12/09/83....................................................... 0.398055 12/31/83....................................................... 0.409590 12/31/84....................................................... 0.448065 12/31/85....................................................... 0.553378 12/31/86....................................................... 0.596828 12/31/87....................................................... 0.599251 12/31/88....................................................... 0.594018 12/31/89....................................................... 0.751909 12/31/90....................................................... 0.746754 12/31/91....................................................... 1.175150 12/31/92....................................................... 1.201651 12/31/93....................................................... 1.359770 12/31/94....................................................... 1.288688 12/31/95....................................................... 1.698136 12/31/96....................................................... 2.030942 12/31/97....................................................... 2.433077 12/31/98....................................................... 2.765282 12/31/99....................................................... 3.744306 12/31/00....................................................... 2.993351 12/31/01....................................................... 2.295636 Scudder High Yield Subaccount Unit Date Values ---- ------ 04/06/82....................................................... 0.164990 12/31/82....................................................... 0.203961 12/31/83....................................................... 0.231005 12/31/84....................................................... 0.256732 12/31/85....................................................... 0.308356 12/31/86....................................................... 0.358291 12/31/87....................................................... 0.374589 12/31/88....................................................... 0.428338 12/31/89....................................................... 0.417569 12/31/90....................................................... 0.348689 12/31/91....................................................... 0.522328 12/31/92....................................................... 0.607144 12/31/93....................................................... 0.719173 12/31/94....................................................... 0.694304 12/31/95....................................................... 0.805619 12/31/96....................................................... 0.906202 12/31/97....................................................... 0.998783 12/31/98....................................................... 1.000780 12/31/99....................................................... 1.009714 12/31/00....................................................... 0.910739 12/31/01....................................................... 0.923060 Scudder Investment Grade Bond Subaccount Unit Date Values ---- ------ 05/01/96....................................................... 0.919654 12/31/96....................................................... 0.944554 12/31/97....................................................... 1.017024 12/31/98....................................................... 1.084101 12/31/99....................................................... 1.048677 12/31/00....................................................... 1.138315 12/31/01....................................................... 1.188432 Scudder Money Market Subaccount Unit Date Values ---- ------ 04/06/82....................................................... 0.397045 12/31/82....................................................... 0.427269 12/31/83....................................................... 0.460442 12/31/84....................................................... 0.502660 12/31/85....................................................... 0.528230 12/31/86....................................................... 0.564956 12/31/87....................................................... 0.594555 12/31/88....................................................... 0.630830 12/31/89....................................................... 0.679587 12/31/90....................................................... 0.725584 12/31/91....................................................... 0.758746 12/31/92....................................................... 0.774991 12/31/93....................................................... 0.787311 12/31/94....................................................... 0.808596 12/31/95....................................................... 0.843696 12/31/96....................................................... 0.874898 12/31/97....................................................... 0.909443 12/31/98....................................................... 0.944546 12/31/99....................................................... 0.978071 12/31/00....................................................... 1.024685 12/31/01....................................................... 1.050134 Scudder Small Growth Subaccount Unit Date Values ---- ------ 05/02/94....................................................... 0.708718 12/31/94....................................................... 0.730450 12/31/95....................................................... 0.937585 12/31/96....................................................... 1.185435 12/31/97....................................................... 1.570576 12/31/98....................................................... 1.835643 12/31/99....................................................... 2.439146 12/31/00....................................................... 2.150971 12/31/01....................................................... 1.512338 Scudder Technology Growth Subaccount Unit Date Values ---- ------ 05/03/99....................................................... 1.010606 12/31/99....................................................... 1.779780 12/31/00....................................................... 1.378579 12/31/01....................................................... 0.920443 Scudder Total Return Subaccount Unit Date Values ---- ------ 04/06/82....................................................... 0.334709 12/31/82....................................................... 0.413033 12/31/83....................................................... 0.479638 12/31/84....................................................... 0.450422 12/31/85....................................................... 0.571187 12/31/86....................................................... 0.649043 12/31/87....................................................... 0.644913 12/31/88....................................................... 0.713106 12/31/89....................................................... 0.872666 12/31/90....................................................... 0.904962 12/31/91....................................................... 1.231509 12/31/92....................................................... 1.236512 12/31/93....................................................... 1.368808 12/31/94....................................................... 1.223433 12/31/95....................................................... 1.526396 12/31/96....................................................... 1.753683 12/31/97....................................................... 2.077090 12/31/98....................................................... 2.361631 12/31/99....................................................... 2.677733 12/31/00....................................................... 2.575232 12/31/01....................................................... 2.388375 TAX-DEFERRED ACCUMULATION NON-QUALIFIED CONVENTIONAL ANNUITY SAVINGS PLAN After-tax contributions and tax-deferred earnings After-tax Taxable Lump contributions No Withdrawals Sum Withdrawal and taxable earnings -------------- -------------- -------------------- 10 Years .............. $107,946 $ 86,448 $ 81,693 20 Years .............. 233,048 165,137 133,476 30 Years .............. 503,133 335,021 218,082 This chart compares the accumulation of a $50,000 initial investment into a Non- Qualified Annuity and a Conventional Savings Plan. Contributions to the Non- qualified Annuity and the Conventional Savings Plan are made after-tax. Only the gain in the Non-Qualified Annuity will be subject to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an 8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate of 36%, representative of the target market, adjusted to reflect a decrease of $3 of itemized deductions for each $100 of income over $117,950. Tax rates are subject to change as is the tax-deferred treatment of the Certificates. Income on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the Prospectus. The chart does not reflect the following charges and expenses under Zurich Preferred: 1.00% mortality and expense risk; 0.25% administration charges; any optional benefit charge; ; and $30 annual records maintenance charge. The tax-deferred accumulation would be reduced if these charges were reflected. No implication is intended by the use of these assumptions that the return shown is guaranteed in any way or that the return shown represents an average or expected rate of return over the period of the Contracts. Unlike savings plans, contributions to Non-Qualified Annuities provide tax- deferred treatment on earnings. In addition, contributions to tax-deferred retirement annuities are not subject to current tax in the year of contribution. When monies are received from a Non-Qualified Annuity (and you have many different options on how you receive your funds), they are subject to income tax. At the time of receipt, if the person receiving the monies is retired, not working or has additional tax exemptions, these monies may be taxed at a lesser rate. PERFORMANCE FIGURES (as of December 31, 2001) (With MIAA and no optional benefit riders)
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Alger American Growth Subaccount -13.50% Life of Subaccount (from 05/03/99)................ $34,278 -14.31% -5.63% -6.18% Life of Portfolio (from 01/06/89)................. 246,564 516.41 15.03 N/A Ten Years......................................... 135,677 239.19 12.99 N/A Five Years........................................ 68,522 71.31 11.37 N/A Three Years....................................... 38,060 -4.85 -1.64 N/A One Year.......................................... 34,599 -13.50 -13.50 -13.95 -------------------------------------------------------------------------------------------------------------------------------- Alger American MidCap Growth Subaccount -8.30 Life of Subaccount (from 07/03/00)................ 34,269 -14.33 -9.82 -10.35 Life of Portfolio (from 04/30/93)................. 157,884 294.71 17.14 N/A Five Years........................................ 73,840 84.60 13.04 N/A Three Years....................................... 51,000 27.50 8.43 N/A One Year.......................................... 36,680 -8.30 -8.30 -8.78 -------------------------------------------------------------------------------------------------------------------------------- Alger American Small Capitalization Subaccount -30.91 Life of Subaccount (from 05/03/99)................ 26,891 -32.77 -13.84 -14.48 Life of Portfolio (from 09/20/88)................. 144,461 261.15 10.15 N/A Ten Years......................................... 53,414 33.54 2.93 N/A Five Years........................................ 34,578 -13.55 -2.87 N/A Three Years....................................... 27,828 -30.43 -11.39 N/A One Year.......................................... 27,635 -30.91 -30.91 -31.30 -------------------------------------------------------------------------------------------------------------------------------- American Century VP Income & Growth Subaccount -10.09 Life of Subaccount (from 05/03/99)................ 34,313 -14.22 -5.59 -6.14 Life of Portfolio (from 10/30/97)................. 49,270 23.18 5.12 N/A Three Years....................................... 36,605 -8.49 -2.91 N/A One Year....................................... 35,963 -10.09 -10.09 -10.56 -------------------------------------------------------------------------------------------------------------------------------- American Century VP Value Subaccount 10.74 Life of Subaccount (from 05/03/99)................ 45,188 12.97 4.68 4.22 Life of Portfolio (from 05/01/96)................. 71,831 79.58 10.87 N/A Five Years........................................ 63,934 59.83 9.83 N/A Three Years....................................... 50,090 25.23 7.79 N/A One Year.............................................. 44,297 10.74 10.74 10.20 -------------------------------------------------------------------------------------------------------------------------------- Credit Suisse Trust Emerging Markets Subaccount -11.34 Life of Subaccount (from 05/01/98)................ 28,759 -28.10 -8.60 -9.24 Life of Portfolio (from 12/31/97)................. 34,413 -13.97 -3.69 N/A Three Years....................................... 42,507 6.27 2.05 1.53 One Year.......................................... 35,464 -11.34 -11.34 -11.80 -------------------------------------------------------------------------------------------------------------------------------- The Dreyfus Socially Responsible Growth Fund -24.09 Subaccount Life of Subaccount (from 05/03/99)................ 31,375 -21.56 -8.71 -9.29 Life of Portfolio (from 10/07/93)................. 93,495 133.74 10.86 N/A Five Years........................................ 54,423 36.06 6.35 N/A Three Years....................................... 33,907 -15.23 -5.36 N/A One Year.......................................... 30,366 -24.09 -24.09 -24.49 -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Equity Income Subaccount -6.75 Life of Subaccount (from 05/01/96)................ 61,754 54.38 7.96 7.61 Life of Portfolio (from 10/09/86)................. 184,928 362.32 10.57 N/A Ten Years......................................... 120,276 200.69 11.64 N/A Five Years........................................ 57,340 43.35 7.47 6.94 Three Years....................................... 41,504 3.76 1.24 0.73 One Year.......................................... 37,300 -6.75 -6.75 -7.23 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information.
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Growth Subaccount -19.24% Life of Subaccount (from 05/01/96)................ $66,306 65.77% 9.32% 8.99% Life of Portfolio (from 10/09/86)................. 232,874 482.18 12.26 N/A Ten Years......................................... 118,045 195.11 11.43 N/A Five Years........................................ 63,521 58.80 9.69 9.15 Three Years....................................... 38,149 -4.63 -1.57 -2.07 One Year.......................................... 32,303 -19.24 -19.24 -19.68 -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP II Contrafund(R)Subaccount -13.92 Life of Subaccount (from 05/01/96)................ 67,629 69.07 9.70 9.38 Life of Portfolio (from 01/03/95)................. 100,477 151.19 14.07 N/A Five Years........................................ 60,131 50.33 8.49 7.96 Three Years........................................... 38,558 -3.61 -1.22 -1.71 One Year.......................................... 34,432 -13.92 -13.92 -14.37 -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP II Index 500 SC Subaccount -13.99 Life of Subaccount (from 05/01/96)................ 68,366 70.91 9.91 9.59 Life of Portfolio (from 08/27/92)................. 113,090 182.72 11.76 N/A Five Years........................................ 59,638 49.10 8.32 7.78 Three Years....................................... 36,199 -9.50 -3.27 -3.76 One Year.......................................... 34,403 -13.99 -13.99 -14.44 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Aggressive Growth Subaccount -40.69 Life of Subaccount (from 09/13/95)................ 58,050 45.12 6.09 5.72 Life of Portfolio (from 09/14/93)................. 94,228 135.57 10.87 N/A Five Years........................................ 51,398 28.50 5.14 4.61 Three Years....................................... 35,197 -12.01 -4.17 -4.67 One Year.......................................... 23,724 -40.69 -40.69 -41.04 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Balanced Subaccount -6.46 Life of Subaccount (from 09/13/95)................ 86,578 116.45 13.03 12.77 Life of Portfolio (from 09/14/93)................. 107,409 168.52 12.64 N/A Five Years........................................ 70,847 77.12 12.11 11.57 Three Years....................................... 44,739 11.85 3.80 3.29 One Year.......................................... 37,415 -6.46 -6.46 -6.94 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Growth Subaccount -26.21 Life of Subaccount (from 09/13/95)................ 68,549 71.37 8.92 8.60 Life of Portfolio (from 09/14/93)................. 89,164 122.91 10.14 N/A Five Years........................................ 56,357 40.89 7.10 6.57 Three Years....................................... 35,042 -12.40 -4.32 -4.80 One Year.......................................... 29,515 -26.21 -26.21 -26.62 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Worldwide Growth Subaccount (5) -23.95 Life of Subaccount (from 09/13/95)................ 83,097 107.74 12.30 12.02 Life of Portfolio (from 09/14/93)................. 119,300 198.25 14.07 N/A Five Years........................................ 61,929 54.82 9.14 8.60 Three Years....................................... 40,725 1.81 0.60 0.09 One Year.......................................... 30,420 -23.95 -23.95 -24.36 -------------------------------------------------------------------------------------------------------------------------------- J.P. Morgan Small Company Subaccount -9.82 Life of Subaccount (from 05/03/99)................ 44,630 11.57 4.19 3.73 Life of Portfolio (from 12/31/94)................. 79,286 98.22 10.26 N/A Five Years........................................ 49,829 24.57 4.49 N/A Three Years....................................... 44,596 11.49 3.69 N/A One Year.......................................... 36,072 -9.82 -9.82 -10.29 -------------------------------------------------------------------------------------------------------------------------------- Scudder Bond Subaccount 3.78 Life of Subaccount (from 05/03/99)................ 44,071 10.18 3.70 3.23 Life of Portfolio (from 07/16/85)................. 107,633 169.08 6.19 N/A Ten Years......................................... 62,688 56.72 4.60 N/A Five Years........................................ 49,240 23.10 4.24 N/A Three Years....................................... 43,874 9.69 3.13 N/A One Year.......................................... 41,513 3.78 3.78 3.27 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information.
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Scudder Capital Growth Subaccount -20.92% Life of Subaccount (from 05/01/98)................ $38,937 -2.66% -0.73% -1.24% Life of Portfolio (from 07/16/85)................. 241,440 503.60 11.53 N/A Ten Years......................................... 98,754 146.88 9.46 N/A Five Years........................................ 60,098 50.25 8.48 N/A Three Years....................................... 37,195 -7.01 -2.39 -2.89 One Year.......................................... 31,632 -20.92 -20.92 -21.34 -------------------------------------------------------------------------------------------------------------------------------- Scudder International Subaccount (5) -32.23 Life of Subaccount (from 05/01/98)................ 31,364 -21.59 -6.41 -7.01 Life of Portfolio (from 05/01/87)................. 86,384 115.96 5.38 N/A Ten Years......................................... 60,991 52.48 4.31 N/A Five Years........................................ 39,468 -1.33 -0.27 N/A Three Years....................................... 31,645 -20.89 -7.51 -7.99 One Year.......................................... 27,109 -32.23 -32.23 -32.60 -------------------------------------------------------------------------------------------------------------------------------- Scudder Government Securities Subaccount 5.49 Life of Subaccount (from 11/06/89)................ 79,800 99.50 5.84 5.58 Life of Portfolio (from 09/03/87)................. 90,768 126.92 5.88 N/A Ten Years......................................... 62,690 56.72 4.60 4.08 Five Years........................................ 51,200 28.00 5.06 4.54 Three Years....................................... 45,487 13.72 4.38 3.86 One Year.......................................... 42,197 5.49 5.49 4.97 -------------------------------------------------------------------------------------------------------------------------------- Scudder Growth Subaccount -23.86 Life of Subaccount (from 12/13/83)................ 226,707 466.77 10.08 9.98 Life of Portfolio (from 12/13/83)................. 226,707 466.77 10.08 9.98 Ten Years......................................... 74,147 85.37 6.37 5.84 Five Years........................................ 43,964 9.91 1.91 1.39 Three Years....................................... 32,608 -18.48 -6.58 -7.06 One Year.......................................... 30,456 -23.86 -23.86 -24.27 -------------------------------------------------------------------------------------------------------------------------------- Scudder High Yield Subaccount (6) 0.71 Life of Subaccount (from 04/14/82)................ 219,444 448.61 9.01 8.91 Life of Portfolio (from 04/14/82)................. 219,444 448.61 9.01 8.91 Ten Years......................................... 67,066 67.66 5.30 4.78 Five Years........................................ 39,611 -0.97 -0.20 -0.70 Three Years....................................... 36,249 -9.38 -3.23 -3.72 One Year.......................................... 40,285 0.71 0.71 0.21 -------------------------------------------------------------------------------------------------------------------------------- Scudder Investment Grade Bond Subaccount 3.75 Life of Subaccount (from 05/01/96)................ 50,416 26.04 4.17 3.75 Life of Portfolio (from 05/01/96)................. 50,416 26.04 4.17 3.75 Five Years........................................ 48,971 22.43 4.13 3.61 Three Years....................................... 43,110 7.78 2.53 2.02 One Year.......................................... 41,500 3.75 3.75 3.24 -------------------------------------------------------------------------------------------------------------------------------- Scudder Money Market Subaccount (7) 1.84 Life of Subaccount (from 04/06/82)................ 101,430 153.58 4.82 4.61 Life of Portfolio (from 04/06/82)................. 101,430 153.58 4.82 4.61 Ten Years......................................... 52,453 31.13 2.75 2.24 Five Years........................................ 46,701 16.75 3.15 2.63 Three Years....................................... 43,716 9.29 3.01 2.49 One Year.......................................... 40,736 1.84 1.84 1.33 -------------------------------------------------------------------------------------------------------------------------------- Scudder Small Cap Growth Subaccount -30.22 Life of Subaccount (from 05/02/94)................ 83,646 109.11 10.09 9.83 Life of Portfolio (from 05/02/94)................. 83,646 109.11 10.09 9.83 Five Years........................................ 49,635 24.09 4.41 3.88 Three Years....................................... 32,353 -19.12 -6.83 -7.31 One Year.......................................... 27,910 -30.22 -30.22 -30.62 -------------------------------------------------------------------------------------------------------------------------------- Scudder Technology Growth Subaccount -33.75 Life of Subaccount (from 05/03/99)................ 35,844 -10.39 -4.03 -4.57 Life of Portfolio (from 05/03/99)................. 35,844 -10.39 -4.03 -4.57 One Year.......................................... 26,499 -33.75 -33.75 -34.13 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information.
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Scudder Total Return Subaccount (6).................. -7.86% Life of Subaccount (from 04/14/82)................ $281,084 602.71% 10.39% 10.31% Life of Portfolio (from 04/14/82)................. 281,084 602.71 10.39 10.31 Ten Years......................................... 73,627 84.07 6.29 5.77 Five Years........................................ 53,021 32.55 5.80 5.28 Three Years....................................... 39,759 -0.60 -0.20 -0.70 One Year.......................................... 36,854 -7.86 -7.86 -8.34 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information. PERFORMANCE FIGURES--NOTES * N/A Not Applicable (1) The Nonstandardized Total Return figures quoted are based on a hypothetical $10,000 initial investment and assumes the deduction of all recurring charges and fees applicable under the Contract except for the Withdrawal Charge and any charge for applicable premium taxes which may be imposed in certain states. The Nonstandardized Total Return figures reflect the current charge for the MIAA program, but not the Guaranteed Minimum Death Benefit rider charge or the Earnings Based Death Benefit rider charge. If such charges were reflected, Nonstandardized Total Return would be lower. (2) The Standardized Average Annual Total Return figures quoted are based on a hypothetical $1,000 initial investment and assumes the deduction of all recurring charges and fees applicable under the Contract including the applicable Withdrawal Charge that may be imposed at the end of the quoted period. Premium taxes are not reflected. The Standardized Average Annual Total Return figures reflect the maximum charge for the MIAA program, but not the Guaranteed Minimum Death Benefit rider charge or the Earnings Based Death Benefit rider charge. If such charges were reflected, Standardized Average Annual Total Return would be lower. (3) The Year to Date percentage return figures quoted are based on the change in unit values for the period January 1, 2001 through December 31, 2001. (4) The Ending Values quoted are based on a $10,000 initial investment and assumes the deduction of all recurring charges and fees applicable under the Contract except for the Withdrawal Charge and any charge for applicable premium taxes which may be imposed in certain states. (5) There are special risks associated with investing in non-U.S. companies, including fluctuating foreign currency exchange rates, foreign governmental regulations and differing degrees of liquidity that may adversely affect portfolio securities. (6) The high yield potential offered by these Subaccounts reflect the substantial risks associated with investments in high-yield bonds. (7) An investment in the Scudder Money Market Subaccount is neither insured nor guaranteed by the U.S. government. There can be no assurance that the Scudder Money Market Portfolio will be able to maintain a stable net asset value of $1.00 per share. PERFORMANCE FIGURES (as of December 31, 2001) (With MIAA, GMDB and EBDB)
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Alger American Growth Subaccount -13.85% Life of Subaccount (from 05/03/99)................ $33,912 -15.22% -6.01% -6.56% Life of Portfolio (from 01/06/89)................. 244,810 512.03 14.96 N/A Ten Years......................................... 134,381 235.95 12.88 N/A Five Years........................................ 67,853 69.63 11.15 N/A Three Years....................................... 37,653 -5.87 -2.00 N/A One Year.......................................... 34,461 -13.85 -13.85 -14.30 -------------------------------------------------------------------------------------------------------------------------------- Alger American MidCap Growth Subaccount -8.64 Life of Subaccount (from 07/03/00)................ 34,063 -14.84 -10.18 -10.71 Life of Portfolio (from 04/30/93)................. 156,704 291.76 17.04 N/A Five Years........................................ 73,171 82.93 12.84 N/A Three Years....................................... 50,593 26.48 8.15 N/A One Year.......................................... 36,542 -8.64 -8.64 -9.12 -------------------------------------------------------------------------------------------------------------------------------- Alger American Small Capitalization Subaccount -31.26 Life of Subaccount (from 05/03/99)................ 26,525 -33.69 -14.28 -14.93 Life of Portfolio (from 09/20/88)................. 142,668 256.67 10.04 N/A Ten Years......................................... 52,120 30.30 2.68 N/A Five Years........................................ 33,910 -15.23 -3.25 N/A Three Years....................................... 27,422 -31.45 -11.83 N/A One Year.......................................... 27,497 -31.26 -31.26 -31.64 -------------------------------------------------------------------------------------------------------------------------------- American Century VP Income & Growth Subaccount -10.44 Life of Subaccount (from 05/03/99)................ 33,946 -15.13 -5.97 -6.53 Life of Portfolio (from 10/30/97)................. 48,401 21.00 4.67 N/A Three Years....................................... 36,198 -9.50 -3.27 N/A One Year....................................... 35,825 -10.44 -10.44 -10.90 -------------------------------------------------------------------------------------------------------------------------------- American Century VP Value Subaccount 10.40 Life of Subaccount (from 05/03/99)................ 44,821 12.05 4.36 3.89 Life of Portfolio (from 05/01/96)................. 71,056 77.64 10.66 N/A Five Years........................................ 63,265 58.16 9.60 N/A Three Years....................................... 49,684 24.21 7.49 N/A One Year.............................................. 44,159 10.40 10.40 9.86 -------------------------------------------------------------------------------------------------------------------------------- Credit Suisse Trust Emerging Markets Subaccount -11.68 Life of Subaccount (from 05/01/98)................ 33,982 -15.05 -4.34 -4.91 Life of Portfolio (from 12/31/97)................. 33,864 -15.34 -4.07 N/A Three Years....................................... 42,100 5.25 1.72 1.21 One Year.......................................... 35,326 -11.68 -11.68 -12.15 -------------------------------------------------------------------------------------------------------------------------------- The Dreyfus Socially Responsible Growth Fund -24.43 Subaccount Life of Subaccount (from 05/03/99)................ 31,008 -22.48 -9.11 -9.70 Life of Portfolio (from 10/07/93)................. 92,374 130.94 10.69 N/A Five Years........................................ 53,754 34.39 6.09 N/A Three Years....................................... 33,501 -16.25 -5.74 N/A One Year.......................................... 30,228 -24.43 -24.43 -24.84 -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Equity Income Subaccount -7.10 Life of Subaccount (from 05/01/96)................ 60,979 52.45 7.72 7.36 Life of Portfolio (from 10/09/86)................. 182,879 357.20 10.49 N/A Ten Years......................................... 118,980 197.45 11.52 N/A Five Years........................................ 56,671 41.68 7.22 6.69 Three Years....................................... 41,098 2.74 0.91 0.40 One Year.......................................... 37,162 -7.10 -7.10 -7.57 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information.
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Growth Subaccount -19.59% Life of Subaccount (from 05/01/96)................ $65,531 63.83% 9.09% 8.76% Life of Portfolio (from 10/09/86)................. 230,825 477.06 12.19 N/A Ten Years......................................... 116,750 191.87 11.31 N/A Five Years........................................ 62,852 57.13 9.46 8.92 Three Years....................................... 37,742 -5.64 -1.92 -2.42 One Year.......................................... 32,165 -19.59 -19.59 -20.02 -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP II Contrafund(R)Subaccount -14.27 Life of Subaccount (from 05/01/96)................ 66,854 67.13 9.48 9.15 Life of Portfolio (from 01/03/95)................. 99,523 148.81 13.91 N/A Five Years........................................ 59,462 48.65 8.25 7.72 Three Years....................................... 38,151 -4.62 -1.57 -2.06 One Year.......................................... 34,294 -14.27 -14.27 -14.71 -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP II Index 500 SC Subaccount -14.34 Life of Subaccount (from 05/01/96)................ 67,590 68.98 9.69 9.36 Life of Portfolio (from 08/27/92)................. 111,820 179.55 11.62 N/A Five Years........................................ 58,969 47.42 8.07 7.54 Three Years....................................... 35,793 -10.52 -3.64 -4.13 One Year.......................................... 34,265 -14.34 -14.34 -14.78 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Aggressive Growth Subaccount -41.03 Life of Subaccount (from 09/13/95)................ 57,189 42.97 5.83 5.46 Life of Portfolio (from 09/14/93)................. 93,099 132.75 10.71 N/A Five Years........................................ 50,729 26.82 4.87 4.34 Three Years....................................... 34,790 -13.03 -4.55 -5.04 One Year.......................................... 23,586 -41.03 -41.03 -41.38 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Balanced Subaccount -6.81 Life of Subaccount (from 09/13/95)................ 86,599 116.50 13.03 12.77 Life of Portfolio (from 09/14/93)................. 106,280 165.70 12.49 N/A Five Years........................................ 70,178 75.44 11.90 11.35 Three Years....................................... 44,333 10.83 3.49 2.97 One Year.......................................... 37,277 -6.81 -6.81 -7.28 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Growth Subaccount -26.56 Life of Subaccount (from 09/13/95)................ 67,688 69.22 8.70 8.38 Life of Portfolio (from 09/14/93)................. 88,034 120.09 9.97 N/A Five Years........................................ 55,688 39.22 6.84 6.31 Three Years....................................... 34,635 -13.41 -4.69 -5.17 One Year.......................................... 29,377 -26.56 -26.56 -26.96 -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Worldwide Growth Subaccount (5) -24.29 Life of Subaccount (from 09/13/95)................ 82,236 105.59 12.11 11.84 Life of Portfolio (from 09/14/93)................. 118,171 195.43 13.94 N/A Five Years........................................ 61,260 53.15 8.90 8.36 Three Years....................................... 40,318 0.79 0.26 -0.24 One Year.......................................... 30,282 -24.29 -24.29 -24.70 -------------------------------------------------------------------------------------------------------------------------------- J.P. Morgan Small Company Subaccount -10.16 Life of Subaccount (from 05/03/99)................ 44,263 10.66 3.87 3.40 Life of Portfolio (from 12/31/94)................. 78,331 95.83 10.07 N/A Five Years........................................ 49,160 22.90 4.21 N/A Three Years....................................... 44,189 10.47 3.38 N/A One Year.......................................... 35,934 -10.16 -10.16 -10.63 -------------------------------------------------------------------------------------------------------------------------------- Scudder Bond Subaccount 3.44 Life of Subaccount (from 05/03/99)................ 43,705 9.26 3.38 2.90 Life of Portfolio (from 07/16/85)................. 93,892 134.73 5.32 N/A Ten Years......................................... 61,394 53.49 4.38 N/A Five Years........................................ 48,571 21.43 3.96 N/A Three Years....................................... 43,468 8.67 2.81 N/A One Year.......................................... 41,375 3.44 3.44 2.92 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information.
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Scudder Capital Growth Subaccount -21.27% Life of Subaccount (from 05/01/98)................ $38,433 -3.92% -1.08% -1.60% Life of Portfolio (from 07/16/85)................. 239,229 498.07 11.47 N/A Ten Years......................................... 97,459 143.65 9.31 N/A Five Years........................................ 59,429 48.57 8.24 N/A Three Years....................................... 36,788 -8.03 -2.75 -3.24 One Year.......................................... 31,494 -21.27 -21.27 -21.69 -------------------------------------------------------------------------------------------------------------------------------- Scudder International Subaccount (5) -32.57 Life of Subaccount (from 05/01/98)................ 30,861 -22.85 -6.82 -7.43 Life of Portfolio (from 05/01/87)................. 84,408 111.02 5.22 N/A Ten Years......................................... 59,697 49.24 4.09 N/A Five Years........................................ 38,800 -3.00 -0.61 N/A Three Years....................................... 31,238 -21.91 -7.91 -8.38 One Year.......................................... 26,971 -32.57 -32.57 -32.95 -------------------------------------------------------------------------------------------------------------------------------- Scudder Government Securities Subaccount 5.14 Life of Subaccount (from 11/06/89)................ 78,089 95.22 5.66 5.38 Life of Portfolio (from 09/03/87)................. 88,753 121.88 5.72 N/A Ten Years......................................... 61,351 53.38 4.37 3.85 Five Years........................................ 50,512 26.28 4.78 4.26 Three Years....................................... 45,072 12.68 4.06 3.54 One Year.......................................... 42,058 5.14 5.14 4.63 -------------------------------------------------------------------------------------------------------------------------------- Scudder Growth Subaccount -24.19 Life of Subaccount (from 12/13/83)................ 224,261 460.65 10.01 9.92 Life of Portfolio (from 12/13/83)................. 224,261 460.65 10.01 9.92 Ten Years......................................... 72,885 82.21 6.18 5.66 Five Years........................................ 43,317 8.29 1.61 1.09 Three Years....................................... 32,218 -19.46 -6.96 -7.44 One Year.......................................... 30,323 -24.19 -24.19 -24.60 -------------------------------------------------------------------------------------------------------------------------------- Scudder High Yield Subaccount (6) 0.37 Life of Subaccount (from 04/14/82)................ 216,673 441.68 8.94 8.84 Life of Portfolio (from 04/14/82)................. 216,673 441.68 8.94 8.84 Ten Years......................................... 65,754 64.38 5.10 4.58 Five Years........................................ 38,944 -2.64 -0.53 -1.03 Three Years....................................... 35,846 -10.39 -3.59 -4.08 One Year.......................................... 40,146 0.37 0.37 -0.14 -------------------------------------------------------------------------------------------------------------------------------- Scudder Investment Grade Bond Subaccount 3.40 Life of Subaccount (from 05/01/96)................ 49,622 24.05 3.87 3.45 Life of Portfolio (from 05/01/96)................. 49,622 24.05 3.87 3.45 Five Years........................................ 48,286 20.71 3.84 3.32 Three Years....................................... 42,697 6.74 2.20 1.69 One Year.......................................... 41,361 3.40 3.40 2.89 -------------------------------------------------------------------------------------------------------------------------------- Scudder Money Market Subaccount (7) 1.49 Life of Subaccount (from 04/06/82)................ 98,718 146.80 4.68 4.46 Life of Portfolio (from 04/06/82)................. 98,718 146.80 4.68 4.46 Ten Years......................................... 51,143 27.86 2.49 1.98 Five Years........................................ 46,028 15.07 2.85 2.34 Three Years....................................... 43,310 8.28 2.69 2.18 One Year.......................................... 40,597 1.49 1.49 0.99 -------------------------------------------------------------------------------------------------------------------------------- Scudder Small Cap Growth Subaccount -30.56 Life of Subaccount (from 05/02/94)................ 82,615 106.54 9.92 9.65 Life of Portfolio (from 05/02/94)................. 82,615 106.54 9.92 9.65 Five Years........................................ 48,985 22.46 4.14 3.61 Three Years....................................... 31,963 -20.09 -7.20 -7.69 One Year.......................................... 27,778 -30.56 -30.56 -30.95 -------------------------------------------------------------------------------------------------------------------------------- Scudder Technology Growth Subaccount -34.10 Life of Subaccount (from 05/03/99)................ 35,478 -11.31 -4.40 -4.94 Life of Portfolio (from 05/03/99)................. 35,478 -11.31 -4.40 -4.94 One Year.......................................... 26,361 -34.10 -34.10 -34.48 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information.
-------------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL TOTAL RETURN(1) RETURN(2) (Non-Standardized) Standardized -------------------------------------------------------------------------------------------------------------------------------- Year-to-Date Cumulative Annualized Annualized (%) Ending (%) (%) (%) Return(3) Value(4) Return Return Return -------------------------------------------------------------------------------------------------------------------------------- Scudder Total Return Subaccount (6) -8.21% Life of Subaccount (from 04/14/82)................ $278,284 595.71% 10.33% 10.25% Life of Portfolio (from 04/14/82)................. 278,284 595.71 10.33 10.25 Ten Years......................................... 72,318 80.79 6.10 5.58 Five Years........................................ 52,348 30.87 5.53 5.01 Three Years....................................... 39,355 -1.61 -0.54 -1.04 One Year.......................................... 36,717 -8.21 -8.21 -8.68 --------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investment return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page __ for additional information. PERFORMANCE FIGURES--NOTES * N/A Not Applicable (1) The Nonstandardized Total Return figures quoted are based on a hypothetical $10,000 initial investment and assumes the deduction of all recurring charges and fees applicable under the Contract except any charge for applicable premium taxes which may be imposed in certain states and prorated portion of the Records Maintenance Charge. The Nonstandardized Total Return figures also reflect the current charge for the MIAA program, the Guaranteed Minimum Death Benefit rider charge and the Earnings Based Death Benefit rider charge. (2) The Standardized Average Annual Total Return figures quoted are based on a hypothetical $1,000 initial investment and assumes the deduction of all recurring charges and fees applicable under the Contract including a prorated portion of the Records Maintenance Charge, the maximum charge for the MIAA program, the Guaranteed Minimum Death Benefit rider charge and the Earnings Based Death Benefit rider charge. Premium taxes are not reflected. (3) The Year to Date percentage return figures quoted are based on the change in unit values for the period January 1, 2001 through December 31, 2001. (4) The Ending Values quoted are based on a $10,000 initial investment and assumes the deduction of all recurring charges and fees applicable under the Contract except any charge for applicable premium taxes which may be imposed in certain states. (5) There are special risks associated with investing in non-U.S. companies, including fluctuating foreign currency exchange rates, foreign governmental regulations and differing degrees of liquidity that may adversely affect portfolio securities. (6) The high yield potential offered by these Subaccounts reflect the substantial risks associated with investments in high-yield bonds. (7) An investment in the Scudder Money Market Subaccount is neither insured nor guaranteed by the U.S. government. There can be no assurance that the Scudder Money Market Portfolio will be able to maintain a stable net asset value of $1.00 per share. APPENDIX B STATE PREMIUM TAX CHART Rate of Tax Qualified Non-Qualified State Plans Plans ------------- ------------- ---------- California........................ .50%* 2.35%* Maine............................. 2.00% 2.00% Nevada............................ 3.50% 3.50%* South Dakota...................... -- 1.25% West Virginia..................... 1.00% 1.00% Wyoming........................... -- 1.00% * Taxes become due when annuity benefits commence, rather than when the premiums are collected. At the time of annuitization, the premium tax payable will be charged against the Contract Value. APPENDIX C CONDENSED FINANCIAL INFORMATION The following Condensed Financial Information is derived from the financial statements of the Separate Account. The data should be read in conjunction with the financial statements, related notes and other financial information included in the Statement of Additional Information. Each table shows unit values under Contracts with a different combination of optional benefits, including the Guaranteed Retirement Income Benefit, which is no longer offered under new Contracts. The following chart shows which combination of benefits each table represents. Information for the least and most expensive currently offered combinations are shown in the Prospectus under the heading "Condensed Financial Information". In each table, Condensed Financial Information is not shown for certain Subaccounts available under the Contract because those Subaccounts did not have investments under Contracts reflecting that possible combination of benefits and separate account charges indicated in that table as of the dates covered by that table.
Table Total Optional Guaranteed Earnings Based Ten-Year Guaranteed Seven-Year Guaranteed Benefit Charge Minimum Death Death Benefit Retirement Income Retirement Income Benefit Charge Charge Benefit Charge Benefit Charge C-1 0.45% Y N Y N C-2 0.65% Y Y Y N
Table C-1 Year End December 31 2001 Beginning of Year* End of Year Subaccount Unit Value Number of Units Unit Value (000s) American Century VP Value Subaccount 6.473 0 7.378 Fidelity VIP Equity-Income Subaccount 21.717 0 23.779 Fidelity VIP Growth Subaccount 30.186 0 35.239 J.P. Morgan Small Company Subaccount 10.738 0 12.981 Scudder Bond Subaccount 7.100 0 7.039 Scudder International Subaccount 9.610 0 9.666 Table C-2 Subaccount American Century VP Value Subaccount 6.472 1 7.374 Fidelity VIP Equity-Income Subaccount 21.717 0 23.767 Fidelity VIP Growth Subaccount 30.186 0 35.221 J.P. Morgan Small Company Subaccount 10.738 1 12.975 Scudder Bond Subaccount 7.099 3 7.036 Scudder International Subaccount 9.610 2 9.661 Scudder Money Market Subaccount 1.048 6 1.048
*Commencement of Offering on October 1, 2001 PART C OTHER INFORMATION Item 24 Financial Statements and Exhibits (a) Financial Statements included in Part B: Condensed Financial Information KILICO Variable Annuity Separate Account Report of Independent Accountants Combined Statement of Assets and Liabilities and Contract Owners' Equity as of December 31, 2001 Combined Statement of Operations for the year ended December 31, 2001 Combined Statements of Changes in Contract Owners' Equity for the Years ended December 31, 2001 and 2000 Notes to Financial Statements Kemper Investors Life Insurance Company and Subsidiaries Report of Independent Accountants Kemper Investors Life Insurance Company and Subsidiaries Consolidated Balance Sheets as of December 31, 2001 and 2000. Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statement of Operations, years ended December 31, 2001, 2000 and 1999. Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income, years ended December 31, 2001,2000 and 1999. Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statement of Stockholder's Equity, years ended December 31, 2001, 2000 and 1999. Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statement of Cash Flows, years ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. (b) Exhibits: /3/1.1 A copy of resolution of the Board of Directors of Kemper Investors Life Insurance Company dated September 13, 1977. /3/1.2 A copy of Record of Action of Kemper Investors Life Insurance Company dated April 15, 1983. 2. Not Applicable. /2/3.1 Distribution Agreement between Investors Brokerage Services, Inc. and KILICO. /1/3.2 Addendum to Kemper Financial Services, Inc. Selling Group Agreement. /20/4.1 Form of Group Variable and Market Value Adjusted Annuity Contract. /20/4.2 Form of Certificate to Variable and Market Value Adjusted Annuity Contract. /20/4.3 Form of Individual Variable and Market Value Adjusted Annuity Contract. /20/4.4 Unisex Rider. /20/4.5 Qualified Plan Rider. /21/4.6 Form of Guaranteed Minimum Death Benefit Rider. /21/4.7 Form of Earnings Based Death Benefit Rider. /21/4.8 Form of Guaranteed Retirement Income Benefit Rider. /20/5.1 Form of Group Master Application. /20/5.2 Form of Variable Annuity Application. /2/6.1 Kemper Investors Life Insurance Company Articles of Incorporation. /4/6.2 Kemper Investors Life Insurance Company Bylaws. 7. Not Applicable. /7/8.1 Fund Participation Agreement among KILICO, Kemper Investors Fund (now known as Scudder Variable Series II), Zurich Kemper Investments, Inc. and Kemper Distributors, Inc. /6/8.2(a) Participation Agreement between KILICO and Scudder Variable Life Investment Fund (now known as Scudder Variable Series I). /6/8.2(b) Participating Contract and Policy Agreement between KILICO and Scudder Kemper Investments, Inc. /6/8.2(c) Indemnification Agreement between KILICO and Scudder Kemper Investments, Inc. /5/8.3(a) Fund Participation Agreement by and among The Alger American Fund, KILICO and Fred Alger & Company, Incorporated. /5/8.3(b) Service Agreement between Fred Alger Management, Inc. and KILICO (redacted). /8/8.4(a) Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund and Fidelity Distributors Corporation. /9/8.4(b) Third Amendment to Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund and Fidelity Distributors Corporation. /8/8.4(c) Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund II and Fidelity Distributors Corporation. /10/8.4(d) Amendment to Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund II and Fidelity Distributors Corporation. /11/8.5(a) Fund Participation Agreement among KILICO, Janus Aspen Series and Janus Capital Corporation. /12/8.5(b) Service Agreement between KILICO and Janus Capital Corporation. /15/8.6 Fund Participation Agreement by and between KILICO and American Century Investment Management, Inc. /16/8.7 Fund Participation Agreement between KILICO and J.P. Morgan Series Trust II. /7/8.8(a) Participation Agreement By and Among KILICO and Warburg, Pincus Trust and Credit Suisse Asset Management, LLC (successor to Warburg Pincus Asset Management, Inc.) and Credit Suisse Asset Management Securities, Inc. (f/k/a Counsellors Securities Inc.). /14/8.8(b) Service Agreement between Credit Suisse Asset Management, LLC (successor to Warburg Pincus Asset Management, Inc.) and Federal Kemper Life Assurance Company and KILICO. /17/8.8(c) Restatement of Participation Agreement among Counsellors Securities Inc., Warburg Pincus Asset Management, Inc. and/or the Warburg Pincus Funds and KILICO. /13/8.9(a) Fund Participation Agreement between KILICO and The Dreyfus Socially Responsible Growth Fund, Inc. /5/8.9(b) November 1, 1999 Amendment to Fund Participation Agreement between KILICO. /5/8.9(c) Administrative Services Agreement by and between The Dreyfus Corporation and KILICO (redacted). /5/8.9(d) November 1, 1999 Amendment to Administrative Services Agreement by and between The Dreyfus Corporation and KILICO (redacted). /21/9. Opinion and Consent of Counsel. 10. Consent of PricewaterhouseCoopers LLP, Independent Accountants. 11. Not Applicable. 12. Not Applicable. /21/13. Schedules for Computation of Performance Information. /22/16.1 Schedule III: Supplementary Insurance Information (years ended December 31, 2001 and 2000). /22/16.2 Schedule IV: Reinsurance (year ended December 31, 2001). /18/16.3 Schedule IV: Reinsurance (year ended December 31, 2000). /19/16.4 Schedule IV: Reinsurance (year ended December 31, 1999). /22/16.5 Schedule V: Valuation and qualifying accounts (year ended December 31, 2001). /18/16.6 Schedule V: Valuation and qualifying accounts (year ended December 31, 2000). /19/16.7 Schedule V: Valuation and qualifying accounts (year ended December 31, 1999). ------------ /1/ Incorporated herein by reference to Exhibits filed with Amendment No. 32 to the Registration Statement on Form N-4 for KILICO Variable Annuity Separate Account (File No. 811-3199) filed on or about April 27, 1995. /2/ Incorporated herein by reference to Exhibits filed with the Registration Statement on Form S-1 for KILICO (File No. 333-02491) filed on or about April 12, 1996. /3/ Incorporated herein by reference to Exhibits filed with the Registration Statement on Form N-4 for KILICO (File No. 333-22375) filed on or about February 26, 1997. /4/ Incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form S-1 for KILICO (File No. 333-02491) filed on or about April 23, 1997. /5/ Incorporated herein by reference to Amendment No. 6 to the Registration Statement on Form S-1 (File No. 333-22389) filed on or about April 17, 2000. /6/ Incorporated herein by reference to Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-22389) filed on or about April 20, 1999. /7/ Incorporated herein by reference to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-22389) filed on or about April 8, 1998. /8/ Incorporated herein by reference to Post-Effective Amendment No. 24 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 26, 1996. /9/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 (File No. 333-88845) filed on or about December 29, 1999. /10/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the Registration Statement on Form S-6 (File No. 33-65399) filed on or about April 23, 1999. /11/ Incorporated herein by reference to Post-Effective Amendment No. 23 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about September 14, 1995. /12/ Incorporated herein by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 28, 1997. /13/ Incorporated herein by reference to Post-Effective Amendment No. 28 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 28, 1998. /14/ Incorporated herein by reference to Post-Effective Amendment No. 4 to the Registration Statement of FKLA Variable Separate Account on Form S-6 (File No. 33-79808) filed on or about April 30, 1997. /15/ Incorporated herein by reference to the Initial Registration Statement on Form S-1 (File No. 333-32840) filed on or about March 20, 2000. /16/ Incorporated herein by reference to Post-Effective Amendment No. 29 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 26, 2000. /17/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the Registration Statement on Form N-4 (File No. 333-22375) filed on or about September 14, 1999. /18/ Incorporated herein by reference to Form 10-K for Kemper Investors Life Insurance Company for fiscal year ended December 31, 2000 filed on or about March 28, 2001. /19/ Incorporated herein by reference to Form 10-K for Kemper Investors Life Insurance Company for fiscal year ended December 31, 1999 filed on or about March 29, 2000. /20/ Incorporated herein by reference to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-32632) filed on or about June 21, 2000. /21/ Incorporated herein by reference to Post-Effective Amendment No. 2 to the Registration Statement on Form N-4 (File No. 333-32840) filed on or about March 2, 2001. /22/ Incorporated herein by reference to Form 10-K for Kemper Investors Life Insurance Company for fiscal year ended December 31, 2001 filed on or about March 29, 2002. Item 25. Directors and Officers of Kemper Investors Life Insurance Company The directors and officers of KILICO are listed below together with their current positions. The address of each officer and director is 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801.
Name Office with KILICO ---- ------------------ Gale K. Caruso ................................. President, Chief Executive Officer and Director Frederick L. Blackmon .......................... Executive Vice President, Chief Financial Officer and Director Russell M. Bostick ............................. Executive Vice President and Chief Information Officer James C. Harkensee ............................. Executive Vice President Edward K. Loughridge ........................... Executive Vice President and Corporate Development Officer Debra P. Rezabek ............................... Executive Vice President, General Counsel, Corporate Secretary and Director Edward L. Robbins .............................. Executive Vice President and Chief Actuary George Vlaisavljevich .......................... Executive Vice President Martin D. Feinstein ............................ Chairman of the Board
Item 26. Persons Controlled by or Under Common Control with the Insurance Company or Registrant Incorporated herein by reference to Post-Effective Amendment No. 29 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 26, 2000. Item 27. Number of Contract Owners As of March 31, 2002, the Registrant had approximately 276 qualified and non-qualified Zurich Preferred Contract Owners. Item 28. Indemnification To the extent permitted by law of the State of Illinois and subject to all applicable requirements thereof, Article VI of the By-Laws of Kemper Investors Life Insurance Company ("KILICO") provides for the indemnification of any person against all expenses (including attorneys fees), judgments, fines, amounts paid in settlement and other costs actually and reasonably incurred by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in which he is a party or is threatened to be made a party by reason of his being or having been a director, officer, employee or agent of KILICO, or serving or having served, at the request of KILICO, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of his holding a fiduciary position in connection with the management or administration of retirement, pension, profit sharing or other benefit plans including, but not limited to, any fiduciary liability under the Employee Retirement Income Security Act of 1974 and any amendment thereof, if he acted in good faith and in a manner he reasonably believed to be in and not opposed to the best interests of KILICO, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that he did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of KILICO, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. No indemnification shall be made in respect of any claim, issue or matter as to which a director or officer shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the company, unless and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, employees or agents of KILICO pursuant to the foregoing provisions, or otherwise, KILICO has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by KILICO of expenses incurred or paid by a director, officer, employee or agent of KILICO in the successful defense of any action, suit or proceeding) is asserted by such director, officer, employee or agent of KILICO in connection with variable annuity contracts, KILICO will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by KILICO is against public policy as expressed in that Act and will be governed by the final adjudication of such issue. Item 29.(a) Principal Underwriter Investors Brokerage Services, Inc. acts as principal underwriter for KILICO Variable Annuity Separate Account, KILICO Variable Separate Account, Kemper Investors Life Insurance Company Variable Annuity Account C and FKLA Variable Separate Account. Item 29.(b) Information Regarding Principal Underwriter, Investors Brokerage Services, Inc. The address of each officer is 1600 McConnor Parkway, Schaumburg, IL 60196-6801.
Name and Principal Position and Offices Business Address with Underwriter ------------------ -------------------- Gale K. Caruso ................................. Chairman and Director Michael E. Scherrman ........................... President and Director David S. Jorgensen ............................. Vice President and Treasurer Thomas K. Walsh ................................ Asst. Vice President & Chief Compliance Officer Debra P. Rezabek ............................... Secretary Frank J. Julian ................................ Assistant Secretary Allen R. Reed .................................. Assistant Secretary George Vlaisavljevich .......................... Director
Item 29.(c) Not Applicable. Item 30. Location of Accounts and Records Accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are maintained by Kemper Investors Life Insurance Company at its home office at 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 or at Deutsche Investment Management Americas Inc., 222 South Riverside Plaza, Chicago, Illinois 60606-5808. Item 31. Management Services Not Applicable. Item 32. Undertakings and Representations a. Registrant hereby undertakes to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than sixteen (16) months old for so long as payment under the variable annuity contracts may be accepted. b. Registrant hereby undertakes to include either (1) as part of any application to purchase a contract offered by the Prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a postcard or similar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information. c. Registrant hereby undertakes to deliver any Statement of Additional Information and any financial statement required to be made available under this Form promptly upon written or oral request. Representation Regarding Fees and Charges Pursuant to Section 26 of the Investment Company Act of 1940 Kemper Investors Life Insurance Company ("KILICO") represents that the fees and charges deducted under the Contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by KILICO. Representation Regarding Contracts Issued to Participants of Tax-Sheltered Annuity Programs KILICO, depositor and sponsor of Registrant, KILICO Variable Annuity Separate Account (the "Separate Account"), and Investors Brokerage Services, Inc. ("IBS"), the principal underwriter of the Group Flexible Premium Modified Guaranteed, Fixed and Variable Deferred Annuity Contracts (the "Contracts") issued by Registrant, will issue the Contracts to participants in IRC 403(b) Tax-Sheltered Annuity Programs in reliance upon, and in compliance with, the no-action letter dated November 28, 1988 to American Council of Life Insurance. In connection therewith, KILICO, the Separate Account and IBS represent that they will: 1. Include appropriate disclosure regarding the restrictions on redemptions imposed by IRC Section 403(b)(11) in each registration statement, including the Prospectus, used in connection with IRC 403(b) Tax-Sheltered Annuity Programs; 2. Include appropriate disclosure regarding the restrictions on redemptions imposed by IRC Section 403(b)(11) in any sales literature used in connection with the offer of Contracts to 403(b) participants; 3. Instruct salespeople who solicit participants to purchase Contracts specifically to bring the restrictions on redemption imposed by 403(b)(11) to the attention of potential participants; and 4. Obtain from each participant who purchases an IRC Section 403(b) annuity contract, prior to or at the time of such purchase, a signed statement acknowledging the restrictions on redemption imposed by IRC Section 403(b) and the investment alternatives available under the employer's IRC Section 403(b) arrangement, to which the participant may elect to transfer his or her contract value. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, KILICO Variable Annuity Separate Account, certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Amendment to the Registration Statement, and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Schaumburg and State of Illinois on the 29th day of April, 2002. KILICO VARIABLE ANNUITY SEPARATE ACCOUNT (Registrant) By: Kemper Investors Life Insurance Company By: /s/ GALE K. CARUSO ------------------------------------------------------ Gale K. Caruso, President and Chief Executive Officer KEMPER INVESTORS LIFE INSURANCE COMPANY (Depositor) By: /s/ GALE K. CARUSO ------------------------------------------------------ Gale K. Caruso, President and Chief Executive Officer As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following directors and principal officers of Kemper Investors Life Insurance Company in the capacities indicated on the 29th day of April, 2002.
Signature Title --------- ----- /s/ GALE K. CARUSO President, Chief Executive Officer and Director ---------------------------- (Principal Executive Officer) Gale K. Caruso /s/ MARTIN D. FEINSTEIN Chairman of the Board ---------------------------- Martin D. Feinstein /s/ FREDERICK L. BLACKMON Executive Vice President and Chief Financial Officer & Director --------------------------- (Principal Financial Officer and Principal Accounting Officer) Frederick L. Blackmon /s/ DEBRA P. REZABEK Director ---------------------------- Debra P. Rezabek /s/ GEORGE VLAISAVLJEVICH Director ---------------------------- George Vlaisavljevich
EXHIBIT LIST
Sequentially Exhibit Page Number Description Number* ------- ----------- ------------ 10. Consent of PricewaterhouseCoopers LLP, Independent Accountants.