-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H3bXRwaMrN7D+0iHo2lcKO+EfHqFzYZEaUWxT2sbvKsZDswiAfbk35AnC51P7cqh sTZLKLs14mkXxaluU2n0SA== 0000950131-03-002361.txt : 20030428 0000950131-03-002361.hdr.sgml : 20030428 20030428154210 ACCESSION NUMBER: 0000950131-03-002361 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20030428 EFFECTIVENESS DATE: 20030501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILICO VARIABLE ANNUITY SEPARATE ACCOUNT CENTRAL INDEX KEY: 0000353448 IRS NUMBER: 363050975 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 333-22375 FILM NUMBER: 03666771 BUSINESS ADDRESS: STREET 1: 1600 MCCONNOR PARKWAY CITY: SCHAUMBURG STATE: IL ZIP: 60196-6801 BUSINESS PHONE: 847-874-4000 MAIL ADDRESS: STREET 1: 1600 MCCONNOR PARKWAY CITY: SCHAUMBURG STATE: IL ZIP: 60196-6801 FORMER COMPANY: FORMER CONFORMED NAME: KILICO MONEY MARKET SEPARATE ACCOUNT DATE OF NAME CHANGE: 19890824 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILICO VARIABLE ANNUITY SEPARATE ACCOUNT CENTRAL INDEX KEY: 0000353448 IRS NUMBER: 363050975 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03199 FILM NUMBER: 03666772 BUSINESS ADDRESS: STREET 1: 1600 MCCONNOR PARKWAY CITY: SCHAUMBURG STATE: IL ZIP: 60196-6801 BUSINESS PHONE: 847-874-4000 MAIL ADDRESS: STREET 1: 1600 MCCONNOR PARKWAY CITY: SCHAUMBURG STATE: IL ZIP: 60196-6801 FORMER COMPANY: FORMER CONFORMED NAME: KILICO MONEY MARKET SEPARATE ACCOUNT DATE OF NAME CHANGE: 19890824 485BPOS 1 d485bpos.txt ZURICH LIFE DESTINATIONS AND FARMERS PROSPECTUS As filed with the Securities and Exchange Commission on April 28, 2003 Commission File Nos. 333-22375 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. 11 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 85 [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 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: As soon as practicable after the effective date of this filing. 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, 2003 pursuant to paragraph (b) of Rule 485 [ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485 [ ] on (date) pursuant to paragraph (a)(1) of Rule 485 If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment Title of Securities Being Registered: Variable portion of individual and group variable, fixed and market value adjusted deferred annuity contracts. EXPLANATORY NOTE This amendment to the registration statement on Form N-4 includes two prospectuses describing Individual and Group Variable, Fixed and Market Value Adjusted Deferred Annuity Contracts which are substantially identical, except that the Contract described in the second prospectus makes available to Contract owners different investment subaccounts of Registrant than does the Contract described in the original prospectus. CROSS-REFERENCE SHEET KILICO VARIABLE ANNUITY SEPARATE ACCOUNT Registration Statement on Form N-4
N-4 Item 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 Funds; Fixed Account Option; Voting Rights Item 6. Deductions and Expenses Contract Charges and Expenses Item 7. General Description of Variable Annuity Contracts .. The Contracts 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 Funds; The Contracts Item 11. Redemptions ........................................ The Contracts; 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, FIXED AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS - -------------------------------------------------------------------------------- Scudder Destinations/SM/ Annuity Issued By KILICO VARIABLE ANNUITY SEPARATE ACCOUNT and KEMPER INVESTORS LIFE INSURANCE COMPANY This Prospectus describes Variable, Fixed 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. 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. The Contract was available to be purchased by natural persons, or by trusts or custodial accounts which hold the Contract as agent for and for the sole benefit of a natural person. The Contract is not available for sale to other types of purchasers without our prior approval. The Contract is currently not being issued. You may allocate purchase payments to one or more of the variable options or the Fixed Account Option, or the Market Value Adjustment ("MVA") option in states where a MVA is authorized. The availability of the Fixed Option and the MVA Option may be restricted in some states. The Contract currently offers thirty-nine investment options, each of which is a Subaccount of KILICO Variable Annuity Separate Account. Currently, you may choose among the following Portfolios or Funds: The Alger American Fund (Class O Shares): . Alger American Balanced Portfolio . Alger American Leveraged AllCap Portfolio Credit Suisse Trust: . Credit Suisse Trust-Emerging Markets Portfolio . Credit Suisse Trust-Global Post-Venture Capital Portfolio Dreyfus Investment Portfolios (Initial Share Class): . MidCap Stock Portfolio ("Dreyfus IP MidCap Stock Portfolio") The Dreyfus Socially Responsible Growth Fund, Inc. (Initial Share Class) INVESCO Variable Investment Funds, Inc.: . INVESCO VIF-Utilities Fund Scudder Variable Series I (Class A Shares): . Scudder 21st Century Growth . Scudder Capital Growth . Scudder Global Discovery . Scudder Growth and Income . Scudder Health Sciences . Scudder International Scudder Variable Series II (Class A Shares): . Scudder Aggressive Growth . Scudder Blue Chip . Scudder Contrarian Value . Scudder Fixed Income (formerly Scudder Investment Grade Bond) . Scudder Global Blue Chip . Scudder Government Securities . Scudder Growth . Scudder High Income (formerly Scudder High Yield) . Scudder International Select Equity* . Scudder Money Market . Scudder Small Cap Growth . Scudder Strategic Income . Scudder Technology Growth . Scudder Total Return . SVS Davis Venture Value . SVS Dreman Financial Services . SVS Dreman High Return Equity . SVS Dreman Small Cap Value . SVS Eagle Focused Large Cap Growth . SVS Focus Value+Growth . SVS Index 500 . SVS INVESCO Dynamic Growth . SVS Janus Growth And Income . SVS Janus Growth Opportunities . SVS Oak Strategic Equity . SVS Turner Mid Cap Growth *Effective November 1, 2002, pursuant to shareholder approval, the Scudder New Europe Portfolio merged into the Scudder International Select Equity Portfolio. Subaccounts and Portfolios may be added or deleted in the future. Contract Values allocated to any of the Subaccounts vary, reflecting the investment experience of the selected Subaccounts. Contract Values allocated to the Fixed Account or one or more Guarantee Periods of the Market Value Adjustment Option accumulate on a fixed basis. 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 (847) 874-4000. A table of contents for the SAI appears on page 40. 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, 2003. 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.................................................. 6 CONDENSED FINANCIAL INFORMATION...................................... 9 KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS........... 12 FIXED ACCOUNT OPTION................................................. 18 THE CONTRACTS........................................................ 18 CONTRACT CHARGES AND EXPENSES........................................ 25 THE ANNUITY PERIOD................................................... 27 FEDERAL INCOME TAXES................................................. 31 DISTRIBUTION OF CONTRACTS............................................ 37 VOTING RIGHTS........................................................ 37 REPORTS TO CONTRACT OWNERS AND INQUIRIES............................. 38 DOLLAR COST AVERAGING................................................ 38 SYSTEMATIC WITHDRAWAL PLAN........................................... 39 EXPERTS.............................................................. 39 LEGAL MATTERS........................................................ 39 SPECIAL CONSIDERATIONS............................................... 39 AVAILABLE INFORMATION................................................ 39 LEGAL PROCEEDINGS.................................................... 40 TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION............... 40 FINANCIAL STATEMENTS................................................. 40 CONTRACTS ISSUED BEFORE NOVEMBER 12, 2001............................ 40 ANNUAL REPORTS AND OTHER DOCUMENTS................................... 42 APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT................. 44 APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT. 46
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. Accumulation Unit--A unit of measurement used to determine the value of each Subaccount during the Accumulation Period. Annuitant--The person designated to receive or who is actually receiving annuity payments and upon the continuation of whose life annuity payments involving life contingencies depend. Annuity Date--The date on which annuity payments are to commence. Annuity Option--One of several forms in which annuity payments can be made. Annuity Period--The period starting on the Annuity Date. Annuity Unit--A unit of measurement used to determine the amount of Variable Annuity payments. Beneficiary--The person designated to receive any benefits under a Contract upon the death of the Annuitant or the Owner 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, Fixed and Market Value Adjusted 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 Separate Account Contract Value, Accumulated Guarantee Period Value and Fixed Account Contract Value. Contract Year--Period between anniversaries of the Contract's Date of Issue. Contract Quarter--Periods between quarterly anniversaries of the Contract's Date of Issue. Contribution Year--Each one year period following the date a Purchase Payment is made. Date of Issue--The date on which the first Contract Year commences. Fixed Account--The General Account of KILICO to which you may allocate all or a portion of Purchase Payments or Contract Value. We guarantee a minimum rate of interest on Purchase Payments allocated to the Fixed Account. Fixed Account Contract Value--The value of your Contract interest in the Fixed Account. Fixed Annuity--An annuity under which we guarantee the amount of each annuity payment; it does not vary with the investment experience of a Subaccount. Fund or Funds--The Alger American Fund, Credit Suisse Trust, Dreyfus Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc., INVESCO Variable Investment Funds, Inc., Scudder Variable Series I and Scudder Variable Series II, including any Portfolios thereunder. General Account--All our assets other than those allocated to any separate account. 1 Guaranteed Interest Rate--The rate of interest we establish for a given Guarantee Period. Guarantee Period--The time when an amount is credited with a Guaranteed Interest Rate. Guarantee Period options may range from one to ten years, at our option. Guarantee Period Value--The value of your Contract interest in a Guarantee Period is the sum of your: (1) Purchase Payment allocated or amount transferred to a Guarantee Period; plus (2) interest credited; minus (3) withdrawals, previously assessed Withdrawal Charges and transfers; and (4) as adjusted for any applicable Market Value Adjustment previously made. Market Adjusted Value--A Guarantee Period Value adjusted by the market value adjustment formula on any date prior to the end of a Guarantee Period. Market Value Adjustment--An adjustment of values under a Guarantee Period in accordance with the market value adjustment formula prior to the end of that Guarantee Period. 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. Non-Qualified Plan Contract--A Contract which does not receive favorable tax treatment under Sections 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--A series of a Fund with its own objective and policies, which represents shares of beneficial interest in a separate portfolio of securities and other assets. Portfolio is sometimes referred to herein as a Fund. Purchase Payments--Amounts paid to us by you or on your behalf. Qualified Plan Contract--A Contract issued in connection with a retirement plan which receives favorable tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal Revenue Code. Separate Account--The KILICO Variable Annuity Separate Account. Separate Account Contract Value--The sum of your Subaccount Values. Subaccounts--The thirty-nine subdivisions of the Separate Account, the assets of which consist solely of shares of the corresponding Portfolios or Funds. Subaccount Value--The value of your interest in each Subaccount. Unitholder--The person holding the voting rights with respect to an Accumulation or Annuity Unit. Valuation Date--Each day when the New York Stock Exchange is open for trading, as well as each day otherwise required. 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) in which you have an interest. Withdrawal Charge--The "contingent deferred sales charge" assessed against certain withdrawals of Contract Value in the first seven Contribution Years after a Purchase Payment is made or against certain annuitizations of Contract Value in the first seven Contribution Years after a Purchase Payment is made. Withdrawal Value--Contract Value, plus or minus any applicable Market Value Adjustment, less any premium tax payable if the Contract is being annuitized, minus any Withdrawal Charge applicable to that Contract. 2 SUMMARY Because this is a summary, it does not contain all of the information that may be important. Read the entire Prospectus and Contract before deciding to invest. The Contracts provide for investment on a tax-deferred basis and for payment of annuity benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in this Prospectus. The Contract may be purchased by natural persons, or by trusts or custodial accounts which hold the Contract as agent for and for the sole benefit of a natural person. The Contract is not available for sale to other types of purchasers without our prior approval. The minimum initial Purchase Payment is $1,000. Subject to certain exceptions, the minimum subsequent Purchase Payment is $500. An allocation to a Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior approval is required for Purchase Payments over $1,000,000. (See "The Contracts," page 18.) Variable accumulations and benefits are provided by crediting Purchase Payments to one or more Subaccounts that you select. Each Subaccount invests in one of the following corresponding Portfolios or Funds: . Alger American Balanced Portfolio (Class O Shares) . Alger American Leveraged AllCap Portfolio (Class O Shares) . Credit Suisse Trust-Emerging Markets . Credit Suisse Trust-Global Post-Venture Capital . Dreyfus IP MidCap Stock Portfolio (Initial Share Class) . The Dreyfus Socially Responsible Growth Fund, Inc. (Initial Share Class) . INVESCO VIF-Utilities Fund . Scudder 21st Century Growth (Class A Shares) . Scudder Capital Growth (Class A Shares) . Scudder Global Discovery (Class A Shares) . Scudder Growth and Income (Class A Shares) . Scudder Health Sciences (Class A Shares) . Scudder International (Class A Shares) . Scudder Aggressive Growth (Class A Shares) . Scudder Blue Chip (Class A Shares) . Scudder Contrarian Value (Class A Shares) . Scudder Fixed Income Portfolio (formerly Scudder Investment Grade Bond) (Class A Shares) . Scudder Global Blue Chip (Class A Shares) . Scudder Government Securities (Class A Shares) . Scudder Growth (Class A Shares) . Scudder High Income (formerly Scudder High Yield ) (Class A Shares) . Scudder International Select Equity (Class A Shares) . Scudder Money Market (Class A Shares) . Scudder Small Cap Growth (Class A Shares) . Scudder Strategic Income (Class A Shares) . Scudder Technology Growth (Class A Shares) . Scudder Total Return (Class A Shares) 3 . SVS Davis Venture Value (Class A Shares) . SVS Dreman Financial Services (Class A Shares) . SVS Dreman High Return Equity (Class A Shares) . SVS Dreman Small Cap Value (Class A Shares) . SVS Eagle Focused Large Cap Growth (Class A Shares) . SVS Focus Value+Growth (Class A Shares) . SVS Index 500 (Class A Shares) . SVS INVESCO Dynamic Growth (Class A Shares) . SVS Janus Growth And Income (Class A Shares) . SVS Janus Growth Opportunities (Class A Shares) . SVS Oak Strategic Equity (Class A Shares) . SVS Turner Mid Cap Growth (Class A Shares) Contract Value allocated to the Separate Account varies with the investment experience of the selected Subaccounts. The Fixed Account has fixed accumulations and benefits. We guarantee that Purchase Payments allocated to the Fixed Account earn not less than the minimum guaranteed rate. In our discretion, we may credit interest in excess of the minimum guaranteed rate. (See "Fixed Account Option," page 18.) The MVA Option also provides fixed accumulations. The MVA Option may not be available in all states. The MVA Option is only available during the Accumulation Period. You may allocate amounts to one or more Guarantee Periods. We may offer additional Guarantee Periods at our discretion. For new Contracts, we may limit the number of Guarantee Period options available to three (3). We credit interest daily to amounts allocated to the MVA Option. We declare the rate at our sole discretion. We guarantee amounts allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee Periods you select. These guaranteed amounts are subject to any applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance Charge. We will not change a Guaranteed Interest Rate for the duration of the Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee Periods are set at our discretion. At the end of a Guarantee Period, a new Guarantee Period for the same duration starts, unless you timely elect another Guarantee Period. The interests under the Contract relating to the MVA Option are registered under the Securities Act of 1933 but are not registered under the Investment Company Act of 1940. (See "The MVA Option," page 12.) You bear the investment risk under the Contracts, unless Contract Values are allocated to: . the MVA Option and are guaranteed to receive the Guaranteed Interest Rate, subject to any Market Value Adjustment, or . the Fixed Account Option and are guaranteed to earn not less than the minimum guaranteed rate (see "Fixed Account Option"). Transfers between Subaccounts are permitted before and after annuitization, subject to certain limitations. A transfer from a Guarantee Period is subject to a Market Value Adjustment unless effected within 30 days after the existing Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account. (See "Transfers During the Accumulation Period" and "Transfers During the Annuity Period," pages 21 and 29, respectively.) You may withdraw Contract Value subject to Withdrawal Charges, any applicable market value adjustment and other specified conditions. (See "Withdrawals During the Accumulation Period," page 22.) We do not deduct sales charges from Purchase Payments. Each Contract Year, you may withdraw or surrender the Contract, without Withdrawal Charge, up to the greater of: . the excess of Contract Value over total Purchase Payments subject to Withdrawal Charges, minus prior withdrawals that were previously assessed a Withdrawal Charge, or 4 . 10% of Contract Value. If you withdraw a larger amount, the excess Purchase Payments withdrawn are subject to a Withdrawal Charge. The Withdrawal Charge is: . 7% in the first Contribution Year, . 6% in the second Contribution Year, . 5% in the third and fourth Contribution Years, . 4% in the fifth Contribution Year, . 3% in the sixth Contribution Year, . 2% in the seventh Contribution Year, and . 0% thereafter. (See "Withdrawal Charge," page 26.) The Withdrawal Charge also applies at the annuitization of Accumulation Units in their seventh Contribution Year or earlier, except as set forth under "Withdrawal Charge." Withdrawals may be subject to income tax, a 10% penalty tax, and other tax consequences. Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue Code (the "Code"). (See "Federal Income Taxes," page 31.) Contract charges include: . mortality and expense risk, . administrative expenses, . records maintenance charges, . withdrawal charges, and . applicable premium taxes. (See "Charges Against the Separate Account," page 25.) In addition, the investment advisers to the Funds deduct varying charges from the assets of the Funds for which they provide investment advisory services. (See the Funds' prospectuses for such information.) The Contract may be purchased in connection with retirement plans qualifying either under Section 401 or 403(b) of the Code or as individual retirement annuities including Roth IRAs. We may limit Purchase Payments under qualified plans, other than IRAs, to lump-sum rollovers and transfers. The Contract is also available in connection with state and municipal deferred compensation plans and non-qualified deferred compensation plans. (See "Taxation of Annuities in General," page 31 and "Qualified Plans," page 34.) You may examine a Contract and return it for a refund during the "free look" period. 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 18.) 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. 5 SUMMARY OF EXPENSES - -------------------------------------------------------------------------------- The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract, or transfer cash value between investment options. State premium taxes may also be deducted. Contract Owner Transaction Expenses Sales Load Imposed on Purchases (as a percentage of Purchase Payments):............. None Maximum Withdrawal Charge/(1)/ (as a percentage of Purchase Payments):............. 7% Withdrawal Year of Withdrawal after Purchase Payment Charge ----------------------------------------- ---------- First year....................................... 7.00% Second year...................................... 6.00% Third year....................................... 5.00% Fourth year...................................... 5.00% Fifth year....................................... 4.00% Sixth year....................................... 3.00% Seventh year..................................... 2.00% Eight years and following........................ 0.00% Maximum Transfer Fee:............................... $25/(2)/
- -------- /(1)/A Contract Owner may withdraw up to the greater of (i) the excess of Contract Value over total Purchase Payments subject to a Withdrawal Charge less prior withdrawals that were previously assessed a Withdrawal Charge and (ii) 10% of the Contract Value in any Contract Year without assessment of any Withdrawal Charge. In certain circumstances we may reduce or waive the Withdrawal Charge. See "Withdrawal Charge." /(2)/We reserve the right to charge a fee of $25 for each transfer of Contract Value in excess of twelve transfers per calendar year. See "Transfers During the Accumulation Period." The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including Fund fees and expenses. Annual Records Maintenance Charge $30/(3)/
Separate Account Annual Expenses (as a percentage of average Separate Account Contract Value) Mortality and Expense Risk Charge........................... 1.25% Administration Charge....................................... 0.15% ----- Total Separate Account Annual Expenses...................... 1.40% =====
- -------- /(3)/The records maintenance charge applies to Contracts with Contract Value less than $50,000 on the date of assessment. In certain circumstances we may reduce or waive the annual records maintenance charge. See "Records Maintenance Charge." 6 The next table shows the minimum and maximum total operating expenses charged by the Funds that you may pay periodically during the time that you own the Contract. More detail concerning each Fund's fees and expenses is contained in the prospectus for each Fund.
Minimum -- Maximum Total Annual Fund Operating Expenses/(4)/ (expenses that are deducted from Funds assets, including management fees, distribution and/or service (12b-1) fees, and other expenses, prior to any fee waivers or expense reimbursements)............................................................. .46% -- 1.84%
- -------- /(4)/The expenses shown are for the year ended December 31, 2002, and do not reflect any fee waivers or expense reimbursements. The advisers and/or other service providers of certain Funds have agreed to reduce their fees and/or reimburse the Funds' expenses in order to keep the Funds' expenses below specified limits. The expenses of certain Funds are reduced by contractual fee reduction and expense reimbursement arrangements that will remain in effect at least through May 1, 2003. Other Funds have voluntary fee reduction and/or expense reimbursement arrangements that may be terminated at any time. The minimum and maximum Total Annual Fund Operating Expenses for all Funds after all fee reductions and expense reimbursements are 0.46% and 1.40%, respectively. Each fee reduction and/or expense reimbursement arrangement is described in the relevant Fund's prospectus. THE FUND'S INVESTMENT MANAGER OR ADVISER PROVIDED THE ABOVE EXPENSES FOR THE FUNDS. WE HAVE NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION. - -------------------------------------------------------------------------------- EXAMPLE - -------------------------------------------------------------------------------- This Example is intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include Contract Owner transaction expenses, Contract fees, Separate Account annual expenses, and Fund fees and expenses. The Example assumes that you invest $10,000 in the Contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year and assumes the maximum fees and expenses of any of the Funds. In addition, this Example assumes no transfers were made and no premium taxes were deducted. If these arrangements were considered, the expenses shown would be higher. This Example also does not take into consideration any fee waiver or expense reimbursement arrangements of the Funds. If these arrangements were taken into consideration, the expenses shown would be lower. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: (1)If you surrender or annuitize your Contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ------------------------------- $966.. $1,474 $2,096 $3,626
(2)a. If you annuitize your Contract at the end of the available time period under Annuity Option 2, 3, 4, or under Annuity Option 1 for a period of 5 years or more/(5)/:
1 year 3 years 5 years 10 years ------------------------------- $337.. $1,027 $1,740 $3,626
7 b. If you annuitize your Contract at the end of the available time period under Annuity Option 1 for a period of less than 5 years/(5)/:
1 year 3 years 5 years 10 years ------------------------------- $966. $1,474 $2,096 $3,626
(3)If you do not surrender your Contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ------------------------------- $337. $1,027 $1,740 $3,626
- -------- /(5)/Withdrawal Charges do not apply if the Contract is annuitized under Annuity Option 2, 3 or 4, or under Annuity Option 1 for a period of 5 years or more. The fee table and example should not be considered a representation of past or future expenses and charges of the Subaccounts. Your actual expenses may be greater or less than those shown. The example does not include the deduction of state premium taxes, which may be assessed before or upon annuitization or any taxes or penalties you may be required to pay if you surrender the Contract. Similarly, the 5% annual rate of return assumed in the example is not intended to be representative of past or future performance of any Subaccount. 8 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. Selected data for accumulation units outstanding as of the year ended December 31st for each period:
Subaccount 2002 2001 2000 1999 1998 ---------- ------- ------- ------- ------- ------- Alger American Balanced Subaccount***** Accumulation unit value at beginning of period*............................ $10.240 $10.588 $11.041 $10.000 $ -- Accumulation unit value at end of period................................... $ 8.857 $10.240 $10.588 $11.041 $ -- Number of accumulation units outstanding at end of Period (000's omitted).. 10,165 8,205 1,292 19 -- Alger American Leveraged AllCap Subaccount***** Accumulation unit value at beginning of period*............................ 8.103 9.773 13.184 10.000 -- Accumulation unit value at end of period................................... 5.281 8.103 9.773 13.184 -- Number of accumulation units outstanding at end of Period (000's omitted).. 9,225 9,057 4,158 49 -- Credit Suisse Trust-Emerging Markets Subaccount Accumulation unit value at beginning of period*............................ 8.602 9.639 14.302 7.994 9.755 Accumulation unit value at end of period................................... 7.502 8.602 9.639 14.302 7.994 Number of accumulation units outstanding at end of Period (000's omitted).. 2,512 1,918 1,034 213 7 Credit Suisse Trust-Global Post-Venture Capital Subaccount Accumulation unit value at beginning of period*............................ 8.818 12.529 15.673 9.720 9.882 Accumulation unit value at end of period................................... 5.725 8.818 12.529 15.673 9.720 Number of accumulation units outstanding at end of Period (000's omitted).. 1,990 1,586 712 129 9 Dreyfus IP MidCap Stock Subaccount***** Accumulation unit value at beginning of period*............................ 11.199 11.738 10.992 10.000 -- Accumulation unit value at end of period................................... 9.664 11.199 11.738 10.992 -- Number of accumulation units outstanding at end of Period (000's omitted).. 10,436 7,541 1,141 12 -- The Dreyfus Socially Responsible Growth Subaccount***** Accumulation unit value at beginning of period*............................ 7.563 9.905 11.289 9.941 -- Accumulation unit value at end of period................................... 5.299 7.563 9.905 11.289 -- Number of accumulation units outstanding at end of Period (000's omitted).. 1,546 1,444 600 22 -- INVESCO VIF-Utilities Subaccount++ Accumulation unit value at beginning of period............................. 6.796 10.000 -- -- -- Accumulation unit value at end of period................................... 5.340 6.796 -- -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 1,638 1,004 -- -- -- Scudder 21st Century Growth Subaccount+ Accumulation unit value at beginning of period*............................ 6.211 8.188 10.000 -- -- Accumulation unit value at end of period................................... 3.598 6.211 8.188 -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 5,790 4,197 508 -- -- Scudder Capital Growth Subaccount Accumulation unit value at beginning of period*............................ 10.201 12.826 14.435 10.823 9.985 Accumulation unit value at end of period................................... 7.124 10.201 12.826 14.435 10.823 Number of accumulation units outstanding at end of Period (000's omitted).. 4,949 4,261 1,959 916 56 Scudder Global Discovery Subaccount Accumulation unit value at beginning of period*............................ 11.412 15.347 16.430 10.043 9.911 Accumulation unit value at end of period................................... 9.017 11.412 15.347 16.430 10.043 Number of accumulation units outstanding at end of Period (000's omitted).. 7,117 6,536 3,226 509 74 Scudder Growth and Income Subaccount Accumulation unit value at beginning of period*............................ 8.527 9.748 10.096 9.651 10.033 Accumulation unit value at end of period................................... 6.464 8.527 9.748 10.096 9.651 Number of accumulation units outstanding at end of Period (000's omitted).. 5,647 4,982 2,341 1,073 175 Scudder Health Sciences Subaccount++ Accumulation unit value at beginning of period............................. 10.551 10.000 -- -- -- Accumulation unit value at end of period................................... 8.002 10.551 -- -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 6,232 4,222 -- -- -- Scudder International Subaccount Accumulation unit value at beginning of period*............................ 7.892 11.574 14.990 9.837 9.972 Accumulation unit value at end of period................................... 6.354 7.892 11.574 14.990 9.837 Number of accumulation units outstanding at end of Period (000's omitted).. 10,313 9,022 4,655 1,653 88 Scudder Aggressive Growth Subaccount** Accumulation unit value at beginning of period*............................ 10.022 12.990 13.859 10.000 -- Accumulation unit value at end of period................................... 6.853 10.022 12.990 13.859 -- Number of accumulation units outstanding at end of Period (000's omitted).. 4,070 3,999 1,910 89 -- Scudder Blue Chip Subaccount Accumulation unit value at beginning of period*............................ 9.680 11.659 12.827 10.386 9.964 Accumulation unit value at end of period................................... 7.435 9.680 11.659 12.827 10.386 Number of accumulation units outstanding at end of Period (000's omitted).. 9,733 9,110 4,280 1,728 125
9
Subaccount 2002 2001 2000 1999 1998 ---------- ------- ------- ------- ------- ------- Scudder Contrarian Value Subaccount Accumulation unit value at beginning of period*............................ $10.913 $10.863 $ 9.485 $10.712 $10.029 Accumulation unit value at end of period................................... $ 9.150 $10.913 $10.863 $ 9.485 $10.712 Number of accumulation units outstanding at end of Period (000's omitted).. 7,780 6,319 2,516 1,851 110 Scudder Fixed Income (formerly Scudder Investment Grade Bond) Subaccount Accumulation unit value at beginning of period*............................ 11.369 10.905 10.062 10.417 10.014 Accumulation unit value at end of period................................... 12.110 11.369 10.905 10.062 10.417 Number of accumulation units outstanding at end of Period (000's omitted).. 6,990 4,482 1,144 940 66 Scudder Global Blue Chip Subaccount Accumulation unit value at beginning of period*............................ 10.029 12.031 12.624 10.103 9.989 Accumulation unit value at end of period................................... 8.331 10.029 12.031 12.624 10.103 Number of accumulation units outstanding at end of Period (000's omitted).. 2,745 2,280 855 308 29 Scudder Government Securities Subaccount Accumulation unit value at beginning of period*............................ 11.896 11.223 10.259 10.332 10.012 Accumulation unit value at end of period................................... 12.676 11.896 11.223 10.259 10.332 Number of accumulation units outstanding at end of Period (000's omitted).. 12,527 7,960 1,273 857 77 Scudder Growth Subaccount Accumulation unit value at beginning of period*............................ 8.272 10.802 13.532 10.007 9.889 Accumulation unit value at end of period................................... 5.759 8.272 10.802 13.532 10.007 Number of accumulation units outstanding at end of Period (000's omitted).. 5,924 5,824 2,552 892 50 Scudder High Income (formerly Scudder High Yield) Subaccount Accumulation unit value at beginning of period*............................ 8.857 8.751 9.717 9.646 10.003 Accumulation unit value at end of period................................... 8.709 8.857 8.751 9.717 9.646 Number of accumulation units outstanding at end of Period (000's omitted).. 8,371 6,665 2,803 1,923 361 Scudder International Select Equity Subaccount Accumulation unit value at beginning of period*............................ 7.918 10.624 13.549 9.429 9.944 Accumulation unit value at end of period................................... 6.756 7.918 10.624 13.549 9.429 Number of accumulation units outstanding at end of Period (000's omitted).. 4,842 1,829 977 351 56 Scudder Money Market Subaccount #1 Accumulation unit value at beginning of period*............................ 11.315 11.049 10.559 10.213 10.003 Accumulation unit value at end of period................................... 11.311 11.315 11.049 10.559 10.213 Number of accumulation units outstanding at end of Period (000's omitted).. 18,002 18,261 3,372 1,569 82 Scudder Money Market Subaccount #2 Accumulation unit value at beginning of period*............................ 11.894 11.454 10.795 10.297 10.004 Accumulation unit value at end of period................................... 12.056 11.894 11.454 10.795 10.297 Number of accumulation units outstanding at end of Period (000's omitted).. 2,620 3,759 1,103 118 21 Scudder Small Cap Growth Subaccount Accumulation unit value at beginning of period*............................ 9.082 12.936 14.691 11.070 9.867 Accumulation unit value at end of period................................... 5.959 9.082 12.936 14.691 11.070 Number of accumulation units outstanding at end of Period (000's omitted).. 8,221 6,740 2,896 843 106 Scudder Strategic Income Subaccount Accumulation unit value at beginning of period*............................ 10.483 10.102 9.986 10.755 10.009 Accumulation unit value at end of period................................... 11.507 10.483 10.102 9.986 10.755 Number of accumulation units outstanding at end of Period (000's omitted).. 2,105 1,041 298 124 7 Scudder Technology Growth Subaccount** Accumulation unit value at beginning of period*............................ 9.079 13.617 17.605 10.000 -- Accumulation unit value at end of period................................... 5.773 9.079 13.617 17.605 -- Number of accumulation units outstanding at end of Period (000's omitted).. 24,909 23,797 7,183 1,112 -- Scudder Total Return Subaccount Accumulation unit value at beginning of period*............................ 10.615 11.462 11.936 10.542 9.983 Accumulation unit value at end of period................................... 8.880 10.615 11.462 11.936 10.542 Number of accumulation units outstanding at end of Period (000's omitted).. 11,368 10,298 4,778 2,617 123 SVS Davis Venture Value Subaccount++ Accumulation unit value at beginning of period............................. 9.412 10.000 -- -- -- Accumulation unit value at end of period................................... 7.816 9.412 -- -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 14,480 9,293 -- -- -- SVS Dreman Financial Services Subaccount Accumulation unit value at beginning of period*............................ 11.006 11.729 9.362 9.998 10.049 Accumulation unit value at end of period................................... 9.930 11.006 11.729 9.362 9.998 Number of accumulation units outstanding at end of Period (000's omitted).. 5,697 4,691 1,465 603 121 SVS Dreman High Return Equity Subaccount Accumulation unit value at beginning of period*............................ 11.865 11.831 9.192 10.491 9.997 Accumulation unit value at end of period................................... 9.591 11.865 11.831 9.192 10.491 Number of accumulation units outstanding at end of Period (000's omitted).. 32,960 23,548 5,275 3,389 518 SVS Dreman Small Cap Value Subaccount Accumulation unit value at beginning of period*............................ 10.177 8.770 8.547 8.431 9.943 Accumulation unit value at end of period................................... 8.897 10.177 8.770 8.547 8.431 Number of accumulation units outstanding at end of Period (000's omitted).. 12,826 7,886 1,281 610 125 SVS Eagle Focused Large Cap Growth Subaccount**** Accumulation unit value at beginning of period*............................ 9.367 11.437 12.747 10.000 -- Accumulation unit value at end of period................................... 6.652 9.367 11.437 12.747 -- Number of accumulation units outstanding at end of Period (000's omitted).. 6,086 4,046 630 5 --
10
Subaccount 2002 2001 2000 1999 1998 ---------- ------- ------- ------- ------- ------- SVS Focus Value+Growth Subaccount Accumulation unit value at beginning of period*............................ $ 9.839 $11.648 $12.291 $10.697 $ 9.937 Accumulation unit value at end of period................................... $ 7.191 $ 9.839 $11.648 $12.291 $10.697 Number of accumulation units outstanding at end of Period (000's omitted).. 3,429 2,736 915 498 56 SVS Index 500 Subaccount*** Accumulation unit value at beginning of period*............................ 8.270 9.535 10.735 10.027 -- Accumulation unit value at end of period................................... 6.334 8.270 9.535 10.735 -- Number of accumulation units outstanding at end of Period (000's omitted).. 23,118 17,576 4,497 633 -- SVS INVESCO Dynamic Growth Subaccount++ Accumulation unit value at beginning of period............................. 8.718 10.000 -- -- -- Accumulation unit value at end of period................................... 5.940 8.718 -- -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 3,074 2,256 -- -- -- SVS Janus Growth And Income Subaccount+ Accumulation unit value at beginning of period*............................ 7.597 8.782 10.000 -- -- Accumulation unit value at end of period................................... 5.952 7.597 8.782 -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 17,677 13,923 3,895 -- -- SVS Janus Growth Opportunities Subaccount+ Accumulation unit value at beginning of period*............................ 6.219 8.264 10.000 -- -- Accumulation unit value at end of period................................... 4.255 6.219 8.264 -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 17,795 15,117 5,662 -- -- SVS Oak Strategic Equity Subaccount++ Accumulation unit value at beginning of period............................. 7.529 10.000 -- -- -- Accumulation unit value at end of period................................... 4.474 7.529 -- -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 7,019 4,707 -- -- -- SVS Turner Mid Cap Growth Subaccount++ Accumulation unit value at beginning of period............................. 8.748 10.000 -- -- -- Accumulation unit value at end of period................................... 5.842 8.748 -- -- -- Number of accumulation units outstanding at end of Period (000's omitted).. 7,947 4,649 -- -- --
- -------- *Commencementof Offering on June 1, 1998. **Commencementof Offering on May 3, 1999 at initial accumulation unit value of $10.000. ***Commencementof Offering on September 10, 1999 at initial accumulation unit value of $10.027. ****Commencementof Offering on October 29, 1999 at initial accumulation unit value of $10.000. *****Commencementof Offering on November 1, 1999 at initial accumulation unit value of $10.000, for all except Dreyfus Socially Responsible Growth--$9.941. +Commencementof Offering on May 1, 2000 at initial accumulation unit value of $10.000. ++Commencementof Offering on May 1, 2001 at initial accumulation unit value of $10.000. 11 KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS Kemper Investors Life Insurance Company We were organized in 1947 and are a stock life insurance company organized under the laws of the State of Illinois. Our offices are located 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. You may choose a different Guarantee Period by pre-authorized telephone instructions or by giving us written notice (See "Guarantee Periods of the MVA Option"). The MVA Option may not be available in all states. At our discretion, we may offer additional Guarantee Periods or limit, for new Contracts, the number of Guarantee Periods available to three. The amounts allocated to the MVA Option under the Contracts are invested under the 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. 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. We consider the return available on the instruments in which Contract proceeds are invested when establishing Guaranteed Interest Rates. This return is only one of many factors considered in establishing Guaranteed Interest Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest Rates.") Our investment strategy for the non-unitized separate account 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 invested assets portfolio at December 31, 2002 included approximately 85.7 percent in cash, short-term investments and investment grade fixed maturities, 2.4 percent in below investment grade (high risk) bonds, 4.6 percent in mortgage loans and other real estate-related investments and 7.3 percent in all other investments. 12 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, 2002. (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. Thirty-nine 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. Not all Subaccounts may be available in all jurisdictions or under all Contracts. 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 Fund or Portfolio of a Fund are reinvested in that Fund or 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 . Credit Suisse Trust . Dreyfus Investment Portfolios . The Dreyfus Socially Responsible Growth Fund, Inc. . INVESCO Variable Investment Funds, Inc. . Scudder Variable Series I . Scudder Variable Series II The Funds provide investment vehicles for variable life insurance and variable annuity contracts and, in the case of Credit Suisse Trust, certain qualified retirement plans. 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 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 a Fund's response to any of those events or conflicts insufficiently protects Owners, we will take appropriate action. A Fund may 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 13 operates as a separate investment fund, and the investment performance of one Portfolio has no effect on the investment performance of any other Portfolio. The thirty-nine Portfolios or Funds are summarized below: The Alger American Fund Alger American Balanced Portfolio seeks current income and long-term capital appreciation. Alger American Leveraged AllCap Portfolio seeks long-term capital appreciation. Credit Suisse Trust Credit Suisse Trust-Emerging Markets Portfolio seeks long-term growth of capital by investing in equity securities of companies located or conducting a majority of their business in emerging markets. Credit Suisse Trust-Global Post-Venture Capital Portfolio seeks long-term growth of capital by investing primarily in equity securities of U.S. and foreign companies considered to be in their post-venture-capital stage of development. Dreyfus Investment Portfolios Dreyfus IP MidCap Stock Portfolio seeks investment results that are greater than the total return performance of medium-size domestic companies in the aggregate as represented by the Standard and Poor's MidCap 400(R) Index. The Dreyfus Socially Responsible Growth Fund, Inc. The Fund's primary goal is to provide capital growth with current income as a secondary goal. To pursue this goal, the Fund normally invests at least 80% of its assets 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. INVESCO Variable Investment Funds, Inc. INVESCO VIF-Utilities Fund seeks capital growth and current income. Scudder Variable Series I Scudder 21st Century Growth Portfolio seeks long-term growth of capital by investing primarily in equity securities issued by emerging growth companies. Scudder Capital Growth Portfolio seeks to maximize long-term capital growth through a broad and flexible investment program. Scudder Global Discovery Portfolio seeks above-average capital appreciation over the long term by investing primarily in the equity securities of small companies located throughout the world. Scudder Growth and Income Portfolio seeks long-term growth of capital, current income and growth of income. Scudder Health Sciences Portfolio seeks long-term growth of capital by investing at least 80% of total assets, plus the amount of any borrowings for investment purposes, in common stocks of companies in the health care sector. Scudder International Portfolio seeks long-term growth of capital primarily through diversified holdings of marketable foreign equity investments. 14 Scudder Variable Series II Scudder Aggressive Growth Portfolio seeks capital appreciation through the use of aggressive investment techniques. Scudder Blue Chip Portfolio seeks growth of capital and income. Scudder Contrarian Value Portfolio seeks to achieve a high rate of total return. Scudder Fixed Income (formerly Scudder Investment Grade Bond) Portfolio seeks high current income. Scudder Global Blue Chip Portfolio seeks long-term capital growth. Scudder Government Securities Portfolio seeks high current income consistent with preservation of capital. Scudder Growth Portfolio seeks maximum appreciation of capital. Scudder High Income (formerly Scudder High Yield) Portfolio seeks to provide a high level of current income. Scudder International Select Equity Portfolio seeks capital appreciation. 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 Strategic Income Portfolio seeks high current return. Scudder Technology Growth Portfolio seeks growth of capital. Scudder Total Return Portfolio seeks high total return, a combination of income and capital appreciation. SVS Davis Venture Value Portfolio seeks growth of capital. SVS Dreman Financial Services Portfolio seeks long-term capital appreciation. SVS Dreman High Return Equity Portfolio seeks to achieve a high rate of total return. SVS Dreman Small Cap Value Portfolio seeks long-term capital appreciation. SVS Eagle Focused Large Cap Growth Portfolio seeks growth through long-term capital appreciation. SVS Focus Value+Growth Portfolio seeks growth of capital through a portfolio of growth and value stocks. A secondary objective of the portfolio is the reduction of risk over a full market cycle compared to a portfolio of only growth stocks or only value stocks. SVS Index 500 Portfolio seeks returns that, before expenses, correspond to the total return of U.S. common stocks as represented by the Standard & Poor's(R) 500 Composite Stock Price Index.* SVS INVESCO Dynamic Growth Portfolio seeks long-term capital growth. SVS Janus Growth And Income Portfolio seeks long-term capital growth and current income. SVS Janus Growth Opportunities Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital. SVS Oak Strategic Equity Portfolio seeks long-term capital growth. SVS Turner Mid Cap Growth Portfolio seeks capital appreciation. 15 The Portfolios may not achieve their stated objective. 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 Alger American Balanced Portfolio and the Alger American Leveraged AllCap Portfolio. Credit Suisse Asset Management, LLC ("CSAM") is the investment adviser for the two available Portfolios of the Credit Suisse Trust. CSAM's Australian and U.K. affiliates, located in Sydney, Australia and London, U.K., respectively, and each known as Credit Suisse Asset Management Limited, are sub-advisers for the Credit Suisse Trust-Emerging Markets Portfolio. The Dreyfus Corporation is the investment adviser for the Dreyfus IP MidCap Stock Portfolio and The Dreyfus Socially Responsible Growth Fund, Inc. INVESCO Funds Group, Inc. is the investment adviser for the available Portfolio of the INVESCO Variable Investment Funds, Inc. Deutsche Investment Management Americas Inc. ("DeIM") is the investment manager for the six available Portfolios of Scudder Variable Series I and the twenty-six available Portfolios of Scudder Variable Series II. Davis Selected Advisers, L.P. serves as the sub-adviser to the SVS Davis Venture Value Portfolio. Dreman Value Management L.L.C. ("DVM") serves as the sub-adviser for the SVS Dreman Financial Services Portfolio, the SVS Dreman High Return Equity Portfolio, the SVS Dreman Small Cap Value Portfolio, and the value portion of the SVS Focus Value+Growth Portfolio. Under the terms of the sub-advisory agreement between DeIM and DVM for each such Portfolio, DVM manages the day-to-day investment and trading functions for each such Portfolio. Eagle Asset Management, Inc. ("Eagle") is the sub-adviser for the SVS Eagle Focused Large Cap Growth Portfolio. Under the terms of a sub-advisory agreement with DeIM, Eagle handles day-to-day investment and trading functions for the SVS Eagle Focused Large Cap Growth Portfolio under the guidance of DeIM. Jennison Associates LLC serves as the sub-adviser for the growth portion of the SVS Focus Value+Growth Portfolio. INVESCO Funds Group, Inc. is the sub-adviser to the SVS INVESCO Dynamic Growth Portfolio. Janus Capital Management LLC (formerly Janus Capital Corporation) ("Janus") serves as the sub-adviser for the SVS Janus Growth And Income Portfolio and the SVS Janus Growth Opportunities Portfolio. Under the terms of sub-advisory agreements with DeIM, Janus handles day-to-day investment and trading functions for the SVS Janus Growth and Income Portfolio and the SVS Janus Growth Opportunities Portfolio under the guidance of DeIM. Oak Associates, Ltd. is the sub-adviser for the SVS Oak Strategic Equity Portfolio. Turner Investment Partners, Inc. serves as the sub-adviser to the SVS Turner Mid Cap Growth Portfolio. The investment advisers are paid fees for their services by the Funds they manage. We may receive compensation from the Funds or 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. - -------- *"Standard& Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's(R) 500," and "500" are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by Deutsche Asset Management Americas Inc. The SVS Index 500 Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's(R), and Standard & Poor's(R) makes no representation regarding the advisability of investing in the Portfolio. Additional information may be found in the Portfolio's Statement of Additional Information. 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 may eliminate the shares of any of the Portfolios and 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 in view of the purposes of the Separate Account. We will not substitute any shares attributable to your interest in a 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 contracts, or may permit a conversion between series or classes of contracts 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, in our discretion, 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, in our discretion, marketing, tax, or investment conditions warrant. We will notify all Owners of any such changes. If we deem it to be in the best interests of persons having voting rights under the Contract, the Separate Account may be: (a) operated as a management company under the 1940 Act; (b) deregistered under the 1940 16 Act in the event such registration is no longer required; or (c) 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 Fixed Income (formerly Scudder Investment Grade Bond), Scudder Government Securities Subaccount, Scudder High Income (formerly Scudder High Yield) 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 a 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 average annual 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 for the life of the Subaccount. We will show 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 the 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. You may redeem Subaccount units at Accumulation Unit value, which may be more or less than original cost. The standardized performance figures reflect the deduction of all expenses and fees, including a prorated portion of the Records Maintenance Charge. Redemptions within the first seven years may be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after seven years. Yield, effective yield and nonstandardized total return figures do not include the effect of any Withdrawal Charge that may be imposed upon the redemption of units. In addition, nonstandardized total return figures do not include the effect of the Records Maintenance Charge. 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 reflect the deduction of all expenses and fees, excluding a prorated portion of the Records Maintenance Charge. Thus yield, effective yield and nonstandardized total return figures may be higher than if such charges were deducted. Standardized average annual total return figures include the effect of the applicable Withdrawal Charge that may be imposed at the end of the period. The Subaccounts may be compared to relevant indices and performance data from independent sources, including, but not limited to, the Dow Jones Industrial Average, the Standard & Poor's(R) 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(R) 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 that a Subaccount may purchase and the investments measured by the indexes. In particular, it should be noted that the comparative information with regard to the indexes will not reflect the deduction of any Contract charges or fees. Similarly, 17 the indexes are unmanaged and do not reflect the fees and expenses of management and acquisition costs. In addition, certificates of deposit may offer fixed or variable yields and principal is guaranteed and may be insured. The units of the Subaccounts are not insured. Also, the value of each Subaccount 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. FIXED ACCOUNT OPTION Amounts allocated or transferred to the Fixed Account are part of our General Account, supporting insurance and annuity obligations. Interests in the Fixed Account are not registered under the Securities Act of 1933 ("1933 Act"), and the Fixed Account is not registered as an investment company under the Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed Account nor any interests therein generally are subject to the provisions of the 1933 or 1940 Acts. We have been advised that the staff of the SEC has not reviewed the disclosures in this Prospectus relating to the Fixed Account. Disclosures regarding the Fixed Account, however, may be subject to the general provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. Under the Fixed Account Option, we pay a fixed interest rate for stated periods. This Prospectus describes only the aspects of the Contract involving the Separate Account and the MVA Option, unless we refer to fixed accumulation and annuity elements. We guarantee that payments allocated to the Fixed Account earn a minimum fixed interest rate not less than the minimum rate allowed by state law. At our discretion, we may credit interest in excess of the minimum guaranteed rate. We reserve the right to change the rate of excess interest credited. We also reserve the right to declare different rates of excess interest depending on when amounts are allocated or transferred to the Fixed Account. As a result, amounts at any designated time may be credited with a different rate of excess interest than the rate previously credited to such amounts and to amounts allocated or transferred at any other designated time. THE CONTRACTS A. GENERAL INFORMATION. The minimum initial Purchase Payment is $1,000, and the minimum subsequent Purchase Payment is $500. The minimum subsequent Purchase Payment is $100 if you authorize us to draw on an account via check or electronic debit. Cumulative Purchase Payments in excess of $1,000,000 require our prior approval. The Internal Revenue Code may also limit the maximum annual amount of Purchase Payments. An allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at least $500. 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 amounts allocated to the General Account and the Guarantee Periods on the date we receive the returned Contract, without any deduction for Withdrawal Charges or 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. 18 During the Accumulation Period, you may assign the Contract or change a Beneficiary at any time by signing our form. No assignment or Beneficiary change is binding on us until we receive it. We assume no responsibility for the validity of the assignment or Beneficiary change. An assignment may subject you to immediate tax liability and a 10% tax penalty. (See "Tax Treatment of Withdrawals, Loans and Assignments.") Amounts payable during the Annuity Period may not be assigned or encumbered. 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 Annuitant's debts or obligations. You designate the Beneficiary. If you or the Annuitant die, and no designated Beneficiary or contingent beneficiary is alive at that time, we will pay your or the Annuitant's estate. Under a Qualified Plan Contract, the provisions of the applicable plan may prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan Contract may not be assigned. B. THE ACCUMULATION PERIOD. 1. Application of Purchase Payments. You select the allocation of Purchase Payments to the Subaccount(s), Guarantee Periods, or Fixed Account. 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 as of 3:00 p.m. Central time on each day that the New York Stock Exchange is open for trading. Purchase Payments allocated to a Guarantee Period or to the Fixed Account begin earning interest one day after we receive them. However, with respect to initial Purchase Payments, the amount is credited only after we determine to issue the Contract, but no later than the second day after we receive the Purchase Payment. 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 and Guaranteed Retirement Income Benefit Charge (see "Contracts Issued Before November 12, 2001"). The number of Accumulation Units is reduced when the Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge are assessed. 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 five (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. We will issue a Contract without a signed application if: . a dealer provides us with application information, electronically or in writing, . we receive the initial Purchase Payment, and . you confirm in writing, after the Contract is delivered, that all information in the Contract is correct. Until a written confirmation is received by us, your ability to request transactions under the Contract will be limited. 2. Accumulation Unit Value. Each Subaccount has an Accumulation Unit value. When Purchase Payments or other amounts are allocated to a Subaccount, the number of units purchased is based on the Subaccount's Accumulation Unit value at the end of the current Valuation Period. When amounts are transferred out of or deducted from a Subaccount, units are redeemed 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. 19 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: (1 / 2) - 3, where: (1) 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; (2) is the net asset value per share of the investment held in the Subaccount determined at the end of the preceding Valuation Period; and (3) is the factor representing the mortality and expense risk and administration charges. 3. Guarantee Periods of the MVA Option. You may allocate Purchase Payments to one or more Guarantee Periods with durations of one to ten years. Each Guarantee Period has a Guaranteed Interest Rate that will not change during the Guarantee Period. Interest is credited daily at the effective annual rate. 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 1.55% Effective Annual Rate
Interest Credited Cumulative Year During Year Interest Credited ---- ----------------- ----------------- 1.. $620.00 $ 620.00 2.. 629.61 1,249.61 3.. 639.37 1,888.98 4.. 649.28 2,538.26 5.. 659.34 3,197.60
Accumulated value at the end of 5 years is: $40,000 + $3,197.60 = $43,197.60 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 and Withdrawal Charges 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. At the end of any Guarantee Period, we send written notice of the beginning of a new Guarantee Period. A new Guarantee Period for the same duration starts unless you elect another Guarantee Period within thirty 20 days after the end of the terminating Guarantee Period. You may choose a different Guarantee Period by preauthorized telephone instructions or by giving us written notice. You should not select a new Guarantee Period extending beyond the Annuity Date. Otherwise, the guarantee period amount available for annuitization is subject to Market Value Adjustments and may be subject to Withdrawal Charges. (See "Market Value Adjustment" and "Withdrawal Charge" 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 1-800-621-5001 or write to Kemper Investors Life Insurance Company, Customer Service, at 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 for the new Guaranteed Interest Rates. 4. 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 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 effectuated or when a Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are subject to Withdrawal Charges and Records Maintenance Charges and may be 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. 5. 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 . your Accumulated Guarantee Period Value in the MVA Option, plus . your interest in the Fixed Account. 6. Transfers During the Accumulation Period. During the Accumulation Period, you may transfer the Contract Value among the Subaccounts, the Guarantee Periods and the Fixed Account subject to the following provisions: . the amount transferred must be at least $100 unless the total Contract Value attributable to a Subaccount, Guarantee Period or Fixed Account is transferred; . the Contract Value remaining in a Subaccount, Guarantee Period or Fixed Account must be at least $500 unless the total value is transferred; . transfers may not be made from any Subaccount to the Fixed Account over the six months following any transfer from the Fixed Account into one or more Subaccounts; and . transfers from the Fixed Account may be made one time during the Contract Year during the thirty days following an anniversary of a Contract Year. We may charge a $25 fee for each transfer in excess of 12 transfers per calendar year. However, transfers made pursuant to the Asset Allocation and Dollar Cost Averaging programs do not count toward these 12 transfers. In addition, transfers of Guarantee Period Value are subject to Market Value Adjustment unless the 21 transfer is made within thirty days of the end of the Guarantee Period. 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. 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 in 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. The following transfers must be requested through standard United States mail: . transfers in excess of $250,000 per Contract, per day, and . transfers into and out of the Credit Suisse Trust-Emerging Markets, the Credit Suisse Trust-Global Post-Venture Capital, the Scudder Global Blue Chip, the Scudder Global Discovery, the Scudder International or the Scudder International Select Equity Subaccounts in excess of $50,000, per Contract, per day. 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. If you authorize a third party to transact transfers on your behalf, we will reallocate the Contract Value pursuant to the authorized asset allocation program. However, we do not offer or participate in any asset allocation program and we take no responsibility for any third party asset allocation program. We may suspend or cancel acceptance of a third party's instructions at any time and may restrict the investment options available for transfer under third party authorizations. You may elect to have transfers made automatically among the Subaccounts on an annual, semiannual or quarterly basis so that Contract Value is reallocated to match the percentage allocations in your predefined allocation elections. Transfers under this program are not subject to the $100 minimum transfer limitation. An election to participate in the automatic asset reallocation program must be in writing on our form and returned to us. 7. 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. 8. Withdrawals During the Accumulation Period. You may redeem some or all of the Contract Value minus previous withdrawals and debt, plus or minus any applicable Market Value Adjustment and minus any Withdrawal Charge. Withdrawals will have tax consequences. (See "Federal Income Taxes.") A withdrawal of the entire Contract Value is called a surrender. Partial withdrawals and surrenders are subject to the following: In any Contract Year, you may withdraw or surrender the Contract, without Withdrawal Charge, up to the greater of: . the excess of Contract Value over total Purchase Payments subject to Withdrawal Charges, minus prior withdrawals that were previously assessed a Withdrawal Charge, or . 10% of the Contract Value. 22 See "Contract Charges and Expenses--Withdrawal Charge" for a discussion of charges applicable to partial withdrawals and surrenders. 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 redeem Accumulation Units on a pro rata basis from all investment options in which you have an interest. Accumulation Units attributable to the earliest Contribution Years are redeemed first. Partial withdrawals are subject to the following: . Partial withdrawals are not permitted from the Fixed Account in the first Contract Year. . The minimum withdrawal is $100 (before any Market Value Adjustment), or your entire interest in the investment option(s) from which withdrawal is requested. . You must leave at least $500 in each investment option from which the withdrawal is requested, unless the total value is withdrawn. Election to withdraw shall be made in writing to us at 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 of the Accumulation Unit values, as calculated after we receive the request. The Withdrawal Value attributable to the Subaccounts is paid within seven (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 Fund or 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 and the Fixed Account, 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. Withdrawals are permitted from Contracts issued in connection with Section 403(b) Qualified Plans only under limited circumstances. (See "Federal Income Taxes.") A participant in the Texas Optional Retirement Program ("ORP") must obtain a certificate of termination from the participant's employer before a Contract can be redeemed. The Attorney General of Texas has ruled that participants in the ORP may redeem their interest in a Contract issued pursuant to the ORP only upon termination of employment in Texas public institutions of higher education, or upon retirement, death or total disability. In those states adopting similar requirements for optional retirement programs, we will follow similar procedures. 9. Market Value Adjustment. Any withdrawal, transfer or annuitization of Guarantee Period Values, unless effected during the "free look" period or within 30 days after a Guarantee Period ends, may be adjusted up or down by a Market Value Adjustment. The Market Value Adjustment applies before deduction of a Withdrawal Charge. The Market Value Adjustment reflects the relationship between (a) 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 (b) 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 Guarantee Period 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 Guarantee Period Value and results in a higher payment. 23 The Market Value Adjustment (MVA) uses this formula: (1 + I) /t/365/ ------- MVA = GPV X -1 (1 + J)
Where: 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 balance of the Guarantee Period for the Guarantee Period Value subject to the Market Value Adjustment, rounded to the next higher number of complete years, and t is the number of days remaining in the Guarantee Period. For an illustration showing an upward and a downward adjustment, see Appendix A. 10. Guaranteed Death Benefit. We pay a death benefit to the Beneficiary if any of the following occurs during the Accumulation Period: . the Owner, or a joint owner, dies, . the Annuitant dies with no living contingent annuitant, or . the contingent annuitant dies after the Annuitant. The amount of the death benefit depends on the age of the deceased Owner or Annuitant when the death benefit becomes payable. If the deceased Owner or Annuitant dies before age 91, we will pay the Beneficiary the greatest of the following less debt: . Contract Value, . Purchase Payments minus previous withdrawals, accumulated at 5.00% interest per year to the earlier of the deceased's age 80 or the date of death, plus Purchase Payments minus all withdrawals from age 80 to the date of death, or . the greatest anniversary value before death. The greatest anniversary value equals: . the highest of the Contract Values on each Contract anniversary prior to the deceased's age 81, plus the dollar amount of any Purchase Payments made since that anniversary, minus . withdrawals since that anniversary. We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after age 91. The Owner or Beneficiary (unless the Owner has already elected an Annuity Option), 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. The Death Benefit must be distributed within 5 years after the date of death unless an Annuity Option is elected or a surviving spouse elects to continue the Contract in accordance with the provisions described below. For Non-Qualified Plan Contracts or Individual Retirement Annuities, if the Beneficiary is the Owner's surviving spouse (or the Annuitant's surviving spouse if the Owner is not a natural person), the surviving spouse may elect to continue the Contract in lieu of taking a Death Benefit distribution. The spouse will become the successor Owner of the Contract subject to the following: . The Contract Value will be increased to reflect the amount of the Death Benefit. The difference will be credited to the Scudder Money Market Subaccount #1. 24 . No withdrawal charges will apply on existing values in the Contract. However, Purchase Payments made after the original owner's death are subject to withdrawal charges. . Upon the death of the surviving spouse, the death benefit will be calculated from the time that the election to continue the Contract is made. A subsequent spouse of the surviving spouse will not be able to continue the Contract. The above option is subject to availability of this feature in your state. As an alternative to the above election, the surviving spouse may elect to continue a Non-Qualified Plan Contract or an Individual Retirement Annuity without receiving the increase in Contract Value attributable to the Death Benefit. In this case, all rights, benefits and charges under the Contract will continue including any applicable Withdrawal Charges. CONTRACT CHARGES AND EXPENSES We deduct the following charges and expenses: . mortality and expense risk, . administrative expenses, . records maintenance charges, . withdrawal charges, and . applicable premium taxes. 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 1.25% 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. The mortality risk we assume arises from two contractual obligations. First, if you or the Annuitant die before age 91 and before the Annuity Date, we may, in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit", above.) 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 Costs. We assess each Subaccount a daily asset charge for administrative costs at a rate of .15% per annum. This charge reimburses us for expenses incurred for administering the Contracts. These expenses include Owner inquiries, changes in allocations, Owner reports, Contract maintenance costs, and data processing costs. The administrative charge 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 costs of a particular Contract. 25 3. Records Maintenance Charge. We deduct an annual Records Maintenance Charge of $30 during the Accumulation Period. The charge is assessed: . at the end of each Contract Year, . on Contract surrender, and . upon annuitization. However, we do not deduct the Records Maintenance Charge for Contracts with Contract Value of at least $50,000 on the assessment date. This charge reimburses us for the expenses of establishing and maintaining Contract records. The Records Maintenance Charge reduces the net assets of each Subaccount, Guarantee Period and the Fixed Account. The Records Maintenance Charge is assessed equally among all investment options in which you have an interest. 4. Withdrawal Charge. We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal Charge covers Contract sales expenses, including commissions and other promotion and acquisition expenses. Each Contract Year, you may withdraw or surrender the Contract, without Withdrawal Charge, up to the greater of: . the excess of Contract Value over total Purchase Payments subject to Withdrawal Charges, minus prior withdrawals that were previously assessed a Withdrawal Charge, or . 10% of the Contract Value. If you withdraw a larger amount, the excess Purchase Payments withdrawn are subject to a Withdrawal Charge. The Withdrawal Charge applies in the first seven Contribution Years following each Purchase Payment as follows:
Withdrawal Contribution Year Charge ----------------- ---------- First............... 7% Second.............. 6% Third............... 5% Fourth.............. 5% Fifth............... 4% Sixth............... 3% Seventh............. 2% Eighth and following 0%
Purchase Payments are deemed surrendered in the order in which they were received. When a withdrawal is requested, you receive a check in the amount requested. If a Withdrawal Charge applies, Contract Value is reduced by the Withdrawal Charge, plus the dollar amount sent to you. Because Contribution Years are based on the date each Purchase Payment is made, you may be subject to a Withdrawal Charge, even though the Contract may have been issued many years earlier. (For additional details, see "Withdrawals During the Accumulation Period.") Subject to certain exceptions and state approvals, Withdrawal Charges are not assessed on withdrawals: . after you have been confined in a hospital or skilled health care facility for at least thirty days and you remain confined at the time of the request; . within thirty days following your discharge from a hospital or skilled health care facility after a confinement of at least thirty days; or . if you or the Annuitant become disabled after the Contract is issued and before age 65. 26 Restrictions and provisions related to the nursing care or hospitalization disability waivers are described in Contract endorsements. The Withdrawal Charge compensates us for Contract distribution expense. Currently, we anticipate Withdrawal Charges will not fully cover distribution expenses. Unrecovered distribution expenses may be recovered from our general assets. Those assets may include proceeds from the mortality and expense risk charge. The Withdrawal Charge also applies at annuitization to amounts attributable to Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal Charge applies upon annuitization if you select Annuity Options 2, 3 or 4 or if payments under Annuity Option 1 are scheduled to continue for at least five years. See "The Annuity Period--Annuity Options" for a discussion of the Annuity Options available. 5. Investment Management Fees and Other Expenses. Each Fund or 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 Funds or Portfolios and the Funds' statements of additional information. 6. 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. See "Appendix--State Premium Tax Chart" in the Statement of Additional Information. 7. Exceptions. We may decrease the mortality and expense risk charge, the administration charge, and the Records Maintenance Charge without notice. However, we guarantee that they will not increase. We bear the risk that those charges will not cover our costs. On the other hand, should the 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 reduce or waive fees and charges, including but not limited to, the Records Maintenance Charge, the Withdrawal Charge, and mortality and expense risk and administrative charges, for certain sales that may result in cost savings, such as those where we incur lower sales expenses or perform fewer services because of economies due to the size of a group, the average contribution per participant, or the use of mass enrollment procedures. We may also reduce or waive fees and charges and/or credit additional amounts on Contracts issued to: . employees and registered representatives (and their families) of broker-dealers (or their affiliated financial institutions) that have entered into selling group agreements with IBS, and . officers, directors and employees (and their families) of KILICO and Scudder Variable Series I and II, their investment advisers and principal underwriter or certain affiliated companies, or to any trust, pension, profit-sharing or other benefit plan for such persons. 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. Annuity payments begin on the Annuity Date and under the selected Annuity Option. The Annuity Date must be at least one year after the Date of Issue. Subject to state variation, the Annuity Date may not be deferred beyond the later of the Annuitant's 91st birthday (100th birthday if the Contract is part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue. However, annuitization is delayed beyond the Annuity Date if we are making systematic withdrawals based on your life expectancy. In this case, annuitization begins when life expectancy withdrawals are stopped. 27 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. Annuity payments may be subject to a Withdrawal Charge. (For additional details, see "Withdrawal Charge.") 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 before the Annuitant's 91st birthday (100th birthday if the Contract is part of a Charitable Remainder Trust) or within ten (10) years after the Date of Issue, whichever is later. You may change the Annuity Option before the Annuity Date. If no other Annuity Option is elected, monthly annuity payments are made in accordance with Option 3 below with a ten (10) year period certain. Generally, annuity payments are made in monthly installments. However, we may make a lump sum payment if the first monthly payment is less than $20. In this case, we may change the frequency of payments to quarterly, semiannual or annual intervals so that the initial payment is at least $20. The amount of periodic annuity payments may depend upon: . the Annuity Option selected; . the age and sex of the Annuitant; and . the investment experience of the selected Subaccount(s). 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. The age of the Annuitant also influences the amount of periodic annuity payments because an older Annuitant is expected to have a shorter life span, resulting in larger payments. The sex of the Annuitant influences the amount of periodic payments because females generally live longer than males, resulting in smaller payments. Finally, if you participate in a Subaccount with higher investment performance, it is likely you will receive a higher periodic payment. If you die before the Annuity Date, available Annuity Options are limited. Unless you have imposed restrictions, 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. 28 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 Annuitant'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. If you elect variable annuitization under Option 1, the Annuitant may elect to cancel all or part of the variable annuity payments remaining due. We will then pay the discounted value of the remaining payments. Option 2--Life Income. Option 2 provides for an annuity payable monthly over the lifetime of the Annuitant. If Option 2 is elected, annuity payments terminate automatically and immediately on the Annuitant'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 Annuitant'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 either Annuitant is living. Upon either Annuitant's death, the monthly income payable continues over the life of the surviving Annuitant at a percentage specified when Option 4 is elected. Annuity payments terminate automatically and immediately upon the surviving Annuitant'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 Fixed Account Contract Value or 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. Transfers during the Annuity Period are subject to certain limitations. 4. Transfers During the Annuity Period. During the Annuity Period, the Annuitant may, by written request, transfer Subaccount Value from one Subaccount to another Subaccount or to the Fixed Account, subject to the following limitations: . Transfers to a Subaccount 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 seven (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 seven (7) days before an annuity payment date, the transfer is effective during the Valuation Period after the annuity payment date. . Transfers to the Fixed Account are available only on an anniversary of the first Annuity Date. We must receive notice at least thirty (30) days prior to the anniversary. 29 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 and Withdrawal Charges. 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 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 Annuitant dies after the Annuity Date while the Contract is in force, the death proceeds, if any, depend upon the form of annuity payment in effect at the time of death. (See "Annuity Options.") 30 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 judicial decisions. 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 Plan 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 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 one 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 31 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. Then, 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 the Annuitant has 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. Partial withdrawals from a Non-Qualified Plan 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. 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. The Contract's death benefit may exceed Purchase Payments or Contract Value. As described in this Prospectus, we impose certain charges with respect to the death benefit. It is possible that those charges (or some portion) could be treated as a partial withdrawal. If the Policy includes the Guaranteed Retirement Income Benefit Endorsement (the "GRIB Endorsement"), 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. 32 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 Endorsement, the Annuitant may elect to receive a lump sum payment after the Annuity Date. In the case of a Non-Qualified Plan Contract, the Company will treat a portion of such a lump sum payment as includible in income, and will determine the taxable portion of subsequent periodic 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 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. 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 Plan 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 one year from Contract purchase and substantially equal periodic payments are made at least annually, or . made with annuities used with certain structured settlement agreements. 33 6. Aggregation of Contracts. The taxable amount of an annuity payment or withdrawal from a Non-Qualified Plan Contract may be determined by combining some or all of the Non-Qualified Plan Contracts owned by an individual. For example, if a person purchases a Contract and also purchases 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 a person purchases 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 The Contracts are also available for use in connection with retirement plans which receive favorable treatment under sections 401, 403, 408, 408A or 457 of the Code ("Qualified Plans"). Such contracts are referred to as "Qualified Contracts." Numerous special tax rules apply to the participants in Qualified Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to provide more than general information about use of the Contract with the various types of Qualified Plans. Persons intending to use the Contract in connection with qualified plans should consult a tax adviser. 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 features other than tax deferral, including the availability of lifetime annuity payments and death benefits protection. The tax rules applicable to Qualified Plans vary according to the type of plan and the 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. Also, loans from Qualified Contracts, where allowed, are subject to a variety of limitations, including restrictions as to the amount that may be borrowed, the duration of the loan, the number of allowable loans and the manner in which the loan must be repaid. (Owners should always consult their tax advisers and retirement plan fiduciaries prior to exercising their loan privileges.) Both the amount of the contribution that may be made, and the tax deduction or exclusion that the Owner may claim for such contribution, are limited under Qualified Plans. If this Contract is used with a Qualified Plan, the Owner and Annuitant generally are the same individual. If a joint Annuitant is named, all distributions made while the Annuitant is alive must be made to the Annuitant. Also, if a joint Annuitant is named who is not the Annuitant's spouse, the annuity options which are available 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" ("IRAs"), distributions of minimum amounts must generally begin by April 1 of the calendar year following the calendar year in which the owner attains age 701/2. An excise tax is imposed for 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 actual 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 purchased a Qualified Contract with a GRIB Endorsement 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 Endorsement. 34 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, for example, to a payment: . received after you reach age 591/2, . 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 Plan 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." IRAs limit 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 generally 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. Employers and employees intending to use the Contract in connection with these plans should consult a tax adviser. 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 has reached age 701/2. All or part of an IRA may be converted into a Roth IRA without taking an actual distribution. An individual 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. 35 Any "qualified distribution," as defined in Code Section 408A, from a Roth IRA is excludible from gross income. A qualified distribution includes a distribution made after you reach age 591/2, after your death, because of your disability, or made to a first-time homebuyer. A qualified distribution can only be made after the first five years after the year for which you (or your spouse) made a contribution to any Roth IRA established for your benefit. Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-Sharing Plans. The Code permits corporate employers to establish various types of tax-favored retirement plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh", permits self-employed individuals also to establish such tax-favored retirement plans for themselves and their employees. Such retirement plans may permit the purchase of the Contracts in order to provide benefits under the plans. The Contract provides a death benefit that in certain circumstances may exceed the greater of the Purchase Payments and the Contract Value. It is possible that such death benefit could be characterized as an incidental death benefit. There are limitations on the amount of incidental benefits that may be provided under pension and profit sharing plans. In addition, the provision of such benefits may result in current taxable income to participants. Employers intending to use the Contract in connection with such plans should seek competent advice. 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 taxable gross income. 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 a death benefit that in certain circumstances may exceed the greater of the Purchase Payments and the Contract Value. It is possible that such death benefit could be characterized as an incidental death benefit. 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. Even if the death benefit under the Contract were characterized as an incidental death benefit, it is unlikely to violate those limits unless you also purchase a life insurance contract as part of your tax-sheltered annuity plan. 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 591/2, severed employment, 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 Code 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 Code 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. 2. Direct Rollovers. If the Contract is used in connection with a retirement plan that is qualified under Sections 401(a), 403(a), or 403(b) of the Code or with an eligible government deferred compensation plan that is qualified under Code 36 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 the 20% 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 Annuitant 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 contract features, charges and 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. 37 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 Annuitant 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 After each Contract anniversary, we send you a statement showing amounts credited to each Subaccount, to the Fixed Account Option and to the Guarantee Period Value. In addition, if you transfer amounts among the investment options or make additional payments, you 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 correspond to the Subaccounts in which you invest and a list of the securities held by that Portfolio. In addition, we calculate for you the portion of a total amount that must be invested in a selected Guarantee Period so that the portion grows to equal the original total amount at the expiration of the Guarantee Period. You may direct inquiries to the selling agent or may call 1-800-621-5001 or write to Kemper Investors Life Insurance Company, Customer Service, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801. DOLLAR COST AVERAGING Under our Dollar Cost Averaging program, a predesignated portion of Subaccount Value is automatically transferred monthly, quarterly, semiannually or annually for a specified duration to other Subaccounts, Guarantee Periods and the Fixed Account. 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 no guarantee that DCA will produce that result. There is currently no charge for this service. The Dollar Cost Averaging program is available only during the Accumulation Period. You may also elect transfers from the Fixed Account on a monthly or quarterly basis for a minimum duration of one year. You may enroll any time by completing our Dollar Cost Averaging form. Transfers are made based on the date you specify. We must receive the enrollment form at least five (5) business days before the transfer date. If you participate in the Dollar Cost Averaging program, you may allocate all or a portion of the initial Purchase Payment to the Scudder Money Market Subaccount #2. This is the only Subaccount with no deduction for the 1.40% charge for mortality and expense risks and administrative costs. You must transfer all Subaccount Value out of Scudder Money Market Subaccount #2 within one year from the initial Purchase Payment. If you terminate Dollar Cost Averaging or do not deplete all Subaccount Value in Scudder Money Market Subaccount #2 within one year, we automatically transfer any remaining Subaccount Value to Scudder Money Market Subaccount #1. The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed Account. The total Contract Value in an account at the time Dollar Cost Averaging is elected must be at least equal to the amount designated to be transferred on each transfer date times the duration selected. Dollar Cost Averaging ends if: . the number of designated monthly transfers has been completed, . Contract Value in the transferring account is insufficient to complete the next transfer; the remaining amount is transferred, . we receive the Owner's written termination at least five (5) business days before the next transfer date, or . the Contract is surrendered or annuitized. If the Fixed Account balance is at least $10,000, you may elect automatic calendar quarter transfers of interest accrued in the Fixed Account to one or more of the Subaccounts or Guarantee Periods. You may enroll in this program any time by completing our Dollar Cost Averaging form. Transfers are made within five business days of the end of the calendar quarter. We must receive the enrollment form at least ten (10) days before the end of the calendar quarter. Dollar Cost Averaging is not available during the Annuity Period. 38 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, or amounts based on your life expectancy, from the Fixed Account, or from any of the Subaccounts or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis. The SWP is available when you request a minimum $100 periodic payment. A market value adjustment applies to any withdrawals under the SWP from a Guarantee Period, unless effected within 30 days after the Guarantee Period ends. SWP withdrawals from the Fixed Account are not available in the first Contract Year and are limited to the amount not subject to Withdrawal Charges. If the amounts distributed under the SWP from the Subaccounts or Guarantee Periods exceed the free withdrawal amount, the Withdrawal Charge is applied on any amounts exceeding the free withdrawal amount. 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 you or us. EXPERTS The consolidated balance sheets of KILICO as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002, are incorporated in this Prospectus by reference to the Statement of Additional Information. The statements of assets, liabilities and contract owners' equity of the KILICO Variable Annuity Separate Account as of December 31, 2002, and the related statements of operations and changes in contract owners' equity for the periods indicated, are incorporated in this Prospectus by reference to the Statement of Additional Information. Both documents have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent 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 Frank Julian, Senior Vice President and Associate General Counsel. 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 adviser regarding the tax consequences, as an assignment may be a taxable event. 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. We have filed registration statements (the "Registration Statements") relating to the Contracts with the SEC under the Securities Act of 1933. This Prospectus has been filed as part of the Registration Statements and 39 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; Experts; Financial Statements; Report of Independent Accountants; Financial Statements of the Separate Account; Report of Independent Accountants; Financial Statements of KILICO; Appendix A State Premium Tax Chart. Please read the Statement of Additional Information 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 BEFORE NOVEMBER 12, 2001 Guaranteed Retirement Income Benefit: General Guaranteed Retirement Income Benefit ("GRIB") was an optional Contract benefit available under Contracts issued before November 12, 2001. GRIB is not offered on Contracts issued on or after November 12, 2001. We reserve the right to begin offering GRIB at any time. GRIB provides a minimum fixed annuity guaranteed lifetime income to the Annuitant as described below. GRIB may be exercised only within thirty days after the seventh or later Contract anniversary. In addition, GRIB must be exercised between the Annuitant's 60th and 91st birthdays. However, if the Annuitant is age 44 or younger on the Date of Issue, GRIB may be exercised after the Contract's 15th Anniversary, even though the Annuitant is not yet 60 years old. GRIB may not be appropriate for Annuitants age 80 and older. State premium taxes may be assessed when you exercise GRIB. If you elected GRIB, the charge is 0.25% of Contract Value. We deduct a pro rata portion of the charge on the last business day of each calendar quarter. The quarterly charge is deducted pro rata from the investment options in which you have an interest. We discontinue deducting the GRIB charge after the Annuitant's 91st birthday. The GRIB charge is in addition to the Contract fees and expenses appearing in the "Summary of Expenses". GRIB may be discontinued after the seventh Contract anniversary by written notice to us. Once discontinued, GRIB may not be elected again. 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 this optional benefit. 40 Annuity Payments with GRIB Annuity payments are based on the greater of: . the income provided by applying the GRIB base to the guaranteed annuity factors, and . the income provided by applying the Contract Value to the current annuity factors. The GRIB base is the greatest of: . Contract Value, . Purchase Payments minus previous withdrawals, accumulated at 5.00% interest per year to the earlier of the Annuitant's age 80 or the GRIB exercise date plus Purchase Payments minus all withdrawals from age 80 to the GRIB exercise date, and . the greatest anniversary value before the exercise date. The greatest anniversary value equals: . the highest of the Contract Values on each Contract anniversary prior to the Annuitant's age 81, plus . the dollar amount of any Purchase Payments made since that anniversary, minus . withdrawals since that anniversary. The guaranteed annuity factors are based on the 1983a table projected using projection scale G, with interest at 2.5% (the "Annuity 2000" table). However, if GRIB is exercised on or after the 10th Contract anniversary, interest at 3.5% is assumed. 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. Because 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, but the age of the older Annuitant is used to determine the GRIB base. If you elect GRIB payable for the life of a single Annuitant, you may elect a period certain of 5, 10, 15, or 20 years. If the Annuitant dies before GRIB has been paid for the period elected, the remaining GRIB payments are paid as they fall due to the Beneficiary, if the Beneficiary is a natural person. If the Beneficiary is not a natural person, the remaining payments may be commuted at a minimum 2.5% interest rate and paid in a lump sum. If you elect 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. If both Annuitants die before GRIB has been paid for 25 years, the remaining GRIB payments are paid as they fall due to the Beneficiary, if the Beneficiary is a natural person. If the Beneficiary is not a natural person, the remaining payments may be commuted at a minimum 2.5% interest rate and paid in a lump sum. GRIB payments are also available on a quarterly, semi-annual or annual basis. We may make other annuity options available. Commutable Annuitization Option If you purchased your Contract on or after May 1, 2000, and you exercise the GRIB option to receive guaranteed benefits, you may elect to have payments made under a commutable annuitization option. Under the commutable annuitization option, partial lump sum payments are permitted, subject to the following requirements: . At the time you exercise the GRIB option, you must elect the commutable annuitization option in order to be eligible for the lump sum payments. 41 . 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, or 20 year certain period that applies to the payout. . Lump sum payments are available once in each calendar year and may not be elected until one year after annuitization has started. . The Annuitant 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 Annuitant 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 Plan 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 (3.5% if GRIB was exercised on or after the 10th Contract anniversary; 2.5% if exercised before that date) 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%
Effect of Death of Owner or Annuitant on GRIB The GRIB terminates upon the death of the Owner or the Annuitant (if the Owner is not a natural person) unless the Owner's or Annuitant's surviving spouse elects to continue the Contract as described in "Guaranteed Death Benefit" on pages 27-28 above. A spouse may continue only a Non-Qualified Contract or an Individual Retirement Annuity. If the spouse elects to continue the Contract as the new Owner and receive any increase in Contract Value attributable to the Death Benefit, the GRIB is modified as follows: The GRIB base is calculated from the time the election to continue the Contract is made. GRIB may not be exercised or canceled prior to the seventh Contract Year anniversary date following the spouse's election to continue the Contract. However, we will waive all other age restrictions that would apply to exercising GRIB. The spouse may also elect to discontinue GRIB within 30 days of the date the election to continue the Contract is made. If the spouse elects to continue the Contract without receiving any increase in Contract Value attributable to the Death Benefit, all rights, benefits and charges under the Contract, including the GRIB charge and the right to exercise GRIB based on the existing exercise period, will continue unchanged. ANNUAL REPORTS AND OTHER DOCUMENTS KILICO's Annual Report on Form 10-K for the year ended December 31, 2002 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 Securities Exchange Act of 1934 are also incorporated herein by reference, which means that they also legally become a part of this Prospectus. 42 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 documents and reports under the Securities Exchange Act of 1934, including our annual and quarterly reports on Form 10-K and Form 10-Q, 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 1-888-477-9700. 43 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 and the Withdrawal Charge 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. No Withdrawal Charge applies to 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. These examples also show the Withdrawal Charge (if any) which would be calculated separately after the Market Value Adjustment. 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: -.0551589* = [(1 + .05)]/4/ --------------- [(1 + .065)] -1
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee Period Value: -2,316.67 = -.0551589 X 42,000.00 The Market Adjusted Value would be: $39,683.33 = $42,000.00 - $2,316.67 A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in excess of the amount available as a free withdrawal. In this case, there are no prior withdrawals, so 10% of the Market Adjusted Value is not subject to a Withdrawal Charge. The Withdrawal Charge is thus: $2,142.90 = $39,683.33 X .90 X .06 Thus, the amount payable on a full withdrawal would be: $37,540.43 = $39,683.33 - $2,142.90 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: - $1,158.34 = - .0551589 X $21,000.00 - -------- *Actualcalculation utilizes 10 decimal places. 44 The Market Adjusted Value would be: $19,841.66 = $21,000.00 - $1,158.34 The Withdrawal Charge of 6% would apply to the Market Adjusted Value being withdrawn, less 10% of the full Market Adjusted Value as there are no prior withdrawals: $952.39 = ($19,841.46 - .10 X $39,683.33) X .06 Thus, the amount payable, net of Withdrawal Charges, on this partial withdrawal would be: $18,889.07 = $19,841.46 - $952.39 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: +.0390198 = (1 + .05)/4/ ------------- (1 + .04) -1
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period Value: $1,638.83 = $42,000.00 X .0390198 The Market Adjusted Value would be: $43,638.33 = $42,000.00 + $1,638.83 A Withdrawal Charge of 6% would apply to the Market Adjusted Value being withdrawn, less 10% of the full Market Adjusted Value, as there were no prior withdrawals: $2,356.47 = $43,638.33 X .90 X .06 Thus, the amount payable on withdrawal would be: $41,281.85 = $43,638.33 - $2,356.47 If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn (partial withdrawal of 50%), the Market Value Adjustment would be: $819.42 = $21,000.00 X .0390198 The Market Adjusted Value of $21,000.00 would be: $21,819.42 = $21,000.00 + $819.42 The Withdrawal Charge of 6% would apply to the Market Adjusted Value being withdrawn, less 10% of the full Market Adjusted Value as there are no prior withdrawals: $1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06 Thus, the amount payable, net of Withdrawal Charges, on this partial withdrawal would be: $20,772.08 = $21,819.42 - $1,047.34 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. 45 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 701/2 (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 701/2), 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 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. 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 46 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 or to a 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 are 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 are 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. 47 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 -------------------------- ---------------- 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 -------------------------- --------------- 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 701/2 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 $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 have passed since the individual first participated in the plan, the individual may treat the SIMPLE IRA as an IRA. 48 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. 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 701/2 (your 701/2 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 701/2 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 701/2 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 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. 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 a 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. The Company reserves 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. 49 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. 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 701/2. 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 not apply. If such a rollover or transfer occurs before January 1, 1999, any 50 portion of the amount rolled over or transferred which is required to be included in gross income will be so included ratably over the 4-taxable year period beginning with the taxable year in which the rollover or transfer is made. Pending legislation may modify these rules retroactively to January 1, 1998. 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 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 591/2, (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 51 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 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 591/2, 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 591/2. 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 higher education expenses, certain medical expenses, or by an unemployed individual to pay health insurance premiums. O. 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, SIMPLE IRA or Roth 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. 52 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 1. If contributions to the Contract are made by other than rollover contributions and direct transfers, the following information based on the charts shown on the next pages, which assumes you were to make a level contribution to the fixed account at the beginning of each year of $1,000 must be completed prior to your signing the enrollment application.
End of Lump Sum Termination At Lump Sum Termination Year Value of Contract* Age Value of Contract* ---- -------------------- --- -------------------- 1 60 2 65 3 70 4 5
- -------- * Includes applicable withdrawal charges as described in Item T below. 2. If contributions to the Contract are made by rollover contributions and/or direct transfers, the following information, based on the charts shown on the next page, and all of which assumes you make one contribution to the fixed account of $1,000 at the beginning of this year, must be completed prior to your signing the enrollment application.
End of Lump Sum Termination At Lump Sum Termination Year Value of Contract* Age Value of Contract* ---- -------------------- --- -------------------- 1 60 2 65 3 70 4 5
- -------- * Includes applicable withdrawal charges as described in Item T below. T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT) 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 1.40% per annum. 2. An annual records maintenance charge of $30.00 will be assessed ratably each quarter against the Separate Account, Fixed Account and Guarantee Periods. 3. Withdrawal (early annuitization) charges will be assessed based on the years elapsed since the Purchase Payments (in a given Contract Year) were received by KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3 to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years, 2%; over 7 years and thereafter, 0%. 4. The method used to compute and allocate the annual earnings is contained in the Prospectus under the heading "Accumulation Unit Value." 5. The growth in value of your Contract is neither guaranteed nor projected but is based on the investment experience of the Separate Account. 53 GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR. (TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF EACH YEAR.)
End of Termination End of Termination End of Termination End of Termination Year Values* Year Values* Year Values* Year Values* ------ ----------- ------ ----------- ------ ----------- ------ ----------- 1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26 2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30 3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20 4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89 5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41 6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86 7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46 8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50 9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40 10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65 11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87 12 13,904.03 25 36,171.26 38 68,871.45 13 15,329.79 26 38,265.04 39 71,946.23 GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR. (TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.) End of Termination End of Termination End of Termination End of Termination Year Values* Year Values* Year Values* Year Values* ------ ----------- ------ ----------- ------ ----------- ------ ----------- 1 $ 937 14 $ 1,000 27 $ 1,000 40 $ 1,000 2 946 15 1,000 28 1,000 41 1,000 3 955 16 1,000 29 1,000 42 1,000 4 955 17 1,000 30 1,000 43 1,000 5 964 18 1,000 31 1,000 44 1,000 6 973 19 1,000 32 1,000 45 1,000 7 982 20 1,000 33 1,000 46 1,000 8 1,000 21 1,000 34 1,000 47 1,000 9 1,000 22 1,000 35 1,000 48 1,000 10 1,000 23 1,000 36 1,000 49 1,000 11 1,000 24 1,000 37 1,000 50 1,000 12 1,000 25 1,000 38 1,000 13 1,000 26 1,000 39 1,000
- -------- * Includes applicable withdrawal charges. 54 STATEMENT OF ADDITIONAL INFORMATION May 1, 2003 INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS SCUDDER DESTINATIONS Issued By KEMPER INVESTORS LIFE INSURANCE COMPANY and KILICO VARIABLE ANNUITY SEPARATE ACCOUNT 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, 2003. 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 ......................................................... 22 Experts .................................................................. 22 Financial Statements ..................................................... 22 Report of Independent Accountants ........................................ 23 Financial Statements of the Separate Account ............................. 24 Report of Independent Accountants ........................................ 58 Financial Statements of KILICO ........................................... 59 Appendix A State Premium Tax Chart ....................................... A-1 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, 2002, 2001 and 2000. The firm performed the annual audit of the financial statements of the Separate Account and KILICO for the years ended December 31, 2002, 2001 and 2000. 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 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 six and one-quarter percent (6.25%) of Purchase Payments. During 2002, 2001 and 2000, KILICO paid gross commissions of approximately $46.0 million, $131.4 million and $54.3 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 Fixed Income (formerly Investment Grade Bond Subaccount); the Government Securities Subaccount, and the Scudder High Income (formerly Scudder High Yield) Subaccount; and "yield" and "effective yield" information may be provided in the case of 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 the applicable Withdrawal Charge that may be imposed at the end of the period as well as all other recurring charges and fees applicable under the Contract to all Contract Owner accounts. Premium taxes are not included in the term charges. 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. 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. No standard formula has been 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 include the effect of the applicable Withdrawal Charge that may be imposed at the end of the period or the effect of the Records Maintenance Charge, and thus may be higher than if such charges were deducted. Premium taxes and Records Maintenance Charges are not included in the term 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 1 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 charge in the value of a Subaccount over the applicable period while nonannualized (cumulative) figures represent the actual percentage change over the applicable period. 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, three, 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 may 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 (reduced by the applicable charges) 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 High Income (formerly Scudder High Yield) Subaccount, Scudder Money Market Subaccount and Scudder Total Return Subaccount, and for periods from December 9, 1983 (inception) for the Scudder Growth Subaccount. This performance information is stated to reflect that the Separate Account was reorganized on November 3, 1989 as a unit investment trust with Subaccounts investing in corresponding Portfolios of the Fund. 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 Government Securities Subaccount, the Scudder High Income (formerly Scudder High Yield) Subaccount, the Scudder Fixed Income (formerly Scudder Investment Grade Bond) Subaccount and the Scudder Strategic Income Subaccount, is computed in accordance with a standard method prescribed by rules of the Securities and Exchange Commission. The yields for the Scudder Government Securities Subaccount, the Scudder High Income (formerly Scudder High Yield) Subaccount, the Scudder Fixed Income (formerly Scudder Investment Grade Bond) Subaccount and the Scudder Strategic Income Subaccount, based upon the one month period ended March 31, 2003, were 0.68%, 7.84%, 2.57% and 2.66%, 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 Withdrawal Charges or 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 Separate Account's portfolio are not included in the calculation. The Scudder Money Market #1 and #2 Subaccounts' yields for the seven-day period ended March 31, 2003 were 0.60% and 0.79%, respectively, and average portfolio maturity was 58 days. 2 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 Scudder Money Market #1 and #2 Subaccounts' effective yields for the seven-day period ended March 31, 2003 were 0.60% and 0.70%, respectively. 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. The standardized performance figures include the deduction of all expenses and fees, including a prorated portion of the Records Maintenance Charge. Redemptions within the first seven years after purchase may be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after seven years. Yield, effective yield and nonstandardized total return do not reflect the effect of the Withdrawal Charge or premium taxes that may be imposed upon the redemption of units. In addition, nonstandardized total return figures do not include the effect of the Records Maintenance Charge. Thus, yield, effective yield and nonstandardized total return figures may be higher than if these charges were deducted. Standardized average annual total return reflects the effect of the applicable Withdrawal Charge (but not premium tax) that may be imposed at the end of the period in question. 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 following tables include standardized average annual total return and nonstandardized total return quotations for various periods as of December 31, 2002. 3 PERFORMANCE FIGURES (as of December 31, 2002) (Standardized and Non-Standardized)
- ------------------------------------------------------------------------------------------------------------------------------------ Average Annual Total Return (1) Total Return (2) (Non-Standardized) (Standardized) - ------------------------------------------------------------------------------------------------------------------------------------ Inception Year-To-Date % Ending Cumulative % Annualized % Annualized % Date Return (3) Value (4) Return Return Return - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Balanced Subaccount -13.50% Life of Subaccount 11/01/1999 35,429 -11.43% -3.76% -5.22% Life of Portfolio 09/05/1989 103,669 159.17% 7.41% N/A Ten Years 86,611 116.53% 8.03% N/A Five Years 53,034 32.59% 5.80% N/A Three Years 32,089 -19.78% -7.08% -8.57% One Year 34,600 -13.50% -13.50% -19.01% - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Leveraged AllCap Subaccount -34.82% Life of Subaccount 11/01/1999 21,125 -47.19% -18.26% -19.53% Life of Portfolio 01/24/1995 98,268 145.67% 11.99% N/A Ten Years N/A N/A N/A N/A Five Years 43,797 9.49% 1.83% N/A Three Years 16,023 -59.94% -26.28% -27.52% One Year 26,070 -34.82% -34.82% -38.99% - ------------------------------------------------------------------------------------------------------------------------------------ Credit Suisse Trust- Emerging Markets Subaccount -12.79% Life of Subaccount 05/01/1998 25,672 -35.82% -9.06% -9.86% Life of Portfolio 12/31/1997 30,614 -23.47% -5.21% N/A Ten Years N/A N/A N/A N/A Five Years 30,614 -23.47% -5.21% N/A Three Years 20,982 -47.55% -19.35% -20.68% One Year 34,885 -12.79% -12.79% -18.34% - ------------------------------------------------------------------------------------------------------------------------------------ Credit Suisse Trust-Global Post-Venture Capital Subaccount -35.07% Life of Subaccount 05/01/1998 21,218 -46.96% -12.69% -13.48% Life of Portfolio 09/30/1996 26,904 -32.74% -6.14% N/A Ten Years N/A N/A N/A N/A Five Years 24,749 -38.13% -9.16% N/A Three Years 14,612 -63.47% -28.51% -29.72% One Year 25,973 -35.07% -35.07% -39.22% - ------------------------------------------------------------------------------------------------------------------------------------ Dreyfus IP MidCap Stock Subaccount -13.70% Life of Subaccount 11/01/1999 38,656 -3.36% -1.07% -2.56% Life of Portfolio 05/01/1998 37,024 -7.44% -1.64% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 35,167 -12.08% -4.20% -5.73% One Year 34,519 -13.70% -13.70% -19.20% - ------------------------------------------------------------------------------------------------------------------------------------ Dreyfus Socially Responsible Growth Subaccount -29.93% Life of Subaccount 05/03/1999 22,333 -44.17% -14.70% -15.86% Life of Portfolio 10/07/1993 66,151 65.38% 5.60% N/A Ten Years N/A N/A N/A N/A Five Years 30,735 -23.16% -5.13% N/A Three Years 18,777 -53.06% -22.28% -23.57% One Year 28,029 -29.93% -29.93% -34.40% - ------------------------------------------------------------------------------------------------------------------------------------ INVESCO VIF-Utilities Subaccount -21.42% Life of Subaccount 05/01/2001 21,279 -46.80% -31.50% -33.82% Life of Portfolio 01/03/1995 46,047 15.12% 1.78% N/A Ten Years N/A N/A N/A N/A Five Years 31,624 -20.94% -4.59% N/A Three Years 21,750 -45.62% -18.38% N/A One Year 31,430 -21.42% -21.42% -26.43% - ------------------------------------------------------------------------------------------------------------------------------------ Janus Growth Subaccount -27.53% Life of Subaccount 09/13/1995 61,863 54.66% 6.15% 6.11% Life of Portfolio 09/14/1993 65,319 63.30% 5.41% N/A Ten Years N/A N/A N/A N/A Five Years 34,446 -13.88% -2.95% -3.72% Three Years 18,132 -54.67% -23.18% -24.46% One Year 28,990 -27.53% -27.53% -32.15% - ------------------------------------------------------------------------------------------------------------------------------------ Janus Growth & Income Subaccount -22.62% Life of Subaccount 06/01/1998 45,630 14.08% 2.86% 2.02% Life of Portfolio 05/01/1998 45,630 14.08% 2.86% 2.02% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 22,398 -44.01% -17.58% -18.92% One Year 30,951 -22.62% -22.62% -27.56% - ------------------------------------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------------------------------------ Average Annual Total Return (1) Total Return (2) (Non-Standardized) (Standardized) - ------------------------------------------------------------------------------------------------------------------------------------ Inception Year-To-Date % Ending Cumulative % Annualized % Annualized % Date Return (3) Value (4) Return Return Return - ------------------------------------------------------------------------------------------------------------------------------------ Scudder 21st Century Growth Subaccount -42.07% Life of Subaccount 05/01/2000 13,789 -65.53% -32.91% -34.18% Life of Portfolio 05/03/1999 23,489 -41.28% -13.52% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 13,419 -66.45% -30.52% N/A One Year 23,174 -42.07% -42.07% -45.78% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Capital Growth Subaccount -30.16% Life of Subaccount 05/01/1998 27,636 -30.91% -7.61% -8.42% Life of Portfolio 07/16/1985 168,135 320.34% 8.57% N/A Ten Years 68,373 70.93% 5.51% N/A Five Years 31,993 -20.02% -4.37% N/A Three Years 19,740 -50.65% -20.98% -22.28% One Year 27,934 -30.16% -30.16% -34.62% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Global Discovery Subaccount -20.99% Life of Subaccount 05/01/1998 34,590 -13.52% -3.06% -3.89% Life of Portfolio 05/01/1996 47,775 19.44% 2.70% N/A Ten Years N/A N/A N/A N/A Five Years 41,240 3.10% 0.61% N/A Three Years 21,951 -45.12% -18.13% -19.47% One Year 31,603 -20.99% -20.99% -26.03% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Growth & Income Subaccount -24.19% Life of Subaccount 05/01/1998 25,141 -37.15% -9.46% -10.26% Life of Portfolio 05/02/1994 59,130 47.83% 4.61% N/A Ten Years N/A N/A N/A N/A Five Years 28,246 -29.39% -6.72% N/A Three Years 25,611 -35.97% -13.81% -15.21% One Year 30,324 -24.19% -24.19% -29.02% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Health Sciences Subaccount -24.16% Life of Subaccount 05/01/2001 32,008 -19.98% -12.51% -15.44% Life of Portfolio 05/01/2001 32,008 -19.98% -12.51% -15.44% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years N/A N/A N/A N/A One Year 30,335 -24.16% -24.16% -29.00% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder International Subaccount -19.49% Life of Subaccount 05/01/1998 25,792 -35.52% -8.97% -9.77% Life of Portfolio 05/01/1987 70,943 77.36% 3.72% N/A Ten Years 53,530 33.82% 2.96% N/A Five Years 30,189 -24.53% -5.47% N/A Three Years 16,955 -57.61% -24.88% -26.14% One Year 32,202 -19.49% -19.49% -24.63% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Aggressive Growth Subaccount -31.62% Life of Subaccount 05/03/1999 27,416 -31.46% -9.79% -11.00% Life of Portfolio 05/03/1999 27,416 -31.46% -9.79% -11.00% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 19,779 -50.55% -20.92% -22.23% One Year 27,351 -31.62% -31.62% -35.99% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Blue Chip Subaccount -23.19% Life of Subaccount 05/01/1997 29,848 -25.38% -6.18% -7.01% Life of Portfolio 05/01/1997 35,537 -11.16% -2.06% N/A Ten Years N/A N/A N/A N/A Five Years 32,150 -19.63% -4.28% N/A Three Years 23,184 -42.04% -16.62% -17.98% One Year 30,723 -23.19% -23.19% -28.09% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Contrarian Value Subaccount -16.16% Life of Subaccount 05/01/1996 36,493 -8.77% -1.98% -2.83% Life of Portfolio 05/01/1996 60,129 50.32% 6.30% N/A Ten Years N/A N/A N/A N/A Five Years 40,186 0.46% 0.09% N/A Three Years 38,584 -3.54% -1.19% -2.76% One Year 33,537 -16.16% -16.16% -21.50% - ------------------------------------------------------------------------------------------------------------------------------------
5 PERFORMANCE FIGURES (as of December 31, 2002 (Standardized and Non-Standardized)
- ------------------------------------------------------------------------------------------------------------------------------------ Total Return (1) Average Annual (Non-Standardized) Total Return (2) (Standardized) - ------------------------------------------------------------------------------------------------------------------------------------ Year-To- Inception Date % Ending Cumulative % Annualized % Annualized % Date Return (3) Value (4) Return Return Return - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Fixed Income (formerly Scudder Investment Grade Bond) Subaccount 6.52% Life of Subaccount 05/01/1996 48,375 20.94% 4.23% 3.42% Life of Portfolio 05/01/1996 54,630 36.57% 4.78% N/A Ten Years N/A N/A N/A N/A Five Years 49,499 23.75% 4.35% N/A Three Years 48,144 20.36% 6.37% 4.82% One Year 42,607 6.52% 6.52% -0.25% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Global Blue Chip Subaccount -16.93% Life of Subaccount 06/01/1998 33,358 -16.61% -3.88% -4.72% Life of Portfolio 05/01/1998 31,996 -20.01% -4.68% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 26,396 -34.01% -12.94% -14.35% One Year 33,227 -16.93% -16.93% -22.23% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Government Securities Subaccount 6.56% Life of Subaccount 11/03/1989 86,851 117.13% 6.07% 6.04% Life of Portfolio 09/03/1987 98,834 147.08% 6.08% N/A Ten Years 66,625 66.56% 5.23% 5.20% Five Years 51,804 29.51% 5.31% 4.60% Three Years 49,427 23.57% 7.31% 5.79% One Year 42,624 6.56% 6.56% -0.21% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Growth Subaccount -30.38% Life of Subaccount 12/09/1983 23,295 -41.76% -11.12% -11.92% Life of Portfolio 12/09/1983 159,451 298.63% 7.52% N/A Ten Years 52,788 31.97% 2.81% N/A Five Years 26,133 -34.67% -8.16% N/A Three Years 17,023 -57.44% -24.78% -26.04% One Year 27,847 -30.38% -30.38% -34.83% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder High Income (formerly Scudder High Yield) Subaccount (6) -1.68% Life of Subaccount 04/06/1982 34,823 -12.94% -2.98% -3.82% Life of Portfolio 04/06/1982 218,213 445.53% 8.53% N/A Ten Years 59,217 48.04% 4.00% N/A Five Years 36,133 -9.67% -2.01% N/A Three Years 35,848 -10.38% -3.59% -5.12% One Year 39,328 -1.68% -1.68% -7.93% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder International Select Equity Subaccount (5) -14.68% Life of Subaccount 01/06/1992 27,175 -32.06% -8.08% -8.90% Life of Portfolio 01/06/1992 52,503 31.26% 2.51% N/A Ten Years 53,591 33.98% 2.97% N/A Five Years 31,100 -22.25% -4.91% N/A Three Years 19,945 -50.14% -20.70% -22.01% One Year 34,129 -14.68% -14.68% -20.11% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Money Market #1 Subaccount (7) -0.04% Life of Subaccount 04/06/1982 45,230 13.07% 2.72% 1.86% Life of Portfolio 04/06/1982 104,302 160.75% 4.73% N/A Ten Years 53,600 34.00% 2.97% N/A Five Years 45,944 14.86% 2.81% N/A Three Years 42,848 7.12% 2.32% 0.70% One Year 39,984 -0.04% -0.04% -6.40% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Small Cap Growth Subaccount -34.38% Life of Subaccount 05/02/1994 24,158 -39.60% -10.41% -11.22% Life of Portfolio 05/02/1994 55,627 39.07% 3.88% N/A Ten Years N/A N/A N/A N/A Five Years 25,137 -37.16% -8.87% N/A Three Years 16,226 -59.44% -25.97% -27.21% One Year 26,246 -34.38% -34.38% -38.58% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Strategic Income Subaccount 9.77% Life of Subaccount 05/01/1997 45,987 14.97% 3.09% 2.24% Life of Portfolio 05/01/1997 47,744 19.36% 3.17% N/A Ten Years N/A N/A N/A N/A Five Years 46,842 17.10% 3.21% N/A Three Years 46,091 15.23% 4.84% 3.24% One Year 43,906 9.77% 9.77% 2.79% - ------------------------------------------------------------------------------------------------------------------------------------
6
- ------------------------------------------------------------------------------------------------------------------------------------ Average Annual Total Return (1) Total Return (2) (Non-Standardized) (Standardized) - ------------------------------------------------------------------------------------------------------------------------------------ Inception Year-To-Date % Ending Cumulative % Annualized % Annualized % Date Return (3) Value (4) Return Return Return - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Technology Growth Subaccount -36.41% Life of Subaccount 05/03/1999 23,095 -42.26% -13.92% -15.08% Life of Portfolio 05/03/1999 23,095 -42.26% -13.92% -15.08% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 13,117 -67.21% -31.04% -32.22% One Year 25,435 -36.41% -36.41% -40.48% - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Total Return Subaccount -16.34% Life of Subaccount 04/06/2002 35,581 -11.05% -2.52% -3.36% Life of Portfolio 04/06/1982 236,935 492.34% 8.96% N/A Ten Years 64,060 60.15% 4.82% N/A Five Years 38,263 -4.34% -0.88% N/A Three Years 29,759 -25.60% -9.39% -10.84% One Year 33,462 -16.34% -16.34% -21.67% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Davis Venture Value Subaccount -16.95% Life of Subaccount 05/01/2001 31,266 -21.84% -13.73% -16.62% Life of Portfolio 05/01/2001 31,266 -21.84% -13.73% -16.62% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years N/A N/A N/A N/A One Year 33,219 -16.95% -16.95% -22.24% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Dreman Financial Services Subaccount -9.78% Life of Subaccount 06/01/1998 39,525 -1.19% -0.26% -1.12% Life of Portfolio 05/01/1998 38,492 -3.77% -0.82% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 42,426 6.06% 1.98% 0.37% One Year 36,090 -9.78% -9.78% -15.52% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Dreman High Return Equity Subaccount -19.17% Life of Subaccount 06/01/1998 38,376 -4.06% -0.90% -1.75% Life of Portfolio 05/01/1998 37,270 -6.83% -1.50% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 41,738 4.35% 1.43% -0.18% One Year 32,333 -19.17% -19.17% -24.32% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Dreman Small Cap Value Subaccount -12.58% Life of Subaccount 05/01/1996 35,794 -10.52% -2.39% -3.24% Life of Portfolio 05/01/1996 44,783 11.96% 1.71% N/A Ten Years N/A N/A N/A N/A Five Years 36,948 -7.63% -1.57% N/A Three Years 41,641 4.10% 1.35% -0.25% One Year 34,970 -12.58% -12.58% -18.14% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Eagle Focused Large Cap Growth Subaccount -28.98% Life of Subaccount 10/29/1999 26,610 -33.48% -12.05% -13.40% Life of Portfolio 10/29/1999 26,610 -33.48% -12.05% -13.40% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 20,875 -47.81% -19.49% -20.81% One Year 28,408 -28.98% -28.98% -33.51% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Focus Value+Growth Subaccount -26.91% Life of Subaccount 05/01/1996 28,947 -27.63% -6.81% -7.63% Life of Portfolio 05/01/1996 44,807 12.02% 1.72% N/A Ten Years N/A N/A N/A N/A Five Years 31,870 -20.32% -4.44% N/A Three Years 23,401 -41.50% -16.36% -17.73% One Year 29,234 -26.91% -26.91% -31.58% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Index 500 Subaccount -23.41% Life of Subaccount 09/01/1999 25,737 -35.66% -12.39% -13.67% Life of Portfolio 09/01/1999 25,737 -35.66% -12.39% -13.67% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 23,601 -41.00% -16.13% -17.49% One Year 30,636 -23.41% -23.41% -28.30% - ------------------------------------------------------------------------------------------------------------------------------------
7
- ------------------------------------------------------------------------------------------------------------------------------------ Average Annual Total Return (1) Total Return (2) (Non-Standardized) (Standardized) - ------------------------------------------------------------------------------------------------------------------------------------ Inception Year-To-Date % Ending Cumulative % Annualized % Annualized % Date Return (3) Value (4) Return Return Return - ------------------------------------------------------------------------------------------------------------------------------------ SVS INVESCO Dynamic Growth Subaccount -31.87% Life of Subaccount 05/01/2001 23,761 -40.60% -26.81% -29.28% Life of Portfolio 05/01/2001 23,761 -40.60% -26.81% -29.28% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years N/A N/A N/A N/A One Year 27,254 -31.87% -31.87% -36.22% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Janus Growth and Income Subaccount -21.65% Life of Subaccount 05/01/2000 23,586 -41.03% -17.96% -19.45% Life of Portfolio 10/29/1999 27,840 -30.40% -10.79% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 24,279 -39.30% -15.33% N/A One Year 31,338 -21.65% -21.65% -26.65% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Janus Growth Opportunities Subaccount -31.58% Life of Subaccount 05/01/2000 16,817 -57.96% -27.73% -29.07% Life of Portfolio 10/29/1999 20,896 -47.76% -18.49% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 17,990 -55.03% -23.38% N/A One Year 27,367 -31.58% -31.58% -35.95% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Oak Strategic Equity Subaccount -40.57% Life of Subaccount 05/01/2001 17,899 -55.25% -38.24% -40.35% Life of Portfolio 05/01/2001 17,899 -55.25% -38.24% -40.35% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years N/A N/A N/A N/A One Year 23,771 -40.57% -40.57% -44.38% - ------------------------------------------------------------------------------------------------------------------------------------ SVS Turner MidCap Growth Subaccount -33.21% Life of Subaccount 05/01/2001 23,370 -41.57% -27.54% -29.98% Life of Portfolio 05/01/2001 23,370 -41.57% -27.54% -29.98% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years N/A N/A N/A N/A One Year 26,714 -33.21% -33.21% -37.48% - ------------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investments return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page 1 for additional information. 8 PERFORMANCE FIGURES--NOTES * N/A Not Applicable (1) The Non-Standardized Total Return figures quoted are based on a hypothetical $40,000 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. (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. (3) The Year to Date percentage return figures quoted are based on the change in unit values. (4) The Ending Values quoted are based on a $40,000 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. Scudder Money Market Subaccount #2 is not shown because it is available only for dollar cost averaging that will deplete your Subaccount Value entirely at least by the end of the first Contribution Year. 9 The following tables illustrate an assumed $40,000 investment in shares of certain Subaccounts. The ending value does not include the effect of the applicable Withdrawal Charge that may be imposed at the end of the period, and thus may be higher than if such charge were deducted. Each table covers the period from the inception date of each Portfolio to December 31, 2002. ALGER AMERICAN BALANCED SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1989 ......................................................... $ 40,004 1990 ......................................................... 39,331 1991 ......................................................... 38,834 1992 ......................................................... 41,163 1993 ......................................................... 43,758 1994 ......................................................... 41,313 1995 ......................................................... 52,407 1996 ......................................................... 56,932 1997 ......................................................... 67,272 1998 ......................................................... 87,252 1999 ......................................................... 111,184 2000 ......................................................... 123,924 2001 ......................................................... 119,850 2002 ......................................................... 103,669 ALGER AMERICAN LEVERAGED ALLCAP SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1995 ......................................................... $ 68,826 1996 ......................................................... 76,040 1997 ......................................................... 89,748 1998 ......................................................... 139,696 1999 ......................................................... 245,315 2000 ......................................................... 181,853 2001 ......................................................... 150,772 2002 ......................................................... 98,268 CREDIT SUISSE TRUST-EMERGING MARKETS SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1997 ......................................................... $ 40,000 1998 ......................................................... 32,622 1999 ......................................................... 58,362 2000 ......................................................... 39,395 2001 ......................................................... 35,102 2002 ......................................................... 30,614 CREDIT SUISSE TRUST-GLOBAL POST-VENTURE CAPITAL SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1996 ......................................................... $ 38,903 1997 ......................................................... 43,483 10 1998 ......................................................... 45,675 1999 ......................................................... 73,647 2000 ......................................................... 58,874 2001 ......................................................... 41,434 2002 ......................................................... 26,904 DREYFUS IP MIDCAP STOCK SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1998 ......................................................... $ 38,533 1999 ......................................................... 42,111 2000 ......................................................... 44,970 2001 ......................................................... 42,903 2002 ......................................................... 37,024 DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1993 ......................................................... $ 42,817 1994 ......................................................... 42,884 1995 ......................................................... 56,987 1996 ......................................................... 68,194 1997 ......................................................... 86,456 1998 ......................................................... 110,385 1999 ......................................................... 141,634 2000 ......................................................... 123,640 2001 ......................................................... 94,405 2002 ......................................................... 66,151 INVESCO VIF-UTILITIES SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1995 ......................................................... $ 43,021 1996 ......................................................... 47,853 1997 ......................................................... 58,242 1998 ......................................................... 72,076 1999 ......................................................... 84,682 2000 ......................................................... 87,924 2001 ......................................................... 58,602 2002 ......................................................... 46,047 JANUS ASPEN GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1993 ......................................................... $ 41,230 1994 ......................................................... 41,785 1995 ......................................................... 53,645 1996 ......................................................... 62,659 1997 ......................................................... 75,123 1998 ......................................................... 100,505 11 1999 ......................................................... 142,716 2000 ......................................................... 121,426 2001 ......................................................... 90,128 2002 ......................................................... 65,319 JANUS ASPEN GROWTH AND INCOME SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1998 ......................................................... $ 47,478 1999 ......................................................... 81,490 2000 ......................................................... 69,031 2001 ......................................................... 58,972 2002 ......................................................... 45,630 SCUDDER 21ST CENTURY GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1999 ......................................................... $ 70,020 2000 ......................................................... 53,455 2001 ......................................................... 40,545 2002 ......................................................... 23,489 SCUDDER CAPITAL GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1985 ......................................................... $ 43,878 1986 ......................................................... 52,927 1987 ......................................................... 51,190 1988 ......................................................... 61,634 1989 ......................................................... 74,624 1990 ......................................................... 68,087 1991 ......................................................... 93,734 1992 ......................................................... 98,364 1993 ......................................................... 117,263 1994 ......................................................... 104,465 1995 ......................................................... 132,542 1996 ......................................................... 157,011 1997 ......................................................... 210,213 1998 ......................................................... 255,462 1999 ......................................................... 340,708 2000 ......................................................... 302,732 2001 ......................................................... 240,759 2002 ......................................................... 168,135 SCUDDER GLOBAL DISCOVERY SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1996 ......................................................... $ 41,810 1997 ......................................................... 46,339 1998 ......................................................... 53,214 12 1999 ........................................................ 87,058 2000 ........................................................ 81,316 2001 ........................................................ 60,470 2002 ........................................................ 47,775 SCUDDER GROWTH AND INCOME SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1994 ........................................................ $ 41,578 1995 ........................................................ 54,021 1996 ........................................................ 65,077 1997 ........................................................ 83,736 1998 ........................................................ 88,276 1999 ........................................................ 92,351 2000 ........................................................ 89,162 2001 ........................................................ 77,997 2002 ........................................................ 59,130 SCUDDER HEALTH SCIENCES SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 2001 ........................................................ $ 42,206 2002 ........................................................ 32,008 SCUDDER INTERNATIONAL SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1987 ........................................................ $ 35,409 1988 ........................................................ 40,769 1989 ........................................................ 55,419 1990 ........................................................ 50,462 1991 ........................................................ 55,468 1992 ........................................................ 53,012 1993 ........................................................ 72,052 1994 ........................................................ 70,457 1995 ........................................................ 77,210 1996 ........................................................ 87,390 1997 ........................................................ 93,997 1998 ........................................................ 109,837 1999 ........................................................ 167,372 2000 ........................................................ 129,234 2001 ........................................................ 88,122 2002 ........................................................ 70,943 SCUDDER AGGRESSIVE GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1999 ........................................................ $ 55,443 13 2000 ........................................................ 51,965 2001 ........................................................ 40,094 2002 ........................................................ 27,416 SCUDDER BLUE CHIP SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1997 ........................................................ $ 44,215 1998 ........................................................ 49,643 1999 ........................................................ 61,313 2000 ........................................................ 55,726 2001 ........................................................ 46,268 2002 ........................................................ 35,537 SCUDDER CONTRARIAN VALUE SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1996 ........................................................ $ 46,528 1997 ........................................................ 59,851 1998 ........................................................ 70,398 1999 ........................................................ 62,335 2000 ........................................................ 71,390 2001 ........................................................ 71,716 2002 ........................................................ 60,129 SCUDDER GLOBAL BLUE CHIP SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1998 ........................................................ $ 38,802 1999 ........................................................ 48,485 2000 ........................................................ 46,209 2001 ........................................................ 38,518 2002 ........................................................ 31,996 SCUDDER GOVERNMENT SECURITIES SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1987 ........................................................ $ 40,113 1988 ........................................................ 40,802 1989 ........................................................ 46,076 1990 ........................................................ 49,932 1991 ........................................................ 56,791 1992 ........................................................ 59,338 1993 ........................................................ 62,337 1994 ........................................................ 59,698 1995 ........................................................ 70,167 1996 ........................................................ 71,013 1997 ........................................................ 76,314 1998 ........................................................ 80,552 1999 ........................................................ 79,983 14 2000 .......................................................... 87,499 2001 .......................................................... 92,750 2002 .......................................................... 98,834 SCUDDER GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1983 .......................................................... $ 41,162 1984 .......................................................... 45,032 1985 .......................................................... 55,641 1986 .......................................................... 60,009 1987 .......................................................... 60,236 1988 .......................................................... 59,691 1989 .......................................................... 75,587 1990 .......................................................... 75,040 1991 .......................................................... 118,218 1992 .......................................................... 120,823 1993 .......................................................... 136,694 1994 .......................................................... 128,113 1995 .......................................................... 170,566 1996 .......................................................... 203,889 1997 .......................................................... 244,064 1998 .......................................................... 277,058 1999 .......................................................... 374,670 2000 .......................................................... 299,075 2001 .......................................................... 229,041 2002 .......................................................... 159,451 SCUDDER HIGH INCOME (FORMERLY SCUDDER HIGH YIELD) SUBACCOUNT Year Ended Total 12/31 Value - ----- ------ 1982 .......................................................... $ 49,485 1983 .......................................................... 56,063 1984 .......................................................... 62,318 1985 .......................................................... 74,896 1986 .......................................................... 87,063 1987 .......................................................... 91,000 1988 .......................................................... 104,083 1989 .......................................................... 101,388 1990 .......................................................... 84,543 1991 .......................................................... 126,809 1992 .......................................................... 147,400 1993 .......................................................... 174,590 1994 .......................................................... 168,495 1995 .......................................................... 195,244 1996 .......................................................... 219,431 1997 .......................................................... 241,567 1998 .......................................................... 241,694 1999 .......................................................... 243,489 2000 .......................................................... 219,287 2001 .......................................................... 221,941 2002 .......................................................... 218,213 15 SCUDDER INTERNATIONAL SELECT EQUITY SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1992 ......................................................... $ 39,188 1993 ......................................................... 51,394 1994 ......................................................... 48,859 1995 ......................................................... 54,742 1996 ......................................................... 62,541 1997 ......................................................... 67,528 1998 ......................................................... 73,273 1999 ......................................................... 105,294 2000 ......................................................... 82,566 2001 ......................................................... 61,535 2002 ......................................................... 52,503 SCUDDER FIXED INCOME (FORMERLY SCUDDER INVESTMENT GRADE BOND) SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1996 ......................................................... $ 41,050 1997 ......................................................... 44,146 1998 ......................................................... 46,992 1999 ......................................................... 45,388 2000 ......................................................... 49,194 2001 ......................................................... 51,287 2002 ......................................................... 54,630 SCUDDER MONEY MARKET SUBACCOUNT #1 Year Ended Total 12/31 Value - ----- ----- 1982 ......................................................... $ 43,058 1983 ......................................................... 46,405 1984 ......................................................... 50,672 1985 ......................................................... 54,097 1986 ......................................................... 56,930 1987 ......................................................... 59,890 1988 ......................................................... 63,522 1989 ......................................................... 68,411 1990 ......................................................... 73,006 1991 ......................................................... 76,284 1992 ......................................................... 77,837 1993 ......................................................... 78,986 1994 ......................................................... 81,032 1995 ......................................................... 84,457 1996 ......................................................... 87,474 1997 ......................................................... 90,808 1998 ......................................................... 94,176 1999 ......................................................... 97,369 2000 ......................................................... 101,882 2001 ......................................................... 104,343 2002 ......................................................... 104,302 16 SCUDDER SMALL CAP GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1994 .............................................................. $ 41,214 1995 .............................................................. 52,896 1996 .............................................................. 66,854 1997 .............................................................. 88,516 1998 .............................................................. 103,332 1999 .............................................................. 137,129 2000 .............................................................. 120,747 2001 .............................................................. 84,777 2002 .............................................................. 55,627 SCUDDER STRATEGIC INCOME SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1997 .............................................................. $ 40,770 1998 .............................................................. 44,625 1999 .............................................................. 41,434 2000 .............................................................. 41,914 2001 .............................................................. 43,496 2002 .............................................................. 47,744 SCUDDER TECHNOLOGY GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1999 .............................................................. $ 70,429 2000 .............................................................. 54,474 2001 .............................................................. 36,319 2002 .............................................................. 23,095 SCUDDER TOTAL RETURN SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1982 .............................................................. $ 49,392 1983 .............................................................. 57,378 1984 .............................................................. 53,853 1985 .............................................................. 68,340 17 1986 .............................................................. 77,673 1987 .............................................................. 77,145 1988 .............................................................. 85,304 1989 .............................................................. 104,439 1990 .............................................................. 108,263 1991 .............................................................. 147,457 1992 .............................................................. 147,945 1993 .............................................................. 163,715 1994 .............................................................. 145,460 1995 .............................................................. 182,305 1996 .............................................................. 209,311 1997 .............................................................. 247,690 1998 .............................................................. 281,266 1999 .............................................................. 318,469 2000 .............................................................. 305,815 2001 .............................................................. 283,224 2002 .............................................................. 236,935 SVS DAVIS VENTURE VALUE SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 2001 .............................................................. $ 37,648 2002 .............................................................. 31,266 SVS DREMAN FINANCIAL SERVICES SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1998 .............................................................. $ 38,758 1999 .............................................................. 36,291 2000 .............................................................. 45,469 2001 .............................................................. 42,663 2002 .............................................................. 38,492 SVS DREMAN HIGH RETURN EQUITY SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1998 .............................................................. $ 40,766 1999 .............................................................. 35,717 2000 .............................................................. 45,974 2001 .............................................................. 46,106 2002 .............................................................. 37,270 SVS DREMAN SMALL CAP VALUE SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1996 .............................................................. $ 40,372 1997 .............................................................. 48,482 1998 .............................................................. 42,434 1999 .............................................................. 43,018 2000 .............................................................. 44,143 18 2001 ............................................................. 51,224 2002 ............................................................. 44,783 SVS EAGLE FOCUSED LARGE CAP GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ---------- 1999 ............................................................. $ 50,988 2000 ............................................................. 45,746 2001 ............................................................. 37,468 2002 ............................................................. 26,610 SVS FOCUS VALUE+GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ---------- 1996 ............................................................. $ 45,433 1997 ............................................................. 56,237 1998 ............................................................. 66,652 1999 ............................................................. 76,588 2000 ............................................................. 72,583 2001 ............................................................. 61,307 2002 ............................................................. 44,807 SVS INDEX 500 SUBACCOUNT Year Ended Total 12/31 Value - ----- ---------- 1999 ............................................................. $ 43,620 2000 ............................................................. 38,745 2001 ............................................................. 33,604 2002 ............................................................. 25,737 SVS INVESCO DYNAMIC GROWTH SUBACCOUNT Year Total Ended Value 12/31 ---------- - ----- 2001 ............................................................. $ 34,874 2002 ............................................................. 23,761 SVS JANUS GROWTH AND INCOME SUBACCOUNT Year Ended Total 12/31 Value - ----- ---------- 1999 ............................................................. $ 45,865 2000 ............................................................. 41,079 2001 ............................................................. 35,534 2002 ............................................................. 27,840 SVS JANUS GROWTH OPPORTUNITIES SUBACCOUNT Year 19 Ended Total 12/31 Value - ----- ---------- 1999 ............................................................ $ 46,462 2000 ............................................................ 40,585 2001 ............................................................ 30,541 2002 ............................................................ 20,896 SVS OAK STRATEGIC EQUITY SUBACCOUNT Year Ended Total 12/31 Value - ----- ---------- 2001 ............................................................ $ 30,118 2002 ............................................................ 17,899 SVS TURNER MID CAP GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ---------- 2001 ............................................................ $ 34,992 2002 ............................................................ 23,370 20 TAX-DEFERRED ACCUMULATION
NON-QUALIFIED ANNUITY CONVENTIONAL After-tax contributions SAVINGS PLAN and tax-deferred earnings After-tax ----------------------------------------- contributions Taxable Lump and taxable No Withdrawals Sum Withdrawal 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 8% return used is for illustrative purposes only, and is not reflective of current market conditions. 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 Contracts. 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 annuity charges and expenses: 1.25% mortality and expense risk; .15% administration charges; 7% maximum deferred withdrawal 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. [IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]. 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. 21 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. EXPERTS The consolidated balance sheets of KILICO as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002, the statements of assets, liabilities and contract owners' equity of the KILICO Variable Annuity Separate Account as of December 31, 2002, and the related statements of operations and changes in contract owners' equity for the periods indicated, have been included herein in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as 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 assets attributable to other variable annuity contracts offered by KILICO through the Separate Account. 22 Report of Independent Accountants To the Board of Directors and Stockholder of Kemper Investors Life Insurance Company and Contract Owners of the Kemper Investors Life Insurance Company Variable Annuity Separate Account: In our opinion, the accompanying statements of assets, liabilities and contract owners' equity and the related statements of operations and of changes in contract owners' equity present fairly, in all material respects, the financial position of the subaccounts of the Kemper Investors Life Insurance Company 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, Dreyfus I.P. Mid Cap Stock, Fidelity VIP Equity Income, Fidelity VIP Growth, Fidelity VIP II Asset Manager, Fidelity VIP II Contrafund, Fidelity VIP II Index 500, Templeton Developing Markets Securities, ING VP Emerging Markets, ING VP Natural Resources Trust, INVESCO VIF-Utilities, Janus Aspen Aggressive Growth, Janus Aspen Balanced, Janus Aspen Capital Appreciation, Janus Aspen Growth, Janus Aspen Growth and Income, Janus Aspen Worldwide Growth, J.P. Morgan Small Company, PIMCO Foreign Bond, PIMCO Low Duration, 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 Variable Series I), Scudder Aggressive Growth, Scudder Blue Chip, Scudder Contrarian Value, Scudder Global Blue Chip, Scudder Government Securities, Scudder Growth, Scudder High Income, Scudder Horizon 10+, Scudder Horizon 20+, Scudder Horizon 5, Scudder International Select Equity, Scudder Investment Grade Bond, Scudder Money Market (Scudder Variable Series II), Scudder New Europe, Scudder Small Cap Growth, Scudder Strategic Income, Scudder Technology Growth, Scudder Total Return, SVS Davis Venture Value, SVS Dreman Financial Services, SVS Dreman High Return Equity, SVS Dreman Small Cap Value, SVS Eagle Focused Large Cap Growth, SVS Focus Value + Growth, SVS Index 500, SVS INVESCO Dynamic Growth, SVS Janus Growth and Income, SVS Janus Growth Opportunities, SVS Oak Strategic Equity and SVS Turner Mid-Cap Growth) at December 31, 2002 and the results of each of their operations and the changes in each of their contract owners' equity for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Kemper Investors Life Insurance 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 direct confirmation of portfolio shares owned at December 31, 2002 with the underlying funds, provide a reasonable basis for our opinion. Chicago, Illinois February 24, 2003 23 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
The Alger American Fund ------------------------------------------------------------------------------------- Alger American Alger American Alger American Alger American Alger American Small Balanced Growth Leveraged AllCap MidCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value $ 90,038 15,061 48,717 7,528 3,314 Dividends and other receivables - - - - 2 ------------------------------------------------------------------------------------- Total assets 90,038 15,061 48,717 7,528 3,316 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 2 2 - 2 - ------------------------------------------------------------------------------------- Contract owners' equity $ 90,036 15,059 48,717 7,526 3,316 ===================================================================================== Accumulation Period $ 90,009 15,028 48,717 7,526 3,282 Annuity Period 27 31 - - 34 ------------------------------------------------------------------------------------- Total Contract Owners' Equity $ 90,036 15,059 48,717 7,526 3,316 ===================================================================================== Units Outstanding 10,165 445 9,225 383 174 ===================================================================================== American Century Variable Portfolios, Inc. Credit Suisse Trust -------------------------------------- ------------------------------------------ American Century Credit Suisse Trust VP Income & American Century Credit Suisse Trust Global Post- Growth VP Value Emerging Markets Venture Capital Subaccount Subaccount Subaccount Subaccount -------------------------------------- ------------------------------------------ ASSETS Investments in underlying portfolio funds, at current market value 14,725 23,974 19,372 11,395 Dividends and other receivables 8 22 - - -------------------------------------- ------------------------------------------ Total assets 14,733 23,996 19,372 11,395 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 6 15 24 - -------------------------------------- ------------------------------------------ Contract owners' equity 14,727 23,981 19,348 11,395 ====================================== ========================================== Accumulation Period 14,711 23,945 19,335 11,394 Annuity Period 16 36 13 1 -------------------------------------- ------------------------------------------ Total Contract Owners' Equity 14,727 23,981 19,348 11,395 ====================================== ========================================== Units Outstanding 2,918 3,642 2,581 1,990 ====================================== ========================================== The Dreyfus Socially Dreyfus Responsible Investment Growth Fund, Inc. Portfolios ------------------------------------- Dreyfus Socially Responsible Dreyfus I.P. Mid Growth Cap Stock Subaccount Subaccount ------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 11,680 100,874 Dividends and other receivables - - ------------------------------------- Total assets 11,680 100,874 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 1 - ------------------------------------- Contract owners' equity 11,679 100,874 ===================================== Accumulation Period 11,667 100,757 Annuity Period 12 117 ------------------------------------- Total Contract Owners' Equity 11,679 100,874 ===================================== Units Outstanding 1,731 10,438 =====================================
See accompanying notes to financial statements 24 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
Fidelity Variable Insurance Products Fund Fidelity Variable Insurance Products Fund II --------------------------------------------------------------------------------- Fidelity VIP Fidelity VIP Fidelity VIP II Fidelity VIP II Fidelity VIP II Equity Income Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 44,979 53,804 5,884 54,039 97,675 Dividends and other receivables - - 1 30 - --------------------------------------------------------------------------------- Total assets 44,979 53,804 5,885 54,069 97,675 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 45 7 1 15 11 --------------------------------------------------------------------------------- Contract owners' equity 44,934 53,797 5,884 54,054 97,664 ================================================================================= Accumulation Period 44,861 53,729 5,642 53,953 97,312 Annuity Period 73 68 242 101 352 --------------------------------------------------------------------------------- Total Contract Owners' Equity 44,934 53,797 5,884 54,054 97,664 ================================================================================= Units Outstanding 1,845 1,600 292 2,401 940 ================================================================================= Franklin Templeton INVESCO Variable Variable Insurance ING VP Emerging ING VP Natural Investment Funds, Products Trust Markets Fund, Inc. Resources Trust Inc. ------------------ ------------------ ------------------ ------------------ Templeton Developing ING VP Emerging ING VP Natural INVESCO VIF- Markets Securities Markets Fund, Inc. Resources Trust Utilities Subaccount Subaccount Subaccount Subaccount ------------------ ------------------ ------------------ ------------------ ASSETS Investments in underlying portfolio funds, at current market value 29 5,246 3,033 8,747 Dividends and other receivables - 3 - - ------------------ ------------------ ------------------ ------------------ Total assets 29 5,249 3,033 8,747 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 13 - - ------------------ ------------------ ------------------ ------------------ Contract owners' equity 29 5,236 3,033 8,747 ================== ================== ================== ================== Accumulation Period 29 5,203 3,033 8,747 Annuity Period - 33 - - ------------------ ------------------ ------------------ ------------------ Total Contract Owners' Equity 29 5,236 3,033 8,747 ================== ================== ================== ================== Units Outstanding 3 807 242 1,638 ================== ================== ================== ================== Janus Aspen Series --------------------------------------------------------------------------------- Janus Aspen Janus Aspen Janus Aspen Capital Janus Aspen Aggressive Growth Balanced Appreciation Growth Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 56,680 141,595 1,356 110,057 Dividends and other receivables - 223 - 3 --------------------------------------------------------------------------------- Total assets 56,680 141,818 1,356 110,060 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 14 9 - 39 --------------------------------------------------------------------------------- Contract owners' equity 56,666 141,809 1,356 110,021 ================================================================================= Accumulation Period 56,625 140,722 1,356 109,817 Annuity Period 41 1,087 - 204 --------------------------------------------------------------------------------- Total Contract Owners' Equity 56,666 141,809 1,356 110,021 ================================================================================= Units Outstanding 3,312 5,660 193 9,555 =================================================================================
See accompanying notes to financial statements. 25 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
J.P. Morgan Janus Aspen Series Series Trust II ---------------------------------- ----------------- Janus Aspen Growth and Janus Aspen JP Morgan Small Income Worldwide Growth Company Subaccount Subaccount Subaccount ---------------------------------- ----------------- ASSETS Investments in underlying portfolio funds, at current market value 43,037 134,037 8,264 Dividends and other receivables 3 2 1 ---------------------------------- ----------------- Total assets 43,040 134,039 8,265 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 8 - ---------------------------------- ----------------- Contract owners' equity 43,040 134,031 8,265 ================================== ================= Accumulation Period 42,968 133,743 8,251 Annuity Period 72 288 14 ---------------------------------- ----------------- Total Contract Owners' Equity 43,040 134,031 8,265 ================================== ================= Units Outstanding 3,720 5,892 800 ================================== ================= PIMCO Variable Insurance Trust ---------------------------------- PIMCO Foreign PIMCO Low Bond Duration Subaccount Subaccount ---------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 210 231 Dividends and other receivables - - ---------------------------------- Total assets 210 231 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - - ---------------------------------- Contract owners' equity 210 231 ================================== Accumulation Period 210 231 Annuity Period - - ---------------------------------- Total Contract Owners' Equity 210 231 ================================== Units Outstanding 18 19 ================================== 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 20,833 17,198 36,569 64,169 Dividends and other receivables - - - 2 ------------------------------------------------------------------------------ Total assets 20,833 17,198 36,569 64,171 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - - - - ------------------------------------------------------------------------------ Contract owners' equity 20,833 17,198 36,569 64,171 ============================================================================== Accumulation Period 20,833 17,198 36,559 64,146 Annuity Period - - 10 25 ------------------------------------------------------------------------------ Total Contract Owners' Equity 20,833 17,198 36,569 64,171 ============================================================================== Units Outstanding 5,790 2,214 5,041 7,117 ============================================================================== Scudder Variable Series I ------------------------------------------------------------------------------- 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 37,291 49,863 83,411 30 Dividends and other receivables - - 3 - ------------------------------------------------------------------------------- Total assets 37,291 49,863 83,414 30 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - - 5 - ------------------------------------------------------------------------------- Contract owners' equity 37,291 49,863 83,409 30 =============================================================================== Accumulation Period 37,291 49,863 83,330 30 Annuity Period - - 79 - ------------------------------------------------------------------------------- Total Contract Owners' Equity 37,291 49,863 83,409 30 =============================================================================== Units Outstanding 5,766 6,232 12,444 3 ===============================================================================
See accompanying notes to financial statements. 26 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ---------------------------------------------------------------------------- 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 27,890 78,109 113,614 22,865 Dividends and other receivables - - 15 - ---------------------------------------------------------------------------- Total assets 27,890 78,109 113,629 22,865 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 7 32 - ---------------------------------------------------------------------------- Contract owners' equity 27,890 78,102 113,597 22,865 ============================================================================ Accumulation Period 27,890 78,014 113,279 22,861 Annuity Period - 88 318 4 ---------------------------------------------------------------------------- Total Contract Owners' Equity 27,890 78,102 113,597 22,865 ============================================================================ Units Outstanding 4,070 16,215 35,977 2,745 ============================================================================ Scudder Variable Series II ------------------------------------------------------------------------- Scudder Scudder Government Scudder High International Select Securities Scudder Growth Income Equity Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 237,393 178,929 179,654 75,036 Dividends and other receivables - 1 40 20 ------------------------------------------------------------------------- Total assets 237,393 178,930 179,694 75,056 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 30 87 22 9 ------------------------------------------------------------------------- Contract owners' equity 237,363 178,843 179,672 75,047 ========================================================================= Accumulation Period 236,662 177,440 178,313 74,751 Annuity Period 701 1,403 1,359 296 ------------------------------------------------------------------------- Total Contract Owners' Equity 237,363 178,843 179,672 75,047 ========================================================================= Units Outstanding 50,525 54,587 40,754 36,850 ========================================================================= Scudder Variable Series II ------------------------------------------------------- Scudder Investment Grade Scudder Money Scudder New Bond Market Europe Subaccount Subaccount Subaccount ------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 99,494 306,169 - Dividends and other receivables - 167 - ------------------------------------------------------- Total assets 99,494 306,336 - LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 12 25 - ------------------------------------------------------- Contract owners' equity 99,482 306,311 - ======================================================= Accumulation Period 99,241 304,968 - Annuity Period 241 1,343 - ------------------------------------------------------- Total Contract Owners' Equity 99,482 306,311 - ======================================================= Units Outstanding 17,704 54,362 - ======================================================= Scudder Variable Series II ----------------------------------------------------- Scudder Scudder Small Scudder Strategic Technology Cap Growth Income Growth Subaccount Subaccount Subaccount ----------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 100,134 24,572 145,612 Dividends and other receivables 5 1 12 ----------------------------------------------------- Total assets 100,139 24,573 145,624 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 14 - - ----------------------------------------------------- Contract owners' equity 100,125 24,573 145,624 ===================================================== Accumulation Period 99,950 24,521 145,579 Annuity Period 175 52 45 ----------------------------------------------------- Total Contract Owners' Equity 100,125 24,573 145,624 ===================================================== Units Outstanding 45,002 2,400 28,007 =====================================================
See accompanying notes to financial statements. 27 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (IN THOUSANDS)
Scudder Variable Series II --------------------------------------------------------------------------------------- SVS Dreman Scudder Total SVS Davis Financial SVS Dreman High SVS Dreman Return Venture Value Services Return Equity Small Cap Value Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 416,331 113,301 56,572 316,952 149,098 Dividends and other receivables 59 2 - 1 - --------------------------------------------------------------------------------------- Total assets 416,390 113,303 56,572 316,953 149,098 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 364 - - - 45 --------------------------------------------------------------------------------------- Contract owners' equity 416,026 113,303 56,572 316,953 149,053 ======================================================================================= Accumulation Period 412,677 113,250 56,565 316,767 148,881 Annuity Period 3,349 53 7 186 172 --------------------------------------------------------------------------------------- Total Contract Owners' Equity 416,026 113,303 56,572 316,953 149,053 ======================================================================================= Units Outstanding 83,840 14,493 5,697 33,048 43,904 ======================================================================================= Scudder Variable Series II --------------------------------------------------------------------- SVS Eagle Focused Large SVS Focus Value SVS INVESCO Cap Growth + Growth SVS Index 500 Dynamic Growth Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 40,566 39,176 146,427 18,257 Dividends and other receivables - 25 1 - --------------------------------------------------------------------- Total assets 40,566 39,201 146,428 18,257 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 7 - - --------------------------------------------------------------------- Contract owners' equity 40,566 39,194 146,428 18,257 ===================================================================== Accumulation Period 40,566 38,934 146,417 18,257 Annuity Period - 260 11 - --------------------------------------------------------------------- Total Contract Owners' Equity 40,566 39,194 146,428 18,257 ===================================================================== Units Outstanding 6,095 16,459 23,118 3,074 ===================================================================== Scudder Variable Series II --------------------------------------------------------------------- SVS Janus SVS Janus SVS Oak SVS Turner Growth and Growth Strategic Mid-Cap Income Opportunities Equity Growth Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 105,210 75,716 31,408 46,432 Dividends and other receivables - - - - --------------------------------------------------------------------- Total assets 105,210 75,716 31,408 46,432 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 2 - - - --------------------------------------------------------------------- Contract owners' equity 105,208 75,716 31,408 46,432 ===================================================================== Accumulation Period 105,145 75,712 31,408 46,432 Annuity Period 63 4 - - --------------------------------------------------------------------- Total Contract Owners' Equity 105,208 75,716 31,408 46,432 ===================================================================== Units Outstanding 17,677 17,795 7,019 7,947 =====================================================================
See accompanying notes to financial statements. 28 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
The Alger American Fund -------------------------------------------------------------------------------------- Alger American Alger American Alger American Alger American Leveraged Alger American Small Balanced Growth AllCap MidCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------------------- REVENUE Dividend income $ 1,545 8 5 - - EXPENSES Mortality and expense risk charges 1,275 244 853 93 48 -------------------------------------------------------------------------------------- Net investment income (loss) 270 (236) (848) (93) (48) -------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,724) (5,922) (10,217) (517) (580) Change in unrealized appreciation (depreciation) of investments (12,083) (1,809) (15,593) (1,930) (478) -------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (13,807) (7,731) (25,810) (2,447) (1,058) -------------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations $ (13,537) (7,967) (26,658) (2,540) (1,106) ====================================================================================== American Century Variable Portfolios, Inc. Credit Suisse Trust -------------------------------- -------------------------------- American Credit Suisse Century VP American Credit Suisse Trust Global Income & Century Trust Emerging Post-Venture Growth VP Value Markets Capital Subaccount Subaccount Subaccount Subaccount -------------------------------- -------------------------------- REVENUE Dividend income 53 1,638 41 - EXPENSES Mortality and expense risk charges 87 367 281 189 -------------------------------- -------------------------------- Net investment income (loss) (34) 1,271 (240) (189) -------------------------------- -------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,032) (1,707) (3,126) (3,595) Change in unrealized appreciation (depreciation) of investments (154) (4,403) (155) (2,109) -------------------------------- -------------------------------- Net realized and unrealized gain (loss) on investments (1,186) (6,110) (3,281) (5,704) -------------------------------- -------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (1,220) (4,839) (3,521) (5,893) ================================ ================================ The Dreyfus Socially Dreyfus Repsonsible Variable Growth Fund, Investment Inc. Fund -------------------------------- Dreyfus Socially Dreyfus Responsible I.P. Mid Growth Cap Stock Subaccount Subaccount -------------------------------- REVENUE Dividend income 31 303 EXPENSES Mortality and expense risk charges 188 1,408 -------------------------------- Net investment income (loss) (157) (1,105) -------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,019) (1,459) Change in unrealized appreciation (depreciation) of investments (1,822) (13,674) -------------------------------- Net realized and unrealized gain (loss) on investments (4,841) (15,133) -------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (4,998) (16,238) ================================
See accompanying notes to financial statements. 29 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Fidelity Variable Insurance Products Fund Fidelity Variable Insurance Products Fund II -------------------------------------------------------------------------------------- Fidelity Fidelity Fidelity Fidelity VIP Fidelity VIP VIP II VIP II VIP II Equity Income Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------------------- REVENUE Dividend income 1,918 171 264 493 1,517 EXPENSES Mortality and expense risk charges 650 878 85 781 1,454 -------------------------------------------------------------------------------------- Net investment income (loss) 1,268 (707) 179 (288) 63 -------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (5,414) (21,392) (1,015) (6,546) (20,822) Change in unrealized appreciation (depreciation) of investments (6,231) (3,782) 67 (130) (9,476) -------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (11,645) (25,174) (948) (6,676) (30,298) -------------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (10,377) (25,881) (769) (6,964) (30,235) ====================================================================================== Franklin Templeton ING VP INVESCO Variable Emerging ING VP Natural Variable Insurance Markets Fund, Resources Investment Products Trust Inc. Trust Funds, Inc. -------------- -------------- -------------- -------------- Templeton ING VP Developing Emerging Markets Markets Fund, ING VP Natural INVESCO Securities Inc. Resources Trust VIF-Utilities Subaccount Subaccount Subaccount Subaccount -------------- -------------- -------------- -------------- REVENUE Dividend income - - 6 46 EXPENSES Mortality and expense risk charges - 76 41 118 -------------- -------------- -------------- -------------- Net investment income (loss) - (76) (35) (72) -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments - (1,282) (236) (604) Change in unrealized appreciation (depreciation) of investments - 600 132 (1,356) -------------- -------------- -------------- -------------- Net realized and unrealized gain (loss) on investments - (682) (104) (1,960) -------------- -------------- -------------- -------------- Net increase (decrease) in contract owners' equity resulting from operations - (758) (139) (2,032) ============== ============== ============== ============== Janus Aspen Series -------------------------------------------------------------------- Janus Aspen Janus Aspen Aggressive Janus Aspen Capital Janus Aspen Growth Balanced Appreciation Growth Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income - 3,698 10 - EXPENSES Mortality and expense risk charges 823 1,970 24 1,943 -------------------------------------------------------------------- Net investment income (loss) (823) 1,728 (14) (1,943) -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (45,198) (10,277) (381) (58,656) Change in unrealized appreciation (depreciation) of investments 23,096 (3,888) 66 13,071 -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (22,102) (14,165) (315) (45,585) -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (22,925) (12,437) (329) (47,528) ====================================================================
See accompanying notes to financial statements. 30 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
J.P. Morgan Series Janus Aspen Series Trust II PIMCO Variable Insurance Trust -------------------------------- -------------- ------------------------------- Janus Aspen Janus Aspen JP Morgan Growth and Worldwide Small PIMCO Foreign PIMCO Low Income Growth Company Bond Duration Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------- -------------- ------------------------------- REVENUE Dividend income 451 1,484 23 13 10 EXPENSES Mortality and expense risk charges 797 2,189 156 5 3 -------------------------------- -------------- ------------------------------- Net investment income (loss) (346) (705) (133) 8 7 -------------------------------- -------------- ------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,292) (40,937) (1,763) 10 3 Change in unrealized appreciation (depreciation) of investments (11,247) (11,177) (1,417) 2 4 -------------------------------- -------------- ------------------------------- Net realized and unrealized gain (loss) on investments (14,539) (52,114) (3,180) 12 7 -------------------------------- -------------- ------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (14,885) (52,819) (3,313) 20 14 ================================ ============== =============================== Scudder Variable Series I -------------------------------------------------------------------- Scudder Scudder 21st Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income - 973 143 - EXPENSES Mortality and expense risk charges 334 219 591 994 -------------------------------------------------------------------- Net investment income (loss) (334) 754 (448) (994) -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,006) (142) (4,866) (4,706) Change in unrealized appreciation (depreciation) of investments (10,296) 425 (10,389) (11,367) -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (13,302) 283 (15,255) (16,073) -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (13,636) 1,037 (15,703) (17,067) ==================================================================== Scudder Variable Series I -------------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income 430 - 727 - EXPENSES Mortality and expense risk charges 599 711 1,322 - -------------------------------------------------------------------- Net investment income (loss) (169) (711) (595) - -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (4,502) (1,491) (11,981) - Change in unrealized appreciation (depreciation) of investments (7,635) (12,243) (1,962) - -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (12,137) (13,734) (13,943) - -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (12,306) (14,445) (14,538) - ====================================================================
See accompanying notes to financial statements. 31 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II --------------------------------------------------------------------------------------------- Scudder Scudder Scudder Scudder Scudder Aggressive Scudder Contrarian Global Government Scudder High Growth Blue Chip Value Blue Chip Securities Growth Income Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------------------- REVENUE Dividend income 154 349 1,898 148 6,147 - 17,861 EXPENSES Mortality and expense risk charges 459 1,251 1,726 325 2,656 3,017 2,336 --------------------------------------------------------------------------------------------- Net investment income (loss) (305) (902) 172 (177) 3,491 (3,017) 15,525 --------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (8,938) (4,896) (5,313) (1,894) 2,549 (85,980) (27,655) Change in unrealized appreciation (depreciation) of investments (4,144) (18,545) (18,105) (2,234) 6,173 1,769 10,241 --------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (13,082) (23,441) (23,418) (4,128) 8,722 (84,211) (17,414) --------------------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (13,387) (24,343) (23,246) (4,305) 12,213 (87,228) (1,889) ============================================================================================= Scudder Variable Series II ---------------------------------------------------------------------------------- Scudder Scudder Scudder Scudder International Investment Scudder Scudder Small Strategic Select Equity Grade Bond Money Market New Europe Cap Growth Income Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------------- REVENUE Dividend income 312 2,569 4,956 180 - 411 EXPENSES Mortality and expense risk charges 888 1,142 4,288 220 1,615 259 ---------------------------------------------------------------------------------- Net investment income (loss) (576) 1,427 668 (40) (1,615) 152 ---------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (22,137) 470 - (6,124) (54,429) 381 Change in unrealized appreciation (depreciation) of investments 12,519 3,597 - 1,325 1,841 1,226 ---------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (9,618) 4,067 - (4,799) (52,588) 1,607 ---------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (10,194) 5,494 668 (4,839) (54,203) 1,759 ==================================================================================
See accompanying notes to financial statements. 32 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ------------------------------------------------------------------ SVS Dreman Scudder Scudder SVS Davis SVS Dreman High Technology Total Venture Financial Return Growth Return Value Services Equity Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ REVENUE Dividend income 197 14,184 149 474 4,158 EXPENSES Mortality and expense risk charges 2,424 6,397 1,542 815 4,556 ------------------------------------------------------------------ Net investment income (loss) (2,227) 7,787 (1,393) (341) (398) ------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (28,246) (67,376) (2,338) 580 (1,747) Change in unrealized appreciation (depreciation) of investments (54,303) (29,917) (17,214) (6,584) (71,516) ------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (82,549) (97,293) (19,552) (6,004) (73,263) ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (84,776) (89,506) (20,945) (6,345) (73,661) ================================================================== Scudder Variable Series II ------------------------------------------------------------------- SVS Eagle SVS Dreman Focused SVS Focus SVS INVESCO Small Cap Large Value SVS Index Dynamic Value Cap Growth + Growth 500 Growth Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------- REVENUE Dividend income 539 - 254 799 - EXPENSES Mortality and expense risk charges 2,054 595 629 2,161 274 ------------------------------------------------------------------- Net investment income (loss) (1,515) (595) (375) (1,362) (274) ------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments 3,050 (3,402) (7,198) (11,328) (1,184) Change in unrealized appreciation (depreciation) of investments (28,127) (11,050) (7,620) (30,105) (6,540) ------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (25,077) (14,452) (14,818) (41,433) (7,724) ------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (26,592) (15,047) (15,193) (42,795) (7,998) =================================================================== Scudder Variable Series II ------------------------------------------------------- SVS Janus SVS Janus SVS Oak SVS Turner Growth and Growth Strategic Mid-Cap Income Opportunities Equity Growth Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------- REVENUE Dividend income 694 - - EXPENSES Mortality and expense risk charges 1,578 1,200 488 677 ------------------------------------------------------- Net investment income (loss) (884) (1,200) (488) (677) ------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (5,257) (6,881) (3,441) (2,235) Change in unrealized appreciation (depreciation) of investments (21,939) (25,884) (15,438) (17,485) ------------------------------------------------------- Net realized and unrealized gain (loss) on investments (27,196) (32,765) (18,879) (19,720) ------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (28,080) (33,965) (19,367) (20,397) =======================================================
See accompanying notes to financial statements. 33 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
The Alger American Fund ------------------------------------------------------------------ Alger Alger Alger Alger American American Alger American American American Leveraged MidCap Small Balanced Growth AllCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ OPERATIONS Net investment Income (loss) $ 270 (236) (848) (93) (48) Net realized gain (loss) on sale of Investments (1,724) (5,922) (10,217) (517) (580) Change in unrealized appreciation (depreciation) of investments (12,083) (1,809) (15,593) (1,930) (478) ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (13,537) (7,967) (26,658) (2,540) (1,106) ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 15,601 3,549 10,314 3,483 1,421 Net transfer (to) from affiliate and subaccounts 8,194 (866) (5,513) 2,186 (325) Payments for redemptions (3,984) (1,434) (2,632) (470) (307) Guaranteed retirement income benefit fees, maintenance fees, and other fees (257) (24) (182) (8) (6) Annuity payout reserve adjustment (2) (1) - - 2 ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 19,552 1,224 1,987 5,191 785 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 6,015 (6,743) (24,671) 2,651 (321) CONTRACT OWNERS' EQUITY Beginning of period 84,021 21,802 73,388 4,875 3,637 ------------------------------------------------------------------ End of period $ 90,036 15,059 48,717 7,526 3,316 ================================================================== The Dreyfus Socially American Responsible Dreyfus Century Variable Growth Investment Portfolios, Inc. Credit Suisse Trust Fund, Inc. Portfolios ----------------------- ------------------------ -------------------------- Credit American Credit Suisse Century Suisse Trust Dreyfus VP Income American Trust Global Post Socially Dreyfus & Century Emerging Venture Responsible I.P. Mid Growth VP Value Markets Capital Growth Cap Stock Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------- ------------------------ ------------------------- OPERATIONS Net investment Income (loss) (34) 1,271 (240) (189) (157) (1,105) Net realized gain (loss) on sale of Investments (1,032) (1,707) (3,126) (3,595) (3,019) (1,459) Change in unrealized appreciation (depreciation) of investments (154) (4,403) (155) (2,109) (1,822) (13,674) ----------------------- ------------------------ ------------------------ Net increase (decrease) in contract owners' equity resulting from operations (1,220) (4,839) (3,521) (5,893) (4,998) (16,238) ----------------------- ------------------------ ------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,806 6,965 3,646 3,741 2,612 17,744 Net transfer (to) from affiliate and subaccounts 9,435 1,079 3,400 (5) (728) 18,564 Payments for redemptions (647) (2,666) (756) (390) (824) (3,356) Guaranteed retirement income benefit fees, maintenance fees, and other fees (58) (35) (58) (40) (37) (292) Annuity payout reserve adjustment 8 22 (24) - (1) - ----------------------- ------------------------ ------------------------ Net increase (decrease) from contract owners' equity transactions 10,544 5,365 6,208 3,306 1,022 32,660 ----------------------- ------------------------ ------------------------ Total increase (decrease) in contract owners' equity 9,324 526 2,687 (2,587) (3,976) 16,422 CONTRACT OWNERS' EQUITY Beginning of period 5,403 23,455 16,661 13,982 15,655 84,452 ----------------------- ------------------------ ------------------------ End of period 14,727 23,981 19,348 11,395 11,679 100,874 ======================= ======================== ========================
See accompanying notes to financial statements. 34 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS* EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Fidelity Variable Fidelity Variable Insurance Products Fund Insurance Products Fund II ------------------------------------------------------------------------ Fidelity Fidelity Fidelity Fidelity VIP Fidelity VIP VIP II VIP II VIP II Equity Income Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------ OPERATIONS Net investment income (loss) 1,268 (707) 179 (288) 63 Net realized gain (loss) on sale of investments (5,414) (21,392) (1,015) (6,546) (20,822) Change in unrealized appreciation (depreciation) of investments (6,231) (3,782) 67 (130) (9,476) ------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (10,377) (25,881) (769) (6,964) (30,235) ------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 7,841 10,414 736 5,865 12,103 Net transfer (to) from affiliate and subaccounts 3,741 (5,280) (627) (1,095) (19,384) Payments for redemptions (6,271) (6,887) (677) (6,242) (11,947) Guaranteed retirement income benefit fees, maintenance fees, and other fees (97) (122) (8) (54) (125) Annuity payout reserve adjustment (34) (2) (1) 30 (6) ------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 5,180 (1,877) (577) (1,496) (19,359) ------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity (5,197) (27,758) (1,346) (8,460) (49,594) CONTRACT OWNERS' EQUITY Beginning of period 50,131 81,555 7,230 62,514 147,258 ------------------------------------------------------------------------ End of period 44,934 53,797 5,884 54,054 97,664 ======================================================================== Franklin INVESCO Templeton ING VP ING VP Variable Variable Emerging Natural Investment Insurance Markets Resources Funds, Products Trust Fund, Inc. Trust Inc. -------------- ---------- ---------- ------------ Templeton ING VP ING VP Developing Emerging Natural Markets Markets Resource INVESCO VIF- Securities Fund, Inc. Trust Utilities Subaccount Subaccount Subaccount Subaccount -------------- ---------- ---------- ------------ OPERATIONS Net investment income (loss) - (76) (35) (72) Net realized gain (loss) on sale of investments - (1,282) (236) (604) Change in unrealized appreciation (depreciation) of investments - 600 132 (1,356) -------------- ---------- ---------- ------------ Net increase (decrease) in contract owners' equity resulting from operations - (758) (139) (2,032) -------------- ---------- ---------- ------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales - 402 302 1,625 Net transfer (to) from affiliate and subaccounts (1) 942 (191) 2,613 Payments for redemptions - (514) (273) (258) Guaranteed retirement income benefit fees, maintenance fees, and other fees - (6) (3) (26) Annuity payout reserve adjustment - 3 - - -------------- ---------- ---------- ------------ Net increase (decrease) from contract owners' equity transactions (1) 827 (165) 3,954 -------------- ---------- ---------- ------------ Total increase (decrease) in contract owners' equity (1) 69 (304) 1,922 CONTRACT OWNERS' EQUITY Beginning of period 30 5,167 3,337 6,825 -------------- ---------- ---------- ------------ End of period 29 5,236 3,033 8,747 ============== ========== ========== ============ Janus Aspen Series ----------------------------------------------------- Janus Aspen Janus Aspen Janus Aggressive Janus Aspen Capital Aspen Growth Balanced Appreciation Growth Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------- OPERATIONS Net investment income (loss) (823) 1,728 (14) (1,943) Net realized gain (loss) on sale of investments (45,198) (10,277) (381) (58,656) Change in unrealized appreciation (depreciation) of investments 23,096 (3,888) 65 13,071 ----------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (22,925) (12,437) (329) (47,528) ----------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 9,012 16,300 35 9,737 Net transfer (to) from affiliate and subaccounts (4,605) (9,125) (175) (27,088) Payments for redemptions (6,406) (14,416) (213) (14,460) Guaranteed retirement income benefit fees, maintenance fees, and other fees (99) (117) (5) (256) Annuity payout reserve adjustment (8) 223 - (22) ----------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (2,106) (7,135) (358) (32,089) ----------------------------------------------------- Total increase (decrease) in contract owners' equity (25,031) (19,572) (687) (79,617) CONTRACT OWNERS' EQUITY Beginning of period 81,697 161,381 2,043 189,638 ----------------------------------------------------- End of period 56,666 141,809 1,356 110,021 =====================================================
See accompanying notes to financial statements 35 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
J.P. Morgan Pimco Variable Insurance Janus Aspen Series Series Trust II Trust ------------------------------- --------------- ------------------------ Janus Aspen Pimco Growth and Janus Aspen JP Morgan Small Foreign Pimco Low Income Worldwide Growth Company Bond Duration Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------- --------------- ------------------------ OPERATIONS Net investment income (loss) (346) (705) (133) 8 7 Net realized gain (loss) on sale of investments (3,292) (40,937) (1,763) 10 3 Change in unrealized appreciation (depreciation) of investments (11,247) (11,177) (1,417) 2 4 ------------------------------- --------------- ------------------------ Net increase (decrease) in contract owners' equity resulting from operations (14,885) (52,819) (3,313) 20 14 ------------------------------- --------------- ------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,180 16,315 3,791 2 3 Net transfer (to) from affiliate and subaccounts (13,392) (24,441) (1,468) (35) (21) Payments for redemptions (4,250) (17,000) (1,425) (165) (43) Guaranteed retirement income benefit fees, maintenance fees, and other fees (145) (167) (59) - - Annuity payout reserve adjustment 3 2 1 - - ------------------------------- --------------- ------------------------ Net increase (decrease) from contract owners' equity transactions (16,604) (25,291) 840 (198) (61) ------------------------------- --------------- ------------------------ Total increase (decrease) in contract owners' equity (31,489) (78,110) (2,473) (178) (47) CONTRACT OWNERS' EQUITY Beginning of period 74,529 212,141 10,738 388 278 ------------------------------- --------------- ------------------------ End of period 43,040 134,031 8,265 210 231 =============================== =============== ======================== Scudder Variable Series I --------------------------------------------------------------------- Scudder 21st Scudder Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- OPERATIONS Net investment income (loss) (334) 754 (448) (994) Net realized gain (loss) on sale of investments (3,006) (142) (4,866) (4,706) Change in unrealized appreciation (depreciation) of investments (10,296) 425 (10,389) (11,367) --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (13,636) 1,037 (15,703) (17,067) --------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,417 3,933 7,059 8,241 Net transfer (to) from affiliate and subaccounts 2,796 880 2,047 1,678 Payments for redemptions (742) (2,008) (2,051) (3,067) Guaranteed retirement income benefit fees, maintenance fees, and other fees (70) (102) (115) (207) Annuity payout reserve adjustment - - - 2 --------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 8,401 2,703 6,940 6,647 --------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (5,235) 3,740 (8,763) (10,420) CONTRACT OWNERS' EQUITY Beginning of period 26,068 13,458 45,332 74,591 --------------------------------------------------------------------- End of period 20,833 17,198 36,569 64,171 ===================================================================== Scudder Variable Series I -------------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- OPERATIONS Net investment income (loss) (169) (711) (595) - Net realized gain (loss) on sale of investments (4,502) (1,491) (11,981) - Change in unrealized appreciation (depreciation) of investments (7,635) (12,243) (1,962) - -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (12,306) (14,445) (14,538) - -------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,602 15,272 14,697 - Net transfer (to) from affiliate and subaccounts 1,735 6,138 9,059 19 Payments for redemptions (2,254) (1,487) (7,790) (54) Guaranteed retirement income benefit fees, maintenance fees, and other fees (115) (158) (293) - Annuity payout reserve adjustment - - 3 - -------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 5,968 19,765 15,676 (35) -------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (6,338) 5,320 1,138 (35) CONTRACT OWNERS' EQUITY Beginning of period 43,629 44,543 82,271 65 -------------------------------------------------------------------- End of period 37,291 49,863 83,409 30 ====================================================================
See accompanying notes to financial statements. 36 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ------------------------------------------------------------------------------ Scudder Aggressive Scudder Scudder Global Growth Scudder Blue Chip Contrarian Value Blue Chip Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------ OPERATIONS Net investment income (loss) (305) (902) 172 (177) Net realized gain (loss) on sale of investments (8,938) (4,896) (5,313) (1,894) Change in unrealized appreciation (depreciation) of investments (4,144) (18,545) (18,105) (2,234) ------------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (13,387) (24,343) (23,246) (4,305) ------------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 4,595 10,004 12,265 3,410 Net transfer (to) from affiliate and subaccounts (1,574) 311 8,089 1,899 Payments for redemptions (1,731) (4,798) (11,925) (942) Guaranteed retirement income benefit fees, maintenance fees, and other fees (97) (227) (245) (63) Annuity payout reserve adjustment - (7) (16) - ------------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 1,193 5,283 8,168 4,304 ------------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity (12,194) (19,060) (15,078) (1) CONTRACT OWNERS' EQUITY Beginning of period 40,084 97,162 128,675 22,866 ------------------------------------------------------------------------------ End of period 27,890 78,102 113,597 22,865 ============================================================================== Scudder Variable Series II ----------------------------------------------------------------------------- Scudder Scudder Scudder Government Scudder High International Investment Grade Securities Scudder Growth Income Select Equity Bond Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 3,491 (3,017) 15,525 (576) 1,427 Net realized gain (loss) on sale of investments 2,549 (85,980) (27,655) (22,137) 470 Change in unrealized appreciation (depreciation) of investments 6,173 1,769 10,241 12,519 3,597 ----------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 12,213 (87,228) (1,889) (10,194) 5,494 ----------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 24,071 12,590 11,455 4,417 13,631 Net transfer (to) from affiliate and subaccounts 60,831 (17,224) 1,659 16,239 21,053 Payments for redemptions (20,032) (30,881) (20,860) (8,495) (5,577) Guaranteed retirement income benefit fees, maintenance fees, and other fees (339) (283) (246) (97) (196) Annuity payout reserve adjustment (30) (85) 20 9 (5) ----------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 64,501 (35,883) (7,972) 12,073 28,906 ----------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 76,714 (123,111) (9,861) 1,879 34,400 CONTRACT OWNERS' EQUITY Beginning of period 160,649 301,954 189,533 73,168 65,082 ----------------------------------------------------------------------------- End of period 237,363 178,843 179,672 75,047 99,482 ============================================================================= Scudder Variable Series II ---------------------------------------------------------------------------- Scudder Scudder Money Scudder New Scudder Small Scudder Strategic Technology Market Europe Cap Growth Income Growth Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 668 (40) (1,615) 152 (2,227) Net realized gain (loss) on sale of investments - (6,124) (54,429) 381 (28,246) Change in unrealized appreciation (depreciation) of investments - 1,325 1,841 1,226 (54,303) ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 668 (4,839) (54,203) 1,759 (84,776) ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 134,454 3,746 16,468 2,287 20,336 Net transfer (to) from affiliate and subaccounts (64,194) (14,015) (3,665) 10,038 (1,847) Payments for redemptions (171,434) (573) (10,774) (956) (5,157) Guaranteed retirement income benefit fees, maintenance fees, and other fees (694) (41) (223) (55) (533) Annuity payout reserve adjustment (2) - (13) 1 12 ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (101,870) (10,883) 1,793 11,315 12,811 ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (101,202) (15,722) (52,410) 13,074 (71,965) CONTRACT OWNERS' EQUITY Beginning of period 407,513 15,722 152,535 11,499 217,589 ---------------------------------------------------------------------------- End of period 306,311 - 100,125 24,573 145,624 ============================================================================
See accompanying notes to financial statements. 37 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ---------------------------------------------------------------------- Scudder Total SVS Davis SVS Dreman SVS Dreman High Return Venture Value Financial Services Return Equity Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------- OPERATIONS Net investment income (loss) 7,787 (1,393) (341) (398) Net realized gain (loss) on sale of investments (67,376) (2,338) 580 (1,747) Change in unrealized appreciation (depreciation) of investments (29,917) (17,214) (6,584) (71,516) ---------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (89,506) (20,945) (6,345) (73,661) ---------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 21,722 31,773 9,510 76,138 Net transfer (to) from affiliate and subaccounts (18,531) 18,412 4,625 47,150 Payments for redemptions (63,771) (3,070) (2,684) (12,194) Guaranteed retirement income benefit fees, maintenance fees, and other fees (537) (327) (164) (930) Annuity payout reserve adjustment (331) 2 - 1 ---------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (61,448) 46,790 11,287 110,165 ---------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (150,954) 25,845 4,942 36,504 CONTRACT OWNERS' EQUITY Beginning of period 566,980 87,458 51,630 280,449 ---------------------------------------------------------------------- End of period 416,026 113,303 56,572 316,953 ====================================================================== Scudder Variable Series II ----------------------------------------------------------------- SVS Eagle SVS Dreman Focused Large SVS Focus Value Small Cap Value Cap Growth + Growth SVS Index 500 Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- OPERATIONS Net investment income (loss) (1,515) (595) (375) (1,362) Net realized gain (loss) on sale of investments 3,050 (3,402) (7,198) (11,328) Change in unrealized appreciation (depreciation) of investments (28,127) (11,050) (7,620) (30,105) ----------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (26,592) (15,047) (15,193) (42,795) ----------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 27,923 11,203 5,423 44,667 Net transfer (to) from affiliate and subaccounts 42,493 7,710 1,430 3,595 Payments for redemptions (8,253) (1,073) (4,206) (3,950) Guaranteed retirement income benefit fees, maintenance fees, and other fees (355) (125) (89) (442) Annuity Payout Reserve Adjustment (44) - 19 1 ----------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 61,764 17,715 2,577 43,871 ----------------------------------------------------------------- Total increase (decrease) in contract owners' equity 35,172 2,668 (12,616) 1,076 CONTRACT OWNERS' EQUITY Beginning of period 113,881 37,898 51,810 145,352 ----------------------------------------------------------------- End of period 149,053 40,566 39,194 146,428 ================================================================= Scudder Variable Series II -------------------------------------------------------------------------- SVS INVESCO SVS Janus SVS Janus SVS Oak SVS Turner Dynamic Growth Growth Strategic MidCap Growth and Income Opportunities Equity Growth Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (274) (884) (1,200) (488) (677) Net realized gain (loss) on sale of investments (1,184) (5,257) (6,881) (3,441) (2,235) Change in unrealized appreciation (depreciation) of investments (6,540) (21,939) (25,884) (15,438) (17,485) -------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (7,998) (28,080) (33,965) (19,367) (20,397) -------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,389 26,252 14,687 11,879 15,286 Net transfer (to) from affiliate and subaccounts 668 5,302 4,545 4,500 11,982 Payments for redemptions (410) (3,705) (3,314) (946) (959) Guaranteed retirement income benefit fees, maintenance fees, and other fees (58) (327) (249) (100) (145) Annuity Payout Reserve Adjustment - (2) - - - -------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 6,589 27,520 15,669 15,333 26,164 -------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (1,409) (560) (18,296) (4,034) 5,767 CONTRACT OWNERS' EQUITY Beginning of period 19,666 105,768 94,012 35,442 40,665 -------------------------------------------------------------------------- End of period 18,257 105,208 75,716 31,408 46,432 ==========================================================================
See accompanying notes to financial statements. 38 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 Alger Alger American American American Alger American American Small Balanced Growth Leveraged AllCap MidCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) $ 335 2,706 1,002 753 (32) Net realized gain (loss) on sale of investments (222) (6,907) (4,875) (825) (3,455) Change in unrealized appreciation (depreciation) of investments (731) 1,100 (4,932) 111 1,692 ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (618) (3,101) (8,805) 39 (1,795) ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 56,892 4,011 39,755 1,334 1,059 Net transfer (to) from affiliate and subaccounts 15,478 1,884 4,227 3,551 30 Payments for redemptions (1,409) (1,476) (2,424) (53) (442) ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 70,961 4,419 41,558 4,832 647 ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 70,343 1,318 32,753 4,871 (1,148) CONTRACT OWNERS' EQUITY Beginning of period 13,678 20,484 40,635 4 4,785 ---------------------------------------------------------------------------- End of period $ 84,021 21,802 73,388 4,875 3,637 ============================================================================ American Century Variable Portfolios, Inc. Credit Suisse Funds ------------------------------------- ---------------------------------- American Century Credit Suisse VP Income & American Century Credit Suisse Global Post- Growth VP Value Emerging Markets Venture Capital Subaccount Subaccount Subaccount Subaccount ------------------------------------- ---------------------------------- OPERATIONS Net investment income (loss) (41) (176) (185) (122) Net realized gain (loss) on sale of investments (482) 495 (1,775) (626) Change in unrealized appreciation (depreciation) of investments 9 1,267 579 (2,242) ------------------------------------- ---------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (514) 1,586 (1,381) (2,990) ------------------------------------- ---------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 844 4,086 8,319 8,103 Net transfer (to) from affiliate and subaccounts 749 15,893 86 227 Payments for redemptions (567) (1,090) (340) (286) ------------------------------------- ---------------------------------- Net increase (decrease) from contract owners' equity transactions 1,026 18,889 8,065 8,044 ------------------------------------- ---------------------------------- Total increase (decrease) in contract owners' equity 512 20,475 6,684 5,054 CONTRACT OWNERS' EQUITY Beginning of period 4,891 2,980 9,977 8,928 ------------------------------------- ---------------------------------- End of period 5,403 23,455 16,661 13,982 ===================================== ================================== The Dreyfus Socially Dreyfus Responsible Investment Growth Fund, Inc. Portfolios ------------------------------------- Dreyfus Socially Responsible Dreyfus I.P. Growth Fund MidCap Stock Subaccount Subaccount ------------------------------------- OPERATIONS Net investment income (loss) (188) (335) Net realized gain (loss) on sale of investments (1,049) (86) Change in unrealized appreciation (depreciation) of investments (2,190) 1,728 ----------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3,427) 1,307 ----------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 7,247 51,129 Net transfer (to) from affiliate and subaccounts 1,594 19,611 Payments for redemptions (705) (992) ----------------------------------- Net increase (decrease) from contract owners' equity transactions 8,136 69,748 ----------------------------------- Total increase (decrease) in contract owners' equity 4,709 71,055 CONTRACT OWNERS' EQUITY Beginning of period 10,946 13,397 ----------------------------------- End of period 15,655 84,452 ===================================
See accompanying notes to financial statements. 39 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 (in thousands)
Fidelity Variable Insurance Products Fund Fidelity Variable Insurance Products Fund II ------------------------------------------------------------------------------------------------ Fidelity VIP Equity Fidelity VIP II Fidelity VIP II Fidelity VIP II Index Income Fidelity VIP Growth Asset Manager Contrafund 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 Funds, Products Trust Inc. ------------------ ----------------- Templeton Developing Invesco VIF Markets Securities Utilities Subaccount Subaccount (a) ------------------ ----------------- OPERATIONS Net investment income (loss) - 47 Net realized gain (loss) on sale of investments (1) (323) Change in unrealized appreciation (depreciation) of investments (2) (154) ------------------ ----------------- Net increase (decrease) in contract owners' equity resulting from operations (3) (430) ------------------ ----------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 2 5,405 Net transfer (to) from affiliate and subaccounts - 1,915 Payments for redemptions (2) (65) ------------------ ----------------- Net increase (decrease) from contract owners' equity transactions - 7,255 ------------------ ----------------- Total increase (decrease) in contract owners' equity (3) 6,825 CONTRACT OWNERS' EQUITY Beginning of period 33 - ------------------ ----------------- End of period 30 6,825 ================== ================= Janus Aspen Series ----------------------------------------------------------------------------------------------- Janus Aspen Janus Aspen Janus Aspen Janus Aspen Capital Janus Aspen Growth and Janus Aspen Aggressive Growth Balanced Appreciation Growth Income Worlddwide Growth Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (1,359) 2,089 (9) (2,689) (198) (2,445) Net realized gain (loss) on sale of investments (53,957) (1,697) (138) (24,674) 1,190 803 Change in unrealized appreciation (depreciation) of investments (3,877) (10,970) (446) (45,271) (15,755) (69,116) Net increase (decrease) in contract owners' equity resulting from operations (59,193) (10,578) (593) (72,634) (14,763) (70,758) ----------------------------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 15,276 16,805 80 16,023 1,741 25,115 Net transfer (to) from affiliate and subaccounts (14,797) (3,392) 91 (24,635) (9,913) (32,891) Payments for redemptions (6,650) (12,492) (102) (14,613) (3,892) (16,475) ----------------------------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (6,171) 921 69 (23,225) (12,064) (24,251) ----------------------------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (65,364) (9,657) (524) (95,859) (26,827) (95,009) CONTRACT OWNERS' EQUITY Beginning of period 147,061 171,038 2,567 285,497 101,356 307,150 ----------------------------------------------------------------------------------------------- End of period 81,697 161,381 2,043 189,638 74,529 212,141 ===============================================================================================
See accompanying notes to financial statements (a) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 40 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED 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, Inc. 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 --------------------------------- PIMCO Foreign PIMCO Low Bond Duration Bond Subaccount Subaccount --------------------------------- OPERATIONS Net investment income (loss) 12 14 Net realized gain (loss) on sale of investments 2 3 Change in unrealized appreciation (depreciation) of investments 12 2 --------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 26 19 --------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6 2 Net transfer (to) from affiliate and subaccounts (85) (55) Payments for redemptions (40) (27) --------------------------------- Net increase (decrease) from contract owners' equity transactions (119) (80) --------------------------------- Total increase (decrease) in contract owners' equity (93) (61) CONTRACT OWNERS' EQUITY Beginning of period 481 339 --------------------------------- End of period 388 278 ================================= Scudder Variable Series I ----------------------------------------------------------------- Scudder 21st Scudder Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- OPERATIONS Net investment income (loss) (180) 119 3,153 107 Net realized gain (loss) on sale of investments (433) 104 (1,068) 61 Change in unrealized appreciation (depreciation) of investments (837) (23) (8,582) (15,681) ----------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (1,450) 200 (6,497) (15,513) ----------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 17,085 4,004 22,254 32,278 Net transfer (to) from affiliate and subaccounts 6,570 8,667 3,615 10,335 Payments for redemptions (298) (753) (1,284) (2,017) ----------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 23,357 11,918 24,585 40,596 ----------------------------------------------------------------- Total increase (decrease) in contract owners' equity 21,907 12,118 18,088 25,083 CONTRACT OWNERS' EQUITY Beginning of period 4,161 1,340 27,244 49,508 ----------------------------------------------------------------- End of period 26,068 13,458 45,332 74,591 ================================================================= Scudder Variable Series I --------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount(b) Subaccount Subaccount --------------------------------------------------------------- OPERATIONS Net investment income (loss) 513 (25) 10,843 3 Net realized gain (loss) on sale of investments (1,026) (4) (26,888) - Change in unrealized appreciation (depreciation) of investments (2,976) 1,606 (2,774) - --------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3,489) 1,577 (18,819) 3 --------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 18,888 32,945 39,682 9 Net transfer (to) from affiliate and subaccounts 5,061 10,307 5,342 (48) Payments for redemptions (912) (286) (2,621) (22) --------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 23,037 42,966 42,403 (61) --------------------------------------------------------------- Total increase (decrease) in contract owners' equity 19,548 44,543 23,584 (58) CONTRACT OWNERS' EQUITY Beginning of period 24,081 - 58,687 123 --------------------------------------------------------------- End of period 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. 41 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 Global Aggressive Growth Scudder Blue Chip Contrarian Value Blue Chip Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (142) (768) 226 117 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 increase (decrease) in contract owners' equity resulting from operations (6,891) (12,732) 587 (2,192) ------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 19,927 41,555 34,423 13,651 Net transfer (to) from affiliate and subaccounts 3,534 11,326 15,252 1,631 Payments for redemptions (1,298) (5,360) (9,600) (516) ------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 22,163 47,521 40,075 14,766 ------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 15,272 34,789 40,662 12,574 CONTRACT OWNERS' EQUITY Beginning of period 24,812 62,373 88,013 10,292 ------------------------------------------------------------------------- End of period 40,084 97,162 128,675 22,866 ========================================================================= Scudder Variable Series II ----------------------------------------------------------------- Scudder Government Scudder Horizon Securities Scudder Growth Scudder High Yield 10+ Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- OPERATIONS Net investment income (loss) 2,428 27,435 18,836 1,121 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 increase (decrease) in contract owners' equity resulting from operations 5,860 (98,051) 3,595 (178) ----------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 68,231 33,092 29,931 483 Net transfer (to) from affiliate and subaccounts 27,492 (12,697) 9,089 (13,207) Payments for redemptions (11,615) (44,679) (26,200) (454) ----------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 84,108 (24,284) 12,820 (13,178) ----------------------------------------------------------------- Total increase (decrease) in contract owners' equity 89,968 (122,335) 16,415 (13,356) CONTRACT OWNERS' EQUITY Beginning of period 70,681 424,289 173,118 13,356 ----------------------------------------------------------------- End of period 160,649 301,954 189,533 - ================================================================= Scudder Variable Series II ---------------------------------------------------------------------------- Scudder Scudder Scudder Horizon International Investment Scudder Money 20+ Scudder Horizon 5 Research Grade Bond Market Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 559 420 13,366 902 5,627 Net realized gain (loss) on sale of investments (1,456) (617) (26,243) 420 - Change in unrealized appreciation (depreciation) of investments 623 166 (13,717) (239) - ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (274) (31) (26,594) 1,083 5,627 ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 367 232 9,594 28,647 467,417 Net transfer (to) from affiliate and subaccounts (8,018) (7,140) (5,250) 15,137 (113,554) Payments for redemptions (398) (498) (11,880) (4,263) (96,321) ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (8,049) (7,406) (7,536) 39,521 257,542 ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (8,323) (7,437) (34,130) 40,604 263,169 CONTRACT OWNERS' EQUITY Beginning of period 8,323 7,437 107,298 24,478 144,344 ---------------------------------------------------------------------------- End of period - - 73,168 65,082 407,513 ============================================================================
See accompanying notes to financial statements 42 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 New Scudder Small Scudder Small Scudder Strategic Technology Europe Cap Growth Cap Value Income Growth Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------ OPERATIONS Net investment income (loss) (39) 19,821 (687) (69) (2,251) Net realized gain (loss) on sale of investments (1,407) (32,119) 897 248 (1,442) Change in unrealized appreciation (depreciation) of investments (1,282) (43,474) 10,183 25 (60,716) ------------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (2,728) (55,772) 10,393 204 (64,409) ------------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 10,800 39,205 45,871 6,159 70,793 Net transfer (to) from affiliate and subaccounts 4,252 (1,696) 29,421 2,441 117,727 Payments for redemptions (344) (14,122) (4,126) (519) (4,359) ------------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 14,708 23,387 71,166 8,081 184,161 ------------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 11,980 (32,385) 81,559 8,285 119,752 CONTRACT OWNERS' EQUITY Beginning of period 3,742 184,920 32,322 3,214 97,837 ------------------------------------------------------------------------------ End of period 15,722 152,535 113,881 11,499 217,589 ============================================================================== Scudder Variable Series II --------------------------------------------------------------------- Scudder Total SVS Dreman SVS Dreman High SVS Dynamic Return Financial Services Return Equity Growth Subaccount Subaccount Subaccount Subaccount(c) --------------------------------------------------------------------- OPERATIONS Net investment income (loss) 31,911 (97) (907) (29) Net realized gain (loss) on sale of investments (11,356) 749 228 (158) Change in unrealized appreciation (depreciation) of investments (65,762) (1,843) 928 1,128 --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (45,207) (1,191) 249 941 --------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 55,750 29,969 167,852 15,136 Net transfer (to) from affiliate and subaccounts 24,024 6,846 54,385 3,698 Payments for redemptions (71,022) (1,177) (5,557) (109) --------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 8,752 35,638 216,680 18,725 --------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (36,455) 34,447 216,929 19,666 CONTRACT OWNERS' EQUITY Beginning of period 603,435 17,183 63,520 - --------------------------------------------------------------------- End of period 566,980 51,630 280,449 19,666 ===================================================================== Scudder Variable Series II ------------------------------------------------------------------ SVS Focus Value SVS Focused SVS Growth and SVS Growth + Growth Large Cap Growth Income Opportunities Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ OPERATIONS Net investment income (loss) 2,443 (160) (565) (981) Net realized gain (loss) on sale of investments (1,975) (458) (344) (932) Change in unrealized appreciation (depreciation) of investments (7,822) (1,113) (5,511) (16,177) ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (7,354) (1,731) (6,420) (18,090) ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 16,182 25,144 63,069 52,213 Net transfer (to) from affiliate and subaccounts 3,645 7,756 16,830 14,805 Payments for redemptions (4,088) (470) (1,914) (1,711) ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 15,739 32,430 77,985 65,307 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 8,385 30,699 71,565 47,217 CONTRACT OWNERS' EQUITY Beginning of period 43,425 7,199 34,203 46,795 ------------------------------------------------------------------ End of period 51,810 37,898 105,768 94,012 ==================================================================
See accompanying notes to financial statements (c) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 43 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. 44 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT NOTES TO FINANCIAL STATEMENTS (1) 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. Under applicable insurance law, the assets and liabilities of the Separate Account are clearly identified and distinguished from KILICO's other assets and liabilities. The portion of the Separate Account's assets applicable to the variable annuity contracts is not chargeable with liabilities arising out of any other business KILICO may conduct. 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"), Zurich Preferred Plus individual and group variable and market value adjusted deferred annuity contracts ("Zurich Preferred Plus"), Scudder ZS4 individual and group variable and market value adjusted deferred annuity contracts ("Scudder ZS4") and Zurich Archway individual and group variable and market value adjusted deferred annuity contracts ("Zurich Archway"). 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 Trust, 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 ING VP Emerging Markets Fund, Inc., the ING VP 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 Trust, 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 Trust, 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. 45 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 Trust, 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 Scudder ZS4 contracts have forty 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 Trust, the Dreyfus Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc., the INVESCO Variable Investment Funds, Inc., the Scudder Variable Series I and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Zurich Archway 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 Trust, 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 Scudder New Europe fund was closed by the investment manager of the Scudder Variable Series II effective November 1, 2002. All monies not reallocated by contract owners by this date were transferred to Scudder International Select Equity subaccount. Deutsche Asset Management, formerly Zurich Scudder Investments, Inc. ("ZSI"), formally an affiliated company, is the investment manager of the Scudder Variable Series I and the Scudder Variable Series II series of funds. On April 8, 2002, ZFS announced the completion of the sale of ZSI to Deutsche Bank ("DB"). DB acquired 100% of ZSI, with the exception of ZSI's UK operations, Threadneedle Investments. See respective contract Prospectus of each product for further description and benefits. (2) SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATION The investments are stated at current market value, which is based on the closing net asset value at December 31, 2002. SECURITY TRANSACTIONS 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. 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 affect 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. 46 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 revenues, expenses, 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. ANNUITY PAYOUTS Net assets allocated to contracts in the annuity payout period are computed according to the 1983a Individual Annuitant Mortality Table. The assumed investment return is 2.5 percent unless the annuitant elects otherwise, in which case the rate may vary from 2.5 percent to 7.75 percent, as regulated by the laws of respective states. The mortality risk is fully born by Kemper Investors Life Insurance Company and may result in additional amounts being transferred into the variable annuity account by Kemper Investors Life Insurance Company to cover greater longevity of annuitants than expected. Conversely, if amounts allocated exceed amounts required, transfers may be made to the insurance company. (3) PURCHASES AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales of investments for the year ended December 31, 2002, are as follows (in thousands):
PURCHASES SALES --------------------------- THE ALGER AMERICAN FUND: Alger American Balanced Subaccount ..................................... $ 7,843 $ 6,120 Alger American Growth Subaccount ....................................... 17,176 11,254 Alger American Leveraged AllCap Subaccount ............................. 20,969 10,751 Alger American MidCap Growth Subaccount ................................ 3,164 2,647 Alger American Small Capitalization Subaccount ......................... 18,123 17,543 AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: American Century VP Income & Growth Subaccount ......................... 5,584 4,552 American Century VP Value Subaccount ................................... 19,255 17,548 CREDIT SUISSE TRUST: Credit Suisse Trust Emerging Markets Subaccount ........................ 11,009 7,883 Credit Suisse Trust Global Post-Venture Capital Subaccount ............. 5,829 2,234 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.: Dreyfus Socially Responsible Growth Subaccount ......................... 6,972 3,953 DREYFUS INVESTMENT PORTFOLIOS: Dreyfus I.P. Mid Cap Stock Subaccount .................................. 9,873 8,415 FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity Income Subaccount .................................. 31,377 25,962 Fidelity VIP Growth Subaccount ......................................... 61,253 39,860 FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Fidelity VIP II Asset Manager Subaccount ............................... 6,156 5,141 Fidelity VIP II Contrafund Subaccount .................................. 41,978 35,432 Fidelity VIP II Index 500 Subaccount ................................... 113,837 93,016
47 (3) PURCHASES AND SALES OF INVESTMENTS (CONTINUED)
PURCHASES SALES -------------------------- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST: Templeton Developing Markets Securities Subaccount ..................... $ 2 $ 1 ING VP EMERGING MARKETS FUND, INC.: ING VP Emerging Markets Subaccount ..................................... 6,197 4,915 ING VP NATURAL RESOURCES TRUST: ING VP Natural Resources Trust Subaccount .............................. 3,363 3,127 INVESCO VARIABLE INVESTMENT FUNDS, INC.: INVESCO VIF-Utilities Subaccount ....................................... 3,657 3,053 JANUS ASPEN SERIES: Janus Aspen Aggressive Growth Subaccount ............................... 86,979 41,782 Janus Aspen Balanced Subaccount ........................................ 102,415 92,138 Janus Aspen Capital Appreciation Subaccount ............................ 877 496 Janus Aspen Growth Subaccount .......................................... 150,540 91,884 Janus Aspen Growth and Income Subaccount ............................... 21,768 18,477 Janus Aspen Worldwide Growth Subaccount ................................ 222,616 181,679 J.P. MORGAN SERIES TRUST II: J.P. Morgan Small Company Subaccount ................................... 14,891 13,128 PIMCO VARIABLE INSURANCE TRUST: PIMCO Foreign Bond Subaccount .......................................... 200 210 PIMCO Low Duration Subaccount .......................................... 78 81 SCUDDER VARIABLE SERIES I: Scudder 21st Century Growth Subaccount ................................. 6,446 3,441 Scudder Bond Subaccount ................................................ 10,624 10,482 Scudder Capital Growth Subaccount ...................................... 10,180 5,314 Scudder Global Discovery Subaccount .................................... 11,471 6,765 Scudder Growth and Income Subaccount ................................... 18,418 13,916 Scudder Health Sciences Subaccount ..................................... 8,204 6,714 Scudder International Subaccount ....................................... 1,007,646 995,664 Scudder Money Market Subaccount ........................................ 71 71 SCUDDER VARIABLE SERIES II: Scudder Aggressive Growth Subaccount ................................... 21,273 12,335 Scudder Blue Chip Subaccount ........................................... 18,804 13,909 Scudder Contrarian Value Subaccount .................................... 48,349 43,035 Scudder Global Blue Chip Subaccount .................................... 8,144 6,250 Scudder Government Securities Subaccount ............................... 63,702 66,252 Scudder Growth Subaccount .............................................. 222,481 136,500 Scudder High Income Subaccount ......................................... 150,004 122,349 Scudder International Select Equity Subaccount ......................... 65,337 43,201 Scudder Investment Grade Bond Subaccount ............................... 16,885 17,355 Scudder Money Market Subaccount ........................................ 1,461,545 1,461,545 Scudder New Europe Subaccount .......................................... 26,488 20,363 Scudder Small Cap Growth Subaccount .................................... 142,790 88,361 Scudder Strategic Income Subaccount .................................... 10,266 10,647 Scudder Technology Growth Subaccount ................................... 45,302 17,056 Scudder Total Return Subaccount ........................................ 360,083 292,706
48 (3) PURCHASES AND SALES OF INVESTMENTS (CONTINUED)
PURCHASES SALES ----------- ----------- SCUDDER VARIABLE SERIES II (CONTINUED): SVS Davis Venture Value Subaccount ..................................... $ 15,517 $ 13,179 SVS Dreman Financial Services Subaccount ............................... 8,327 8,906 SVS Dreman High Return Equity Subaccount ............................... 23,318 21,571 SVS Dreman Small Cap Value Subaccount .................................. 40,981 44,031 SVS Eagle Focused Large Cap Growth Subaccount .......................... 8,461 5,059 SVS Focus Value + Growth Subaccount .................................... 21,348 14,150 SVS Index 500 Subaccount ............................................... 42,312 30,985 SVS INVESCO Dynamic Growth Subaccount .................................. 7,280 6,096 SVS Janus Growth and Income Subaccount ................................. 15,832 10,575 SVS Janus Growth Opportunities Subaccount .............................. 13,114 6,233 SVS Oak Strategic Equity Subaccount .................................... 13,714 10,272 SVS Turner Mid-Cap Growth Subaccount ................................... 9,190 6,955
(4) EXPENSES AND RELATED PARTY TRANSACTIONS 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 following contracts with a daily asset charge for mortality and expense risk and administrative costs: Kemper Advantage III flexible payment contracts an aggregate of one percent (1.00%) per annum. Kemper Advantage III periodic payment contracts an aggregate of one and three-tenths percent (1.30%) per annum. Scudder Passport contracts an aggregate of one and one-quarter percent (1.25%) per annum. Scudder Destinations contracts an aggregate of one and four-tenths percent (1.40%) per annum. Farmers Variable Annuity I contracts an aggregate of one and four-tenths percent (1.40%) per annum. Zurich Preferred contracts an aggregate of one and one-quarter percent (1.25%) per annum. Zurich Preferred Plus contracts an aggregate of one and one-half percent (1.50%) per annum. Scudder ZS4 contracts an aggregate of one and seven-tenths percent (1.70%) per annum. Zurich Archway contracts an aggregate of one and seven-tenths percent (1.70%) 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 $36 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. KILICO also assesses against each Scudder Passport, Scudder Destinations, Farmers Variable Annuity I, Scudder ZS4 and Zurich Archway 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 and $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, Zurich Preferred Plus, Scudder ZS4 and Zurich Archway 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. During the year ended December 31, 2002, 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 49 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. Investors Brokerage Services, Inc. and PMG Securities, Inc., wholly-owned subsidiaries of KILICO, are the principal underwriters for the Separate Account. (5) CHANGES IN UNITS OUTSTANDING The changes in units outstanding for the year ended December 31, 2002 were as follows (in thousands):
NET INCREASE UNITS ISSUED UNITS REDEEMED (DECREASE) -------------- -------------- -------------- THE ALGER AMERICAN FUND: Alger American Balanced Subaccount 8,101 6,141 1,960 Alger American Growth Subaccount 252 230 22 Alger American Leveraged AllCap Subaccount 5,885 5,717 168 Alger American MidCap Growth Subaccount 355 145 210 Alger American Small Capitalization Subaccount 1,207 1,152 55 AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: American Century VP Income & Growth Subaccount 3,313 1,248 2,065 American Century VP Value Subaccount 3,896 3,325 571 CREDIT SUISSE TRUST: Credit Suisse Trust Emerging Markets Subaccount 3,173 2,529 644 Credit Suisse Trust Global Post-Venture Capital Subaccount 1,494 1,090 404 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC: Dreyfus Socially Responsible Growth Subaccount 1,052 941 111 DREYFUS INVESTMENT PORTFOLIOS: Dreyfus I.P. Mid Cap Stock Subaccount 9,897 7,000 2,897 FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity Income Subaccount 930 744 186 Fidelity VIP Growth Subaccount 630 673 (43) FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Fidelity VIP II Asset Manager Subaccount 102 133 (31) Fidelity VIP II Contrafund Subaccount 885 959 (74) Fidelity VIP II Index 500 Subaccount 345 492 (147) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST: Templeton Developing Markets Securities Subaccount 1 1 0 ING VP EMERGING MARKETS FUND, INC.: ING VP Emerging Markets Subaccount 611 517 94 ING VP NATURAL RESOURCES TRUST: ING VP Natural Resources Trust Subaccount 119 134 (15) INVESCO VARIABLE INVESTMENT FUNDS, INC.: INVESCO VIF-Utilities Subaccount 3,431 2,797 634
50 (5) CHANGES IN UNITS OUTSTANDING (CONTINUED)
NET INCREASE UNITS ISSUED UNITS REDEEMED (DECREASE) -------------- -------------- -------------- JANUS ASPEN SERIES: Janus Aspen Aggressive Growth Subaccount 1,452 1,536 (84) Janus Aspen Balanced Subaccount 1,558 1,828 (270) Janus Aspen Capital Appreciation Subaccount 389 438 (49) Janus Aspen Growth Subaccount 3,899 6,593 (2,694) Janus Aspen Growth and Income Subaccount 1,719 2,983 (1,264) Janus Aspen Worldwide Growth Subaccount 2,958 3,921 (963) J.P. MORGAN SERIES TRUST II: J.P. Morgan Small Company Subaccount 1,358 1,361 (3) PIMCO VARIABLE INSURANCE TRUST: PIMCO Foreign Bond Subaccount 85 102 (17) PIMCO Low Duration Subaccount 43 48 (5) SCUDDER VARIABLE SERIES I: Scudder 21st Century Growth Subaccount 6,334 4,741 1,593 Scudder Bond Subaccount 2,094 1,714 380 Scudder Capital Growth Subaccount 3,382 2,693 689 Scudder Global Discovery Subaccount 4,749 4,168 581 Scudder Growth and Income Subaccount 4,972 4,320 652 Scudder Health Sciences Subaccount 6,424 4,414 2,010 Scudder International Subaccount 140,500 138,139 2,361 Scudder Money Market Subaccount 4 7 (3) SCUDDER VARIABLE SERIES II: Scudder Aggressive Growth Subaccount 3,397 3,326 71 Scudder Blue Chip Subaccount 8,421 9,032 (611) Scudder Contrarian Value Subaccount 13,582 17,038 (3,456) Scudder Global Blue Chip Subaccount 2,641 2,176 465 Scudder Government Securities Subaccount 38,240 29,363 8,877 Scudder Growth Subaccount 8,300 19,296 (10,996) Scudder High Income Subaccount 27,915 32,435 (4,520) Scudder International Select Equity Subaccount 15,466 18,269 (2,803) Scudder Investment Grade Bond Subaccount 14,398 12,146 2,252 Scudder Money Market Subaccount 1,059,200 1,133,637 (74,437) Scudder New Europe Subaccount 3,192 5,583 (2,391) Scudder Small Cap Growth Subaccount 49,142 53,749 (4,607) Scudder Strategic Income Subaccount 3,920 3,094 826 Scudder Technology Growth Subaccount 15,587 13,042 2,545 Scudder Total Return Subaccount 10,317 26,363 (16,046) SVS Davis Venture Value Subaccount 16,239 11,039 5,200 SVS Dreman Financial Services Subaccount 4,811 3,805 1,006 SVS Dreman High Return Equity Subaccount 30,845 21,435 9,410 SVS Dreman Small Cap Value Subaccount 39,866 29,945 9,921 SVS Eagle Focused Large Cap Growth Subaccount 5,982 3,933 2,049 SVS Focus Value + Growth Subaccount 5,198 7,614 (2,416) SVS Index 500 Subaccount 26,664 21,122 5,542 SVS INVESCO Dynamic Growth Subaccount 3,274 2,456 818 SVS Janus Growth and Income Subaccount 15,764 12,010 3,754 SVS Janus Growth Opportunities Subaccount 12,792 10,114 2,678 SVS Oak Strategic Equity Subaccount 8,384 6,072 2,312 SVS Turner Mid-Cap Growth Subaccount 8,766 5,468 3,298
51 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS A summary of unit values and units outstanding for variable annuity contracts, net investment income ratios and the expense ratios, excluding expenses of the underlying funds, for each of the two years in the period ended December 31, 2002, follows.
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- THE ALGER AMERICAN FUND: Alger American Balanced Subaccount: 2002 10,165 $ 8.857 $ 9.684 $ 90,036 1.78% 1.40% 2.05% -5.43% -0.08% 2001 8,205 10.240 10.240 84,021 1.99% 1.40% 1.40% -3.29% -3.29% Alger American Growth Subaccount: 2002 445 8.649 34.560 15,059 0.04% 1.00% 3.00% -33.66% -7.97% 2001 423 40.912 52.093 21,732 14.04% 1.00% 3.00% -12.95% 13.13% Alger American Leveraged AllCap Subaccount: 2002 9,225 5.281 8.763 48,717 0.01% 1.40% 2.05% -34.82% -4.68% 2001 9,057 8.103 8.103 73,387 3.24% 1.40% 1.40% -17.09% -17.09% Alger American MidCap Growth Subaccount 2002 383 9.079 19.771 7,526 N/A 1.00% 3.00% -30.24% -1.39% 2001 173 28.092 28.342 4,678 33.96% 1.00% 3.00% -8.01% -4.13% Alger American Small Capitalization Subaccount 2002 174 9.454 23.018 3,316 N/A 1.00% 3.00% -26.96% 2.53% 2001 119 16.250 31.513 3,635 0.05% 1.00% 3.00% -30.78% -13.54% AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: American Century VP Income & Growth Subaccount 2002 2,918 4.947 9.514 14,727 0.53% 1.00% 3.00% -20.99% 1.88% 2001 853 6.323 6.395 5,410 0.83% 1.00% 3.00% -9.82% -8.37% American Century VP Value Subaccount 2002 3,642 6.224 9.636 23,981 6.91% 1.00% 3.00% -14.55% 1.63% 2001 3,071 7.350 7.723 23,380 0.53% 1.00% 3.00% 7.38% 11.70% CREDIT SUISSE TRUST: Credit Suisse Trust Emerging Markets Subaccount 2002 2,581 7.203 8.660 19,348 0.23% 1.00% 3.00% -13.34% -4.47% 2001 1,937 8.326 8.611 16,663 N/A 1.00% 3.00% -11.37% -10.51% Credit Suisse Trust Global Post-Venture Capital Subaccount 2002 1,990 5.725 8.299 11,395 N/A 1.40% 2.05% -35.07% -8.69% 2001 1,586 8.818 8.818 13,982 N/A 1.40% 1.40% -29.62% -29.62% THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.: Dreyfus Socially Responsible Growth Subaccount 2002 1,731 5.299 19.078 11,679 0.23% 1.00% 3.00% -29.93% -29.65% 2001 1,620 7.563 27.119 15,699 0.07% 1.00% 3.00% -23.91% -16.84% DREYFUS INVESTMENT PORTFOLIOS: Dreyfus I.P. Mid Cap Stock Subaccount 2002 10,438 9.522 9.664 100,874 0.33% 1.40% 2.05% -13.70% 1.58% 2001 7,541 11.199 11.199 84,453 0.27% 1.40% 1.40% -4.60% -4.60%
52 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity Income Subaccount 2002 1,845 $ 9.334 $ 25.609 $ 44,934 4.04% 1.00% 3.00% -17.77% 0.96% 2001 1,659 22.475 31.143 50,216 5.91% 1.00% 3.00% -6.46% -5.90% Fidelity VIP Growth Subaccount 2002 1,600 9.210 35.347 53,797 0.25% 1.00% 3.00% -30.80% 0.59% 2001 1,643 33.204 51.078 81,527 6.97% 1.00% 3.00% -19.03% -13.14% FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Fidelity VIP II Asset Manager Subaccount 2002 292 19.957 20.546 5,884 4.03% 1.00% 2.80% -10.56% -9.63% 2001 323 22.326 22.736 7,226 5.70% 1.00% 2.80% -5.40% -5.05% Fidelity VIP II Contrafund Subaccount 2002 2,401 9.558 23.079 54,054 0.85% 1.00% 3.00% -10.25% 0.22% 2001 2,475 19.897 25.714 62,588 3.63% 1.00% 3.00% -13.68% -5.32% Fidelity VIP II Index 500 Subaccount 2002 940 9.460 106.090 97,664 1.24% 1.00% 3.00% -23.02% 1.56% 2001 1,087 127.922 137.84 146,877 1.10% 1.00% 3.00% -13.75% -9.67% FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST: Templeton Developing Markets Securities Subaccount 2002 3 8.725 8.725 29 N/A 1.40% 1.40% -1.53% -1.53% 2001 3 8.860 8.860 30 N/A 1.40% 1.40% -12.68% -12.68% ING VP EMERGING MARKETS FUND, INC.: ING VP Emerging Markets Fund Subaccount 2002 807 4.635 6.628 5,236 N/A 1.00% 2.80% -11.15% -10.23% 2001 713 7.247 7.384 5,432 21.69% 1.00% 2.80% -11.67% -11.31% ING VP NATURAL RESOURCES TRUST: ING VP Natural Resources Trust Subaccount 2002 242 12.422 12.826 3,033 0.19% 1.00% 2.80% -4.06% -3.07% 2001 257 12.958 13.232 3,252 N/A 1.00% 2.80% -17.13% -16.77% INVESCO VARIABLE INVESTMENT FUNDS, INC.: INVESCO VIF-Utilities Subaccount 2002 1,638 5.340 9.919 8,747 0.59% 1.40% 2.05% -21.42% 4.21% 2001 1,004 6.796 6.796 6,825 0.92% 1.40% 1.40% -32.30% -32.30% JANUS ASPEN SERIES: Janus Aspen Aggressive Growth Subaccount 2002 3,312 9.491 17.494 56,666 N/A 1.00% 3.00% -28.65% 1.24% 2001 3,396 21.725 24.518 81,659 N/A 1.00% 3.00% -40.63% -23.00% Janus Aspen Balanced Subaccount 2002 5,660 9.836 25.699 141,809 2.44% 1.00% 3.00% -7.37% 0.33% 2001 5,930 22.896 27.744 161,184 2.59% 1.00% 3.00% -6.17% -4.07%
53 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- JANUS ASPEN SERIES (CONTINUED): Janus Aspen Capital Appreciation Subaccount 2002 193 $ 7.035 $ 7.035 $ 1,356 0.59% 1.40% 1.40% -16.84% -16.84% 2001 242 8.459 8.459 2,043 1.17% 1.40% 1.40% -23.67% -23.67% Janus Aspen Growth Subaccount 2002 9,555 7.687 17.102 110,021 N/A 1.00% 3.00% -27.24% -16.12% 2001 12,249 10.607 23.504 189,564 0.25% 1.00% 3.00% -26.05% -21.32% Janus Aspen Growth and Income Subaccount 2002 3,720 11.570 11.570 43,040 0.77% 1.40% 1.40% -22.62% -22.62% 2001 4,984 14.953 14.953 74,529 1.32% 1.40% 1.40% -14.57% -14.57% Janus Aspen Worldwide Growth Subaccount 2002 5,892 8.991 23.259 134,031 0.86% 1.00% 3.00% -26.24% -3.80% 2001 6,855 28.344 31.533 212,598 0.45% 1.00% 3.00% -23.77% -16.33% J.P. MORGAN SERIES TRUST II: J.P. Morgan Small Company Subaccount 2002 800 9.176 10.538 8,265 0.24% 1.00% 3.00% -22.43% 0.82% 2001 803 12.972 13.584 10,764 0.03% 1.00% 3.00% -9.54% -3.47% PIMCO VARIABLE INSURANCE TRUST: PIMCO Foreign Bond Subaccount 2002 18 11.841 11.841 210 4.34% 1.40% 1.40% 6.68% 6.68% 2001 35 11.099 11.099 389 4.37% 1.40% 1.40% 6.77% 6.77% PIMCO Low Duration Subaccount 2002 19 11.998 11.998 231 3.94% 1.40% 1.40% 5.57% 5.57% 2001 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 2002 5,790 3.598 9.232 20,833 N/A 1.40% 2.05% -42.07% -1.78% 2001 4,197 6.211 6.211 26,068 N/A 1.40% 1.40% -24.15% -24.15% Scudder Bond Subaccount 2002 2,214 7.424 11.785 17,198 6.35% 1.00% 3.00% 5.54% 6.17% 2001 1,834 7.034 11.100 13,450 3.25% 1.00% 3.00% 2.42% 5.47% Scudder Capital Growth Subaccount 2002 5,041 7.124 14.451 36,569 0.35% 1.00% 3.00% -29.89% -24.13% 2001 4,352 10.201 20.611 45,339 9.97% 1.00% 3.00% -20.72% -14.48% Scudder Global Discovery Subaccount 2002 7,117 9.017 9.402 64,171 N/A 1.40% 2.05% -17.62% -6.11% 2001 6,536 11.412 11.412 74,591 1.60% 1.40% 1.40% -25.64% -25.64% Scudder Growth and Income Subaccount 2002 5,766 6.464 9.274 37,291 1.06% 1.40% 2.05% -24.19% -0.70% 2001 5,114 8.527 8.693 43,629 2.74% 1.40% 1.40% -13.30% -12.52% Scudder Health Sciences Subaccount 2002 6,232 8.002 10.906 49,863 N/A 1.40% 2.05% -24.16% 1.28% 2001 4,222 10.551 10.551 44,542 N/A 1.40% 1.40% 5.51% 5.51%
54 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- SCUDDER VARIABLE SERIES I (CONTINUED): Scudder International Subaccount 2002 12,444 $ 6.354 $ 8.882 $ 83,409 0.88% 1.00% 3.00% -19.49% -17.17% 2001 10,083 7.892 10.723 82,158 16.43% 1.00% 3.00% -32.11% -23.44% Scudder Money Market Subaccount 2002 3 10.308 10.783 30 N/A 1.40% 1.40% 0.09% 1.49% 2001 6 10.773 10.773 65 4.26% 1.40% 1.40% 2.41% 2.41% SCUDDER VARIABLE SERIES II: Scudder Aggressive Growth Subaccount 2002 4,070 6.853 9.837 27,890 0.45% 1.40% 2.05% -27.08% -1.85% 2001 3,999 10.022 10.022 40,084 0.85% 1.40% 1.40% -22.84% -22.84% Scudder Blue Chip Subaccount 2002 16,215 0.896 9.379 78,102 0.40% 1.25% 2.05% -23.08% -3.11% 2001 16,826 1.164 9.680 97,162 0.36% 1.25% 1.40% -16.97% -16.86% Scudder Contrarian Value Subaccount 2002 35,977 1.484 9.162 113,597 1.57% 1.00% 2.80% -16.69% -16.05% 2001 39,433 1.799 10.913 128,715 1.50% 1.00% 2.80% 0.46% 0.85% Scudder Global Blue Chip Subaccount 2002 2,745 8.331 9.319 22,865 0.65% 1.40% 2.05% -10.43% -7.08% 2001 2,280 10.029 10.029 22,866 2.07% 1.40% 1.40% 1.40% 1.40% Scudder Government Securities Subaccount 2002 50,525 1.275 12.676 237,363 3.09% 1.00% 3.00% 5.67% 6.56% 2001 41,648 1.218 11.896 160,645 3.48% 1.00% 3.00% 3.52% 6.64% Scudder Growth Subaccount 2002 54,587 1.360 9.431 178,843 N/A 1.00% 3.00% -30.28% 0.73% 2001 65,583 1.951 8.272 302,393 8.78% 1.00% 3.00% -23.67% -14.32% Scudder High Income Subaccount 2002 40,754 0.778 10.239 179,672 9.68% 1.00% 3.00% -2.50% 5.29% 2001 45,274 0.805 9.271 189,316 11.65% 1.00% 3.00% -2.72% 1.61% Scudder International Select Equity Subaccount 2002 36,850 1.299 9.202 75,047 0.42% 1.00% 2.80% -15.22% -1.69% 2001 39,653 1.547 7.918 72,774 16.11% 1.00% 2.80% -25.53% -25.18% Scudder Investment Grade Bond Subaccount 2002 17,704 1.188 12.110 99,482 3.12% 1.00% 3.00% 5.63% 6.52% 2001 15,452 1.135 11.369 64,981 3.41% 1.00% 3.00% 2.24% 4.66% Scudder Money Market Subaccount 2002 54,362 0.990 12.056 306,311 1.39% 1.00% 3.00% -0.86% 1.36% 2001 128,799 1.008 11.894 407,432 3.31% 1.00% 3.00% 0.94% 3.85% Scudder New Europe Subaccount 2002 - N/A N/A - 2.29% 1.40% 1.40% N/A N/A 2001 2,391 6.576 6.576 15,722 1.33% 1.40% 1.40% -30.83% -30.83% Scudder Small Cap Growth Subaccount 2002 45,002 0.817 9.660 100,125 N/A 1.00% 3.00% -34.93% 1.94% 2001 49,609 1.267 9.348 152,170 12.86% 1.00% 3.00% -32.12% -16.19%
55 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- SCUDDER VARIABLE SERIES II (CONTINUED): Scudder Strategic Income Subaccount 2002 2,400 $ 1.204 $ 11.507 $ 24,573 2.28% 1.25% 1.40% 9.77% 9.93% 2001 1,574 1.095 10.483 11,501 0.61% 1.25% 1.40% 3.78% 3.92% Scudder Technology Growth Subaccount 2002 28,007 0.575 9.317 145,624 0.11% 1.00% 3.00% -36.79% 2.62% 2001 25,462 0.920 9.079 217,576 0.18% 1.00% 3.00% -33.63% -7.58% Scudder Total Return Subaccount 2002 83,840 1.624 9.636 416,026 2.89% 1.00% 3.00% -16.22% -9.23% 2001 99,886 1.939 10.615 566,841 6.75% 1.00% 3.00% -7.39% -5.62% SVS Davis Venture Value Subaccount 2002 14,493 7.816 9.666 113,303 0.15% 1.40% 2.05% -16.95% 1.47% 2001 9,293 9.412 9.412 87,458 N/A 1.40% 1.40% -5.88% -5.88% SVS Dreman Financial Services Subaccount 2002 5,697 9.562 9.930 56,572 0.88% 1.40% 2.05% -9.78% -0.02% 2001 4,691 11.006 11.006 51,630 0.97% 1.40% 1.40% -6.17% -6.17% SVS Dreman High Return Equity Subaccount 2002 33,048 9.436 9.591 316,953 1.39% 1.40% 2.05% -19.17% -1.19% 2001 23,638 11.674 11.865 280,450 0.60% 1.40% 1.40% -0.34% 0.29% SVS Dreman Small Cap Value Subaccount 2002 43,904 1.116 8.945 149,053 0.41% 1.00% 2.80% -13.13% -12.10% 2001 33,983 1.285 10.177 113,833 N/A 1.00% 2.80% 16.04% 16.49% SVS Eagle Focused Large Cap Growth Subaccount 2002 6,095 6.652 9.142 40,566 N/A 1.40% 2.05% -28.35% -2.40% 2001 4,046 9.367 9.367 37,898 N/A 1.40% 1.40% -18.10% -18.10% SVS Focus Value + Growth Subaccount 2002 16,459 1.106 9.366 39,194 0.56% 1.00% 2.80% -27.38% -4.81% 2001 18,875 1.538 9.839 51,767 6.41% 1.00% 2.80% -15.56% -15.21% SVS Index 500 Subaccount 2002 23,118 6.334 9.461 146,428 0.55% 1.40% 2.05% -23.41% 1.62% 2001 17,576 8.270 8.270 145,352 0.29% 1.40% 1.40% -13.27% -13.27% SVS INVESCO Dynamic Growth Subaccount 2002 3,074 5.940 9.589 18,257 N/A 1.40% 2.05% -31.87% 4.47% 2001 2,256 8.718 8.718 19,666 N/A 1.40% 1.40% -12.82% -12.82% SVS Janus Growth and Income Subaccount 2002 17,677 5.952 9.235 105,208 0.66% 1.40% 2.05% -21.65% -0.56% 2001 13,923 7.597 7.597 105,768 0.42% 1.40% 1.40% -13.50% -13.50% SVS Janus Growth Opportunities Subaccount 2002 17,795 4.255 9.603 75,716 N/A 1.40% 2.05% -31.58% 1.35% 2001 15,117 6.219 6.219 94,012 N/A 1.40% 1.40% -24.75% -24.75%
56 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- SCUDDER VARIABLE SERIES II (CONTINUED): SVS Oak Strategic Equity Subaccount 2002 7,019 $ 4.474 $ 9.015 $ 31,408 N/A 1.40% 2.05% -40.57% 1.52% 2001 4,707 7.529 7.529 35,442 N/A 1.40% 1.40% -24.71% -24.71% SVS Turner Mid-Cap Growth Subaccount 2002 7,947 5.842 9.446 46,432 N/A 1.40% 2.05% -33.21% 0.48% 2001 4,649 8.748 8.748 40,665 N/A 1.40% 1.40% -12.52% -12.52%
(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 (before rounding for this presentation), which reflects the changes in the underlying fund values and reductions related to the Expense Ratio, for the period indicated. (d) Net Assets equals Contract Owners' Equity. 57 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Kemper Investors Life Insurance Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity and cash flows present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and its subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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 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. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, as of December 31, 2002. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 21, 2003 58 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, December 31, 2002 2001 ------------ ------------ Assets Fixed maturity securities, available-for-sale, at fair value (amortized cost: December 31, 2002, $3,313,920; December 31, 2001, $3,057,139)............... $ 3,420,773 $ 3,094,560 Equity securities (cost: December 31, 2002, $52,627; December 31, 2001, $65,473).................................................................... 58,615 67,731 Short-term investments........................................................ -- 159,105 Joint venture mortgage loans.................................................. 114,061 104,303 Third-party mortgage loans.................................................... 57,985 63,897 Other real estate-related investments......................................... 5,645 8,240 Policy loans.................................................................. 223,888 239,787 Other invested assets......................................................... 2,491 20,799 ----------- ----------- Total investments......................................................... 3,883,458 3,758,422 Cash.......................................................................... 47,436 57,374 Accrued investment income..................................................... 148,549 140,762 Reinsurance recoverable....................................................... 433,566 240,536 Deferred insurance acquisition costs.......................................... 431,915 381,506 Value of business acquired.................................................... 53,600 75,806 Goodwill...................................................................... -- 178,418 Other intangible assets....................................................... 5,502 6,261 Deferred income taxes......................................................... 73,228 95,688 Federal income tax receivable................................................. 11,232 13,866 Receivable on sales of securities............................................. -- 2,100 Fixed assets.................................................................. 3,179 5,619 Other assets and receivables.................................................. 27,241 24,717 Assets held in separate accounts.............................................. 13,547,376 13,108,753 ----------- ----------- Total assets.............................................................. $18,666,282 $18,089,828 =========== =========== Liabilities Future policy benefits........................................................ $ 4,111,063 $ 3,634,161 Other policyholder benefits and funds payable................................. 203,159 436,449 Other accounts payable and liabilities........................................ 80,905 92,472 Liabilities related to separate accounts...................................... 13,547,376 13,108,753 ----------- ----------- Total liabilities......................................................... 17,942,503 17,271,835 ----------- ----------- 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.................................................... 841,633 804,347 Accumulated other comprehensive income........................................ 54,009 16,551 Retained deficit.............................................................. (174,363) (5,405) ----------- ----------- Total stockholder's equity................................................ 723,779 817,993 ----------- ----------- Total liabilities and stockholder's equity................................ $18,666,282 $18,089,828 =========== ===========
See accompanying notes to consolidated financial statements. 59 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Year Ended December 31, ------------------------------- 2002 2001 2000 --------- --------- --------- Revenue Net investment income................................................ $ 228,330 $ 269,419 $ 257,470 Realized investment gains (losses)................................... (779) 20,660 (8,277) Premium income....................................................... 1,002 486 8,394 Separate account fees and charges.................................... 110,013 70,993 68,293 Other income......................................................... 42,196 36,739 35,030 --------- --------- --------- Total revenue.................................................... 380,762 398,297 360,910 --------- --------- --------- Benefits and Expenses Interest credited to policyholders................................... 152,945 159,127 152,289 Claims incurred and other policyholder benefits...................... 62,613 21,933 13,718 Taxes, licenses and fees............................................. 19,244 10,714 17,861 Commissions.......................................................... 111,461 179,585 114,162 Operating expenses................................................... 67,474 66,026 61,671 Deferral of insurance acquisition costs.............................. (96,509) (166,202) (104,608) Amortization of insurance acquisition costs.......................... 34,941 18,052 23,231 Amortization of value of business acquired........................... 20,751 15,606 19,926 Goodwill impairment.................................................. 156,511 -- -- Amortization of goodwill............................................. -- 12,744 12,744 Amortization of other intangible assets.............................. 759 961 368 --------- --------- --------- Total benefits and expenses...................................... 530,190 318,546 311,362 --------- --------- --------- Income (loss) before income tax expense (benefit) and cumulative effect of accounting change, net of tax............................ (149,428) 79,751 49,548 Income tax expense (benefit)......................................... (2,377) 28,154 1,247 --------- --------- --------- Net income (loss) before cumulative effect of accounting change, net of tax............................................................. (147,051) 51,597 48,301 Cumulative effect of accounting change, net of tax................... (21,907) -- -- --------- --------- --------- Net income (loss)................................................ $(168,958) $ 51,597 $ 48,301 ========= ========= =========
See accompanying notes to consolidated financial statements. 60 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
Year Ended December 31, ----------------------------- 2002 2001 2000 --------- -------- -------- Net income (loss)............................................................. $(168,958) $ 51,597 $ 48,301 --------- -------- -------- Other comprehensive income (loss), before tax: Unrealized holding gains (losses) on investments arising during period: Unrealized holding gains on investments.................................... 80,067 54,155 61,487 Adjustment to value of business acquired................................... (1,786) (5,914) (3,400) Adjustment to deferred insurance acquisition costs......................... (15,344) (1,050) (230) --------- -------- -------- Total unrealized holding gains on investments arising during period............................................................... 62,937 47,191 57,857 --------- -------- -------- Less reclassification adjustments for items included in net income (loss): Adjustment for (gains) losses included in realized investment gains (losses)................................................................. 19,394 (9,203) (24,583) Adjustment for amortization of premium on fixed maturities included in net investment income.................................................... (9,400) (5,732) (4,538) Adjustment for (gains) losses included in amortization of value of business acquired........................................................ (331) (1,705) 214 Adjustment for (gains) losses included in amortization of insurance acquisition costs........................................................ (4,185) 6,395 13 --------- -------- -------- Total reclassification adjustments for items included in net income (loss)..................................................... 5,478 (10,245) (28,894) --------- -------- -------- Other comprehensive income, before related income tax expense (benefit)................................................................... 57,459 57,436 86,751 Related income tax expense (benefit).......................................... 20,001 8,167 (1,350) --------- -------- -------- Other comprehensive income, net of tax.............................. 37,458 49,269 88,101 --------- -------- -------- Comprehensive income (loss)......................................... $(131,500) $100,866 $136,402 ========= ======== ========
See accompanying notes to consolidated financial statements. 61 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
Year Ended December 31, ------------------------------ 2002 2001 2000 --------- -------- --------- Capital stock, beginning and end of period........................ $ 2,500 $ 2,500 $ 2,500 --------- -------- --------- Additional paid-in capital, beginning of period................... 804,347 804,347 804,347 Capital contributions from parent................................. 37,286 -- -- --------- -------- --------- Additional paid-in-capital, end of period......................... 841,633 804,347 804,347 --------- -------- --------- Accumulated other comprehensive income (loss), beginning of period 16,551 (32,718) (120,819) Other comprehensive income, net of tax............................ 37,458 49,269 88,101 --------- -------- --------- End of period.................................................. 54,009 16,551 (32,718) --------- -------- --------- Retained deficit, beginning of period............................. (5,405) (44,002) (56,023) Net income (loss)................................................. (168,958) 51,597 48,301 Dividends to parent............................................... -- (13,000) (36,280) --------- -------- --------- End of period.................................................. (174,363) (5,405) (44,002) --------- -------- --------- Total stockholder's equity................................. $ 723,779 $817,993 $ 730,127 ========= ======== =========
See accompanying notes to consolidated financial statements. 62 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ----------------------------------- 2002 2001 2000 ----------- ----------- --------- Cash flows from operating activities Net income (loss).................................................. $ (168,958) $ 51,597 $ 48,301 Reconciliation of net income (loss) to net cash from operating activities: Realized investment (gains) losses............................. 779 (20,660) 8,277 Interest credited and other charges............................ 188,926 169,084 142,344 Deferred insurance acquisition costs, net...................... (61,569) (148,150) (81,377) Amortization of value of business acquired..................... 20,751 15,606 19,926 Amortization of goodwill....................................... -- 12,744 12,744 Goodwill impairment............................................ 156,511 -- -- Amortization of discount and premium on investments............ 9,400 5,731 4,538 Amortization of other intangible assets........................ 759 961 368 Deferred income taxes.......................................... 2,458 16,927 (25,930) Net change in current federal income taxes..................... 2,634 (5,063) (18,593) Benefits and premium taxes due related to separate account business-owned life insurance................................ 11,521 (6,392) (61,476) Funds withheld account transfer................................ (222,500) -- -- Cumulative effect of accounting change, net of tax............. 21,907 -- -- Change in premium suspense..................................... (43,625) 41,938 657 Other, net..................................................... (13,116) (36,818) 41,720 ----------- ----------- --------- Net cash flow from operating activities..................... (94,122) 97,505 91,499 ----------- ----------- --------- Cash flows from investing activities Cash from investments sold or matured: Fixed maturity securities held to maturity..................... 198,824 281,664 170,465 Fixed maturity securities sold prior to maturity............... 2,307,588 1,331,168 589,933 Equity securities.............................................. 17,435 -- 1,271 Mortgage loans, policy loans and other invested assets......... 76,382 60,495 73,177 Cost of investments purchased or loans originated: Fixed maturity securities...................................... (2,757,149) (1,481,699) (569,652) Equity securities.............................................. (4,244) -- (1,264) Mortgage loans, policy loans and other invested assets......... (48,722) (41,395) (47,109) Investment in subsidiaries..................................... -- (2,690) (4,899) Short-term investments, net........................................ 159,105 (143,205) 26,491 Net change in receivable and payable for securities transactions... 12,928 6,186 (4,786) Net change in other assets......................................... 2,440 2,248 (5,141) ----------- ----------- --------- Net cash from investing activities.......................... (35,413) 12,772 228,486 ----------- ----------- --------- Cash flows from financing activities Policyholder account balances: Deposits....................................................... 601,045 680,106 608,363 Withdrawals.................................................... (505,674) (733,521) (881,888) Capital contributions.............................................. 37,286 -- -- Dividends to parent................................................ -- (13,000) (36,280) Cash overdrafts.................................................... (13,060) (20,589) 11,906 ----------- ----------- --------- Net cash from financing activities.......................... 119,597 (87,004) (297,899) ----------- ----------- --------- Net increase (decrease) in cash............................. (9,938) 23,273 22,086 Cash, beginning of period............................................. 57,374 34,101 12,015 ----------- ----------- --------- Cash, end of period................................................... $ 47,436 $ 57,374 $ 34,101 =========== =========== =========
See accompanying notes to consolidated financial statements. 63 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 Life Insurance Company of New York ("ZLICONY"), formerly Zurich Kemper Life Insurance Company of New York, a 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 also owns the PMG group of companies ("PMG"), acquired in 2000, and Investors Brokerage Services, Inc. The Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"), a non-operating holding company. Kemper is a wholly-owned subsidiary of Zurich Holding Company of America ("ZHCA"), a holding company. ZHCA 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 2001 and 2000 consolidated financial statements in order for them to conform to the 2002 presentation. The accompanying consolidated financial statements of the Company as of and for the years ended December 31, 2002, 2001 and for the three years in the period ended December 31, 2002, have been prepared in conformity with Accounting Principles Generally Accepted in the United States of America ("GAAP"). Estimates The preparation of financial statements in conformity with GAAP 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 and equity securities, the valuation allowance for deferred income taxes, the calculation of fair value disclosures for certain financial instruments and future policy benefit reserves. Goodwill and other intangibles In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 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 no longer be amortized, but be tested, at least annually, for impairment at the reporting unit level. In conjunction with management's focus on line of business operations, the Company's goodwill was tested for impairment at the life insurance and annuities operating segment level based on the guidance under SFAS 142. As a result of the testing performed, an impairment of $21.9 million was recorded in the annuities segment as of June 30, 2002 due to more conservative growth assumptions based on the market's volatility over the last few years. The fair value of that segment was estimated using expected present value of future cash flows for both current business in-force and future production estimates. 64 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In September 2002, the board of directors of the Company's indirect, 100% shareholder, Zurich Financial Services Group ("the Group"), approved a plan designed to improve the profitability of the Group and its subsidiaries. Under this plan, the Group considered a number of strategic options, the completion of which could have a significant impact on the recoverability of the carrying value of certain assets. Among the assets affected by the approval of the plan is the goodwill associated with the 1996 acquisition of the Zurich Life companies by ZFS. The Company filed its Form 10-Q for the period ended June 30, 2002 prior to the Group board's action. As a result, the Company recorded the complete write-down of the remaining goodwill of $156.5 million in the third quarter of 2002, the period during which the Company became aware of this action by the Group's board of directors. Other definite-lived, intangible assets of $7.6 million, recorded in 2001 and 2000 in connection with the purchase of PMG, continue to be 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 business acquired. The estimated amortization and accretion of interest for the value of business acquired for each of the years through December 31, 2007 are as follows:
Projected Beginning Accretion Of Ending Year Ended December 31, Balance Amortization Interest Balance ----------------------- --------- ------------ ------------ ------- (in thousands) 2000 (actual)..... $113,111 $(26,805) $6,879 $93,185 2001 (actual)..... 93,185 (21,394) 5,788 77,579 2002 (actual)..... 77,579 (24,464) 3,713 56,828 2003.............. 56,828 (12,977) 3,073 46,924 2004.............. 46,924 (11,795) 2,479 37,608 2005.............. 37,608 (9,585) 2,000 30,023 2006.............. 30,023 (8,321) 1,584 23,286 2007.............. 23,286 (7,624) 1,201 16,863
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 $3.2 million as of December 31, 2002 and by $1.8 million as of December 31, 2001. This adjustment increased the value of business acquired by $2.4 million as of December 31, 2000. Accumulated other comprehensive income decreased by approximately $2.1 million as of December 31, 2002 and $1.2 million as of December 31, 2001, due to this adjustment and increased accumulated other comprehensive income by approximately $1.6 million as of December 31, 2000. Life insurance revenue and expenses Revenue for annuities, variable life insurance and interest-sensitive life insurance products consists of investment income and realized capital gains, policy charges such as mortality, expense and surrender charges, 65 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and expense loads for premium taxes on certain contracts. Expenses consist of benefits in excess of account balances and interest credited to contracts, policy maintenance costs and amortization of deferred insurance acquisition costs and value of business acquired. 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 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 to cover the present value of future benefits for policies that were deemed to have elected annuitization. In accordance with current GAAP guidance, no additional liabilities for future policy benefits related to guaranteed living benefits have been established. 66 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Current interest rates credited during the contract accumulation period range from 0.5 percent to 12.0 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.5 percent. For contracts that have annuitized, interest rates used in determining the present value of future payments range principally from 2.5 percent to 4.5 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 6.0 percent to 7.3 percent over 20 years. Guaranty fund assessments The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 2002 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 securities 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, net of any applicable reserves or write-downs. 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 and unrealized losses are tax benefited. However, the tax benefits from unrealized losses are offset by a valuation allowance, where appropriate. 67 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Derivative instruments The Company is party to an interest rate swap agreement with Zurich Capital Markets, Inc. ("ZCM"), an affiliated counterparty. The Company invests primarily in fixed rate investments. A floating rate funding agreement was reinsured in 2000 and the Company subsequently entered into an interest rate swap agreement. 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 2002, the Company paid $3.8 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 December 31, 2002, and 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 $8.1 million and $5.0 million, respectively. 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 will file a consolidated federal income tax return with Zurich Holding Company of America, beginning with the 2002 tax year. 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 received a federal income tax refund of $2.7 million in 2002 and paid taxes of $19.8 million and $43.9 million directly to the United States Treasury Department during 2001 and 2000, respectively. 68 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (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, 2002 U.S. treasury securities and obligations of U.S. government agencies and authorities..................... $ 265,400 $ 260,287 $ 5,140 $ (26) Obligations of states and political subdivisions, special revenue and nonguaranteed....................... 19,873 19,073 800 -- Debt securities issued by foreign Governments............. 4,793 4,506 287 -- Corporate securities...................................... 2,137,716 2,062,712 90,030 (15,026) Mortgage and asset-backed securities...................... 992,990 967,342 35,972 (10,324) ---------- ---------- -------- -------- Total fixed maturity securities....................... $3,420,773 $3,313,920 $132,229 $(25,376) ========== ========== ======== ======== Equity securities......................................... $ 58,615 $ 52,627 $ 5,988 $ -- ========== ========== ======== ======== 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) ========== ========== ======== ======== Equity securities......................................... $ 67,731 $ 65,473 $ 2,261 $ -- ========== ========== ======== ========
The carrying value and amortized cost of fixed maturity investments, by contractual maturity at December 31, 2002, 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..................................................... $ 63,112 $ 62,223 Over one year through five years..................................... 806,702 774,553 Over five years through ten years.................................... 1,312,277 1,265,409 Over ten years....................................................... 245,692 244,393 Securities not due at a single maturity date, primarily mortgage- and asset-backed securities(1)......................................... 992,990 967,342 ---------- ---------- Total fixed maturity securities............................... $3,420,773 $3,313,920 ========== ==========
- -------- (1) Weighted average maturity of 3.4 years. 69 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Proceeds from sales of investments in fixed maturity securities prior to maturity were $2,307.6 million, $1,331.2 million and $589.9 million during 2002, 2001 and 2000, respectively. Gross gains of $81.2 million, $32.9 million and $8.6 million and gross losses, including write-downs of fixed maturity securities, of $65.8 million, $28.6 million and $20.8 million were realized on sales and maturities in 2002, 2001 and 2000, respectively. Pre-tax write-downs amounted to $18.5 million, $15.5 million and $11.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. At December 31, 2002, the Company held $102.3 million in mortgage loan investments in Delta Wetlands, which exceeded 10 percent of the Company's stockholder's equity at December 31, 2002. Excluding agencies of the U.S. government, no other individual investment exceeded 10 percent of the Company's stockholder's equity at December 31, 2002. At December 31, 2002, securities carried at approximately $5.3 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. The Company recorded write-downs totaling $9.5 million and $8.6 million in 2002 and 2001, respectively, related to their securitized financial assets. The Company did not have any write-downs in 2000 related to their securitized financial assets. 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 recorded fixed maturity write-downs on other than securitized financial assets of $9.0 million, $6.9 million and $11.4 million in 2002, 2001 and 2000, respectively. 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; 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 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 $177.7 million real estate portfolio at December 31, 2002 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 2002 and 2001, total impaired real estate-related loans were as follows:
December 31, December 31, 2002 2001 ------------ ------------ (in millions) Impaired loans without reserves--gross $ 4.8 $ 7.3 Impaired loans with reserves--gross... 10.8 11.3 ----- ----- Total gross impaired loans..... 15.6 18.6 Reserves related to impaired loans.... (2.7) (2.7) Write-downs related to impaired loans. (3.5) (3.5) ----- ----- Net impaired loans............. $ 9.4 $12.4 ===== =====
70 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company had an average balance of $13.6 million and $65.3 million in impaired loans for 2002 and 2001, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 2002 and 2001, loans on nonaccrual status, before reserves and write-downs, amounted to $10.6 million and $13.0 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. Net Investment Income The sources of net investment income were as follows:
2002 2001 2000 -------- -------- -------- (in thousands) Interest on fixed maturity securities............ $186,034 $214,505 $223,964 Dividends on equity securities................... 4,508 4,598 4,573 Income from short-term investments............... 1,479 2,332 3,433 Income from mortgage loans....................... 15,598 30,771 6,091 Income from policy loans......................... 23,189 19,394 20,088 Income from other real estate-related investments 13 27 99 Income from other loans and investments.......... 951 646 2,455 -------- -------- -------- Total investment income................... 231,772 272,273 260,703 Investment expense............................... 3,442 2,854 3,233 -------- -------- -------- Net investment income..................... $228,330 $269,419 $257,470 ======== ======== ========
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 and the project's inclusion by the CALFED Bay-Delta Program ("CALFED") as a potential early implementation project. CALFED is a collaborative effort of state and federal agencies working to find solutions for California's water management issues. Taken together, these facts supported, 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 the loans were on non-accrual status. The release of the general reserve allowance generated a realized gain of $16.4 million in 2001. 71 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net Realized Investment Gains (Losses) Net realized investment gains (losses) for the years ended December 31, 2002, 2001 and 2000, were as follows:
2002 2001 2000 -------- ------- -------- (in thousands) Real estate-related..................................... $ 961 $16,081 $ 1,711 Fixed maturity securities............................... 15,444 4,284 (12,185) Equity securities....................................... 346 262 245 Other................................................... (17,530) 33 1,952 -------- ------- -------- Realized investment gains (losses) before income tax expense (benefit).................................. (779) 20,660 (8,277) Income tax expense (benefit)............................ (273) 7,231 (2,897) -------- ------- -------- Net realized investment gains (losses)........... $ (506) $13,429 $ (5,380) ======== ======= ========
The other losses, net, for 2002 consist primarily of a write-down on a leveraged lease that covers two aircraft. The aircraft are leased by United Airlines ("UAL") and were written down to zero subsequent to UAL filing Chapter 11 bankruptcy in the fourth quarter of 2002. The pre-tax write-down totaled $17.5 million. 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, 2002, 2001 and 2000 were as follows:
December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ (in thousands) Fixed maturity securities................... $ 69,432 $69,970 $89,421 Equity and other securities................. 641 (879) 1,187 Adjustment to deferred insurance acquisition costs..................................... (11,159) (7,446) (243) Adjustment to value of business acquired.... (1,455) (4,209) (3,614) -------- ------- ------- Unrealized gain (loss) before income tax expense (benefit)...................... 57,459 57,436 86,751 Income tax expense (benefit)................ 20,001 8,167 (1,350) -------- ------- ------- Net unrealized gain (loss) on investments........................ $ 37,458 $49,269 $88,101 ======== ======= =======
Income tax expense related to the change in unrealized gains for the years ended December 31, 2002, 2001 and 2000 was $24.4 million, $12.2 million and $0, respectively. The income tax benefit related to the adjustment to deferred insurance acquisition costs for the years ended December 31, 2002, 2001 and 2000 was $3.9 million, $2.6 million and $0.1 million, respectively. The income tax benefit related to the adjustment to value of business acquired for the years ended December 31, 2002, 2001 and 2000 was $0.5 million, $1.5 million and $1.3 million, respectively. (4) 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. 72 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Approximately 16.2 percent of the investment-grade fixed maturity securities at December 31, 2002 were residential mortgage-backed securities, down from 22.0 percent at December 31, 2001. Approximately 6.3 percent of the investment-grade fixed maturity securities at December 31, 2002 were commercial mortgage-backed securities, compared with 5.7 percent at December 31, 2001. The residential mortgage-backed securities 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 7.3 percent and 9.6 percent of the investment-grade fixed maturity securities at December 31, 2002 and 2001, respectively, consisted of asset-backed securities. The majority of investments in asset-backed securities were backed by home equity loans (34.7%), manufactured housing loans (17.7%), collateralized loan and bond obligations (15.4%) and automobile loans (13.1%). 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, 2002 was as follows: California (58.0%), Washington (9.4%), Colorado (7.6%) and Illinois (6.6%). The property type distribution of a majority of the real estate portfolio as of December 31, 2002 was as follows: land (57.0%), hotels (31.4%) and office (6.6%). 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. At December 31, 2002, loans to a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company, a former affiliate, constituted approximately $102.3 million of the Company's real estate portfolio. Kemper's interest in the MLP is 75.0 percent at December 31, 2002. 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 subsequent periods and the general reserve allowance related to these loans was released. At December 31, 2002, MLP-related commitments accounted for approximately $0.2 million of the Company's off-balance-sheet legal commitments. At December 31, 2002, 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 73 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $60.0 million of the Company's real estate portfolio. The Nesbitt ventures consist of nine hotel properties and one retail property. At December 31, 2002, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 2002, the Company carried a valuation reserve of $0.6 million for one of these properties as its estimated fair value decreased below the debt supported by the property. At December 31, 2002, a loan to a joint venture amounted to $11.8 million. This affiliated mortgage loan was on an office property located in Illinois and owned by an affiliate, Zurich North America. At December 31, 2002, 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 $4.9 million at December 31, 2002 and consisted of mortgage loans on unzoned lots located in Hawaii. These properties are not currently producing income and the loans are on non-accrual. All zoned properties were sold by March of 2001. The Company is currently pursuing an out of court settlement with the City of Honolulu for the down zoning of certain unzoned properties. If a settlement is not reached, the trial will begin in 2003. The Company is holding the other unzoned properties for future zoning and sales. The Company anticipates that it could be a number of years until the Company obtains zoning to allow development or completely disposes of all its investment in Hawaii. At December 31, 2002, off-balance-sheet legal commitments related to Hawaiian properties totaled $4.0 million. At December 31, 2002, 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, 2002. (5) Income Taxes Income tax expense (benefit) was as follows for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ------- ------- -------- (in thousands) Current......... $(4,835) $11,228 $ 28,274 Deferred........ 2,458 16,926 (27,027) ------- ------- -------- Total..... $(2,377) $28,154 $ 1,247 ======= ======= ========
Additionally, the deferred income tax expense (benefit) related to items included in other comprehensive income was as follows for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ------- ------- ------- (in thousands) Unrealized gains and losses on investments $24,416 $12,246 $ -- Value of business acquired................ (509) (1,473) (1,265) Deferred insurance acquisition costs...... (3,906) (2,606) (85) ------- ------- ------- Total.............................. $20,001 $ 8,167 $(1,350) ======= ======= =======
74 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The actual income tax expense for 2002, 2001 and 2000 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 2002, 2001, and 2000 to income before income tax expense.
2002 2001 2000 -------- ------- -------- (in thousands) Computed expected tax expense........................ $(52,300) $27,913 $ 17,342 Difference between "expected" and actual tax expense: State taxes....................................... 342 (2,302) 737 Goodwill impairment and amortization of other intangibles..................................... 55,045 4,797 4,589 Dividend received deduction....................... (2,220) -- (1,191) Foreign tax credit................................ -- (15) (214) Change in valuation allowance..................... -- -- (15,201) Recapture of affiliated reinsurance............... -- -- (4,599) Prior year tax settlements........................ (3,594) (2,577) -- Other, net........................................ 350 338 (216) -------- ------- -------- Total actual tax expense...................... $ (2,377) $28,154 $ 1,247 ======== ======= ========
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 related to the recapture of affiliated reinsurance 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. 75 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, 2002 2001 ------------ ------------ (in thousands) Deferred federal tax assets: Deferred insurance acquisition costs ("DAC Tax").......... $141,338 $135,307 Unrealized losses on investments.......................... -- -- Life policy reserves...................................... 82,584 90,870 Unearned revenue.......................................... 56,986 55,574 Real estate-related....................................... -- -- Other investment-related.................................. 13,365 12,646 Other..................................................... 6,131 3,349 -------- -------- Total deferred federal tax assets..................... 300,404 297,746 Valuation allowance....................................... -- -- -------- -------- Total deferred federal tax assets after valuation allowance........................................... 300,404 297,746 -------- -------- Deferred federal tax liabilities: Value of business acquired................................ 13,439 24,608 Deferred insurance acquisition costs...................... 156,042 135,317 Depreciation and amortization............................. 13,142 21,165 Other investment-related.................................. 4,848 7,239 Unrealized gains on investments........................... 35,966 12,246 Other..................................................... 3,739 1,483 -------- -------- Total deferred federal tax liabilities................ 227,176 202,058 -------- -------- Net deferred federal tax assets.............................. $ 73,228 $ 95,688 ======== ========
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. (6) Related-Party Transactions The Company received capital contributions from Kemper totaling $37.3 million in 2002 and paid cash dividends of $13.0 million and $20.0 million to Kemper during 2001 and 2000, 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, 2002 and 2001, joint venture mortgage loans totaled $114.1 million and $104.3 million, respectively, and during 2002, 2001 and 2000, the Company earned interest income on these joint venture loans of $10.4 million, $25.4 million and $0.8 million, respectively. 76 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"), permits 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 2002, 2001 and 2000 amounted to $29.9 million, $27.4 million and $23.3 million, respectively. The Company also paid to Kemper real estate subsidiaries fees of $0.4 million, $0.5 million and $0.6 million in 2002, 2001 and 2000, respectively, related to the management of the Company's real estate portfolio. The Company has a service agreement with Deutsche Investment Management Americas, Inc. ("DIM"), formerly Zurich Scudder Investments, Inc. ("ZSI"), a subsidiary of Zurich at December 31, 2001. DIM provides investment services, including purchases or sales of securities, under the supervision of the Investment Committee of the Company. On September 24, 2001, ZFS announced that it would sell 100% of its ownership in ZSI to Deutsche Bank in a transaction valued at $2.5 billion. The sale was completed on April 5, 2002. This transaction did not include Scudder's United Kingdom operations, Threadneedle Investments. At December 31, 2002 and 2001, the Company reported the following amounts due from or (to) related parties:
December 31, December 31, 2002 2001 ------------ ------------ ZLICA................................... $ 17,979 $ 640,705 Zurich Insurance Company--Bermuda Branch -- 1,131,138 Other................................... 1,017 96,037 ------------ ----------- Receivable from related parties...... $ 18,996 $ 1,867,880 ============ =========== FKLA.................................... $ (3,536,310) $(2,064,245) Zurich Direct........................... (52,607) (83,572) Zurich Insurance Company--Bermuda Branch (16,354,306) -- Other................................... (108,000) (1,859,277) ------------ ----------- Payable to related parties........... $(20,051,223) $(4,007,094) ============ =========== Net payable to related parties....... $(20,032,227) $(2,139,214) ============ ===========
Related party receivables and payables are settled each month. 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 Life Insurance Company of New York ("ZLICONY"). ZLICONY 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 for cash to Farmers Group, Inc., which is an affiliated company. The Company held an $11.8 million real estate-related investment in an affiliated mortgage loan at December 31, 2002 and 2001. 77 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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.) (7) Reinsurance As of December 31, 2002 and 2001, the reinsurance recoverable related to fixed-rate annuity liabilities ceded to FLA amounted to $215.3 million and $230.1 million, respectively. The Company cedes 90 percent of all new direct individual life insurance premiums to outside reinsurers. Life reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $2.4 million and $2.1 million as of December 31, 2002 and 2001, respectively. The Company is party to a 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, under the original agreement, retained a portion of such funds in a funds withheld account ("FWA") which is included as a component of benefits and funds payable in the accompanying consolidated balance sheet as of December 31, 2001. During the first quarter of 2002, the Company amended the BOLI reinsurance agreement with ZICBB. Under the amended agreement, the balance in the FWA was transferred to a trust account that acts as security for the reinsurance agreement. On January 25, 2002, approximately $222.5 million in cash was transferred to the trust account. The trust account is not reflected in the Company's consolidated financial statements but is included in ZICBB's financial statements as of December 31, 2002. At December 31, 2002, reserve credits totaling $237.6 million were secured by the trust agreement, which was supported by cash and invested assets with a fair value of approximately $252.6 million. The net amount at risk of the guaranteed minimum death benefit and guaranteed retirement income benefit on certain new variable annuity contracts issued between March 1, 1997 and April 30, 2000 were ceded to outside reinsurers. As of December 31, 2002 and 2001, the reinsurance recoverable related to reinsuring the net amount at risk on these contracts amounted to $24.7 million and $8.3 million, respectively. 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 January 2003, the specific annuities that comprised the block of business ceded to ZICBB were surrendered. Approximately $5.0 million in surrender charges collected on these specific annuities was paid to ZICBB at the end of February 2003, as the final settlement payment related to this reinsurance agreement. 78 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, ---------------------------- 2002 2001 2000 -------- -------- -------- Face amount in force........... $ 85,592 $ 85,564 $ 85,358 ======== ======== ======== Net amount at risk ceded....... $(75,288) $(76,283) $(78,169) ======== ======== ======== Cost of insurance charges ceded $ 156.5 $ 168.1 $ 173.8 ======== ======== ======== Funds withheld account......... $ -- $ 236.1 $ 228.8 ======== ======== ========
The Company's FWA supported reserve credits on reinsurance ceded on the BOLI product at December 31, 2001 and 2000. At December 31, 2002, the trust supports reserve credits on the reinsurance ceded. (8) 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 as of December 31, 2002 and 2001 amounted to $1.4 million and $1.3 million, respectively. 79 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The discount rate used in determining the allocated postretirement benefit obligation was 6.5 percent and 7.0 percent for 2002 and 2001, respectively. The assumed health care trend rate used was based on projected experience for 2002, 7.3 percent for 2003, gradually declining to 6.1 percent by the year 2007 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, 2002 and 2001 by $159 thousand and $142 thousand, respectively. (9) 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 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. (10) Financial Instruments--Off-Balance-Sheet Risk At December 31, 2002, 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. (11) 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 80 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, DIM. 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. 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 and where no observable price is available, by appraised value. 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 $4.8 million and $2.8 million in 2002 and 2001, 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, 2002 and 2001. 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. 81 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The carrying values and estimated fair values of the Company's financial instruments at December 31, 2002 and 2001 were as follows:
December 31, 2002 December 31, 2001 --------------------- --------------------- Carrying Carrying Value Fair Value Value Fair Value ---------- ---------- ---------- ---------- (in thousands) Financial instruments recorded as assets: Fixed maturity securities........................... $3,420,773 $3,420,773 $3,094,560 $3,094,560 Cash and short-term investments..................... 47,436 47,436 216,479 216,479 Mortgage loans and other real estate-related assets. 177,691 177,691 176,440 176,440 Policy loans........................................ 223,888 223,888 239,787 239,787 Equity securities................................... 58,615 58,615 67,731 67,731 Other invested assets............................... 2,491 2,491 20,799 20,799 Financial instruments recorded as liabilities: Life policy benefits, excluding term life reserves.. 3,625,384 3,565,147 3,376,604 3,324,417 Funds withheld account.............................. -- -- 236,134 236,134
(12) Stockholder's Equity--Retained Earnings The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to stockholders without prior approval of regulatory authorities is restricted. In 2003, the Company cannot pay any dividends without Illinois Department of Insurance approval. In 2002, the Company did not pay dividends. The Company paid cash dividends of $13.0 million and $20.0 million to Kemper during 2001 and 2000, 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:
2002 2001 2000 -------- -------- -------- (in thousands) Net income (loss)............ $(84,871) $(71,854) $ 19,975 ======== ======== ======== Statutory capital and surplus $312,653 $332,598 $397,423 ======== ======== ========
The Company's statutory net loss reflects the market downturn and its impact on reserves for guaranteed death and living benefits consistent with statutory reserving methodology. As of January 1, 2001, the Company adopted the Codification of Statutory Accounting Principles ("Codification") guidance. The National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual is the NAIC's primary guidance on statutory accounting. Codification provides guidance for areas where statutory accounting had been silent and changed current statutory accounting in some areas. The Illinois Insurance Department adopted Codification, 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 Codification. 82 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) 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) 2002 Operating Summary Revenue.................................. $ 92,322 $105,170 $ 92,308 $ 90,962 $ 380,762 ======== ======== ========= ======== ========= Net operating income, excluding realized gains, before cumulative effect of accounting change...................... $ 8,109 $ 394 $(169,309) $ 14,261 $(146,545) ======== ======== ========= ======== ========= Net operating income (loss), excluding realized gains......................... $(13,798) $ 394 $(169,309) $ 14,261 $(168,452) Net realized investment gains (losses)... (841) 7,613 1,037 (8,315) (506) -------- -------- --------- -------- --------- Net income (loss).................... $(14,639) $ 8,007 $(168,272) $ 5,946 $(168,958) ======== ======== ========= ======== ========= 2001 Operating Summary Revenue.................................. $ 91,072 $ 98,360 $ 85,013 $123,852 $ 398,297 ======== ======== ========= ======== ========= Net operating income (loss), excluding realized gains (losses)................ $ 8,183 $ (1,364) $ (6,443) $ 37,792 $ 38,168 Net realized investment gains (losses)... 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 ======== ======== ========= ======== =========
(14) Operations by Business Segment The Company, along with FKLA, ZLICA and FLA, operate under the trade name Zurich Life, formerly Zurich Kemper Life. Prior to 2002, Zurich Life was organized by Strategic Business Unit ("SBU"). Each SBU concentrated on specific distribution channels. However, the SBUs were 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 and/or through more than one distribution channel. In 2002, the Company's management team shifted its financial focus from SBU performance to a line of business performance within each legal entity. The SBUs are now primarily responsible for market management, including distribution management, product design, sales and marketing. The Company has two primary operating segments, life insurance and annuities, that offer different types of products and services. These two operating segments reflect the way the Company manages its operations and makes business decisions. Premiums received from the sale of annuity products and the majority of our life insurance products are treated as deposit-type funds and are not recorded as revenue within the consolidated statements of operations. 83 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) However, revenues for both the life insurance and annuity segments are generated from investing these deposit-type funds. For universal life insurance products and fixed annuity products, deposits are primarily invested in fixed maturity securities and the Company earns investment income. Variable life insurance deposits and variable annuity deposits are transferred to the separate account and invested in underlying investment funds that invest in stocks and bonds. The Company receives cost of insurance charges and other separate account fees as revenues from this business. In addition, the Company receives premium tax and DAC Tax expense loads from certain contractholders. In the following table, the Company uses the caption "net operating income" as an operating measure of segment performance. Net operating income is calculated by deducting net realized investment gains or losses, net of related income taxes, and the cumulative effect of a change in accounting principle, net of tax, from net income. Net realized investment gains or losses are excluded from net operating income because they can, in part, be discretionary and are not indicative of operational trends. Prior period information has been restated to conform to the new composition of our segments.
Twelve Months Ended Twelve Months Ended December 31, 2002 December 31, 2001 ----------------------------------- --------------------------------- Life Annuity Total Life Annuity Total ---------- ---------- ----------- ---------- ---------- ----------- (in thousands) Total operating revenue............................... $ 80,573 $ 300,968 $ 381,541 $ 78,196 $ 299,441 $ 377,637 ---------- ---------- ----------- ---------- ---------- ----------- Operating income (loss) before tax expense, goodwill impairment and cumulative effect of accounting change............................................... $ 13,663 $ (5,800) $ 7,863 $ 15,721 $ 43,370 $ 59,091 Income tax expense (benefit) on operations............ 5,238 (7,342) (2,104) 7,128 13,795 20,923 Goodwill impairment................................... (32,832) (123,679) (156,511) -- -- -- ---------- ---------- ----------- ---------- ---------- ----------- Net operating income (loss) before cumulative effect of accounting change................................. (24,407) (122,137) (146,544) 8,593 29,575 38,168 Cumulative effect of accounting change, net of tax.... -- (21,907) (21,907) -- -- -- ---------- ---------- ----------- ---------- ---------- ----------- Net operating income (loss)........................... $ (24,407) $ (144,044) $ (168,451) $ 8,593 $ 29,575 $ 38,168 ========== ========== =========== ========== ========== =========== Goodwill.............................................. $ -- $ -- $ -- $ 6,601 $ 171,817 $ 178,418 ---------- ---------- ----------- ---------- ---------- ----------- Total assets.......................................... $9,840,840 $8,825,442 $18,666,282 $8,841,469 $9,248,359 $18,089,828 ========== ========== =========== ========== ========== =========== Total reserve for policyholder benefits in the general account.............................................. $ 808,389 $3,303,100 $ 4,111,489 $ 628,899 $3,005,262 $ 3,634,161 Total Separate Account liabilities.................... 8,848,140 4,699,236 13,547,376 7,696,013 5,412,740 13,108,753 ---------- ---------- ----------- ---------- ---------- ----------- Total reserve for policyholder benefits............... $9,656,529 $8,002,336 $17,658,865 $8,324,912 $8,418,002 $16,742,914 ========== ========== =========== ========== ========== ===========
84 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Twelve Months Ended December 31, 2000 ---------------------------------- Life Annuity Total ---------- ---------- ----------- (in thousands) Total operating revenue............................... $ 90,913 $ 278,274 $ 369,187 ---------- ---------- ----------- Operating income (loss) before tax expense, goodwill impairment and cumulative effect of accounting change............................................... $ 23,820 $ 34,005 $ 57,825 Income tax expense (benefit) on operations............ 4,171 (27) 4,144 ---------- ---------- ----------- Net operating income (loss) before cumulative effect of accounting change................................. 19,649 34,032 53,681 Cumulative effect of accounting change, net of tax.... -- -- -- ---------- ---------- ----------- Net operating income (loss)........................... $ 19,649 $ 34,032 $ 53,681 ========== ========== =========== Goodwill.............................................. $ 5,764 $ 185,399 $ 191,163 ---------- ---------- ----------- Total assets.......................................... $8,077,697 $7,928,946 $16,006,643 ========== ========== =========== Total reserve for policyholder benefits in the general account.............................................. $ 691,290 $2,896,850 $ 3,588,140 Total Separate Account liabilities.................... 7,009,309 4,170,330 11,179,639 ---------- ---------- ----------- Total reserve for policyholder benefits............... $7,700,599 $7,067,180 $14,767,779 ========== ========== ===========
(15) Subsequent Event In the first quarter of 2003, the specific annuities that comprised the block of business ceded to ZICBB were surrendered. Approximately $5.0 million in surrender charges collected on these specific annuities was paid to ZICBB at the end of February, 2003, as the final settlement payment related to this reinsurance agreement. (16) Effects of New Accounting Pronouncements In January, 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities. While there are a number of criteria that determine the effective date of FIN 46, the Company has concluded that it does not have any variable-interest entities. 85 APPENDIX A STATE PREMIUM TAX CHART
Rate of Tax ----------- Qualified Non-Qualified State Plans Plans - ----- ----- ----- California ............................... 0.50%* 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. A-1 PROSPECTUS FOR KEMPER INVESTORS LIFE INSURANCE COMPANY - -------------------------------------------------------------------------------- INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS - -------------------------------------------------------------------------------- Farmers Variable Annuity I Issued By KILICO VARIABLE ANNUITY SEPARATE ACCOUNT and KEMPER INVESTORS LIFE INSURANCE COMPANY This Prospectus describes Variable, Fixed 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. 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. The Contract is currently not being issued. You may allocate purchase payments to one or more of the variable options, or the Fixed Account Option, or the Market Value Adjustment ("MVA") option in states where a MVA is authorized. The MVA Option may not be available in all states. The Contract currently offers twelve investment options, each of which is a Subaccount of KILICO Variable Annuity Separate Account. Currently, you may choose among the following Funds or Portfolios: .. Franklin Templeton Variable Insurance Products Trust: .. Templeton Developing Markets Securities Fund (Class 2 Shares) .. Janus Aspen Series: .. Janus Aspen Capital Appreciation .. PIMCO Variable Insurance Trust: .. PIMCO Foreign Bond (Administrative Class) .. PIMCO Low Duration (Administrative Class) .. Scudder Variable Series I: .. Scudder Bond (Class A Shares) .. Scudder Growth and Income (Class A Shares) .. Scudder International (Class A Shares) .. Scudder Money Market (Class A Shares) .. Scudder Variable Series II: .. Scudder Government Securities (Class A Shares) .. Scudder High Income (formerly Scudder High Yield) (Class A Shares) .. Scudder Small Cap Growth (Class A Shares) .. SVS Dreman High Return Equity (Class A Shares) Subaccounts and Portfolios may be added or deleted in the future. Contract Values allocated to any of the Subaccounts vary, reflecting the investment experience of the selected Subaccounts. Contract Values allocated to the Fixed Account or one or more Guarantee Periods of the Market Value Adjustment Option accumulate on a fixed basis. The Contracts are not insured by the FDIC. They are obligations of the issuing insurance company and are 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 35. 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, 2003. 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.................................................. 6 KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS........... 9 FIXED ACCOUNT OPTION................................................. 13 THE CONTRACTS........................................................ 14 CONTRACT CHARGES AND EXPENSES........................................ 20 THE ANNUITY PERIOD................................................... 23 FEDERAL INCOME TAXES................................................. 26 DISTRIBUTION OF CONTRACTS............................................ 33 VOTING RIGHTS........................................................ 33 REPORTS TO CONTRACT OWNERS AND INQUIRIES............................. 33 DOLLAR COST AVERAGING................................................ 34 SYSTEMATIC WITHDRAWAL PLAN........................................... 34 EXPERTS.............................................................. 35 LEGAL MATTERS........................................................ 35 SPECIAL CONSIDERATIONS............................................... 35 AVAILABLE INFORMATION................................................ 35 LEGAL PROCEEDINGS.................................................... 35 TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION............... 35 FINANCIAL STATEMENTS................................................. 36 CONTRACTS ISSUED BEFORE MAY 1, 2002.................................. 36 ANNUAL REPORTS AND OTHER DOCUMENTS................................... 38 APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT................. 39 APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT. 41
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. Accumulation Unit--A unit of measurement used to determine the value of each Subaccount during the Accumulation Period. Annuitant--The person designated to receive or who is actually receiving annuity payments and upon the continuation of whose life annuity payments involving life contingencies depend. Annuity Date--The date on which annuity payments are to commence. Annuity Option--One of several forms in which annuity payments can be made. Annuity Period--The period starting on the Annuity Date. Annuity Unit--A unit of measurement used to determine the amount of Variable Annuity payments. Beneficiary--The person designated to receive any benefits under a Contract upon the death of the Annuitant or the Owner 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, Fixed and Market Value Adjusted 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 Separate Account Contract Value, Accumulated Guarantee Period Value and Fixed Account Contract Value. Contract Year--Period between anniversaries of the Contract's Date of Issue. Contract Quarter--Periods between quarterly anniversaries of the Contract's Date of Issue. Contribution Year--Each one year period following the date a Purchase Payment is made. Date of Issue--The date on which the first Contract Year commences. Fixed Account--The General Account of KILICO to which you may allocate all or a portion of Purchase Payments or Contract Value. We guarantee a minimum rate of interest on Purchase Payments allocated to the Fixed Account. Fixed Account Contract Value--The value of your Contract interest in the Fixed Account. Fixed Annuity--An annuity under which we guarantee the amount of each annuity payment; it does not vary with the investment experience of a Subaccount. Fund or Funds-- Franklin Templeton Variable Insurance Products Trust, Janus Aspen Series, PIMCO Variable Insurance Trust, Scudder Variable Series I and Scudder Variable Series II, including any Portfolios thereunder. General Account--All our assets other than those allocated to any separate account. Guaranteed Interest Rate--The rate of interest we establish for a given Guarantee Period. 1 Guarantee Period--The time when an amount is credited with a Guaranteed Interest Rate. Guarantee Period options may range from one to ten years, at our option. Guarantee Period Value--The value of your Contract interest in a Guarantee Period is the sum of your: (1) Purchase Payment allocated or amount transferred to a Guarantee Period; plus (2) interest credited; minus (3) withdrawals, previously assessed Withdrawal Charges and transfers; and (4) as adjusted for any applicable Market Value Adjustment previously made. Market Adjusted Value--A Guarantee Period Value adjusted by the market value adjustment formula on any date prior to the end of a Guarantee Period. Market Value Adjustment--An adjustment of values under a Guarantee Period in accordance with the market value adjustment formula prior to the end of that Guarantee Period. 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. Non-Qualified Plan Contract--A Contract which does not receive favorable tax treatment under Sections 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--A series of a Fund with its own objective and policies, which represents shares of beneficial interest in a separate portfolio of securities and other assets. Portfolio is sometimes referred to herein as a Fund. Purchase Payments--Amounts paid to us by you or on your behalf. Qualified Plan Contract--A Contract issued in connection with a retirement plan which receives favorable tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal Revenue Code. Separate Account--The KILICO Variable Annuity Separate Account. Separate Account Contract Value--The sum of your Subaccount Values. Subaccounts--The twelve subdivisions of the Separate Account, the assets of which consist solely of shares of the corresponding Portfolios. Subaccount Value--The value of your interest in each Subaccount. Unitholder--The person holding the voting rights with respect to an Accumulation or Annuity Unit. Valuation Date--Each day when the New York Stock Exchange is open for trading, as well as each day otherwise required. 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) in which you have an interest. Withdrawal Charge--The "contingent deferred sales charge" assessed against certain withdrawals of Contract Value in the first seven Contribution Years after a Purchase Payment is made or against certain annuitizations of Contract Value in the first seven Contribution Years after a Purchase Payment is made. Withdrawal Value--Contract Value, plus or minus any applicable Market Value Adjustment, less any premium tax payable if the Contract is being annuitized, minus any Withdrawal Charge applicable to that Contract. 2 SUMMARY Because this is a summary, it does not contain all of the information that may be important. Read the entire Prospectus and Contract before deciding to invest. The Contracts provide for investment on a tax-deferred basis and for payment of annuity benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in this Prospectus. The minimum initial Purchase Payment is $1,000. Subject to certain exceptions, the minimum subsequent Purchase Payment is $500. An allocation to a Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior approval is required for Purchase Payments over $1,000,000. (See "The Contracts," page 14.) Variable accumulations and benefits are provided by crediting Purchase Payments to one or more Subaccounts that you select. Each Subaccount invests in one of the following corresponding Portfolios: . Templeton Developing Markets Securities Fund (Class 2 Shares) . Janus Aspen Capital Appreciation . PIMCO Foreign Bond (Administrative Class) . PIMCO Low Duration (Administrative Class) . Scudder Bond ( Class A Shares) . Scudder Growth and Income (Class A Shares) . Scudder International (Class A Shares) . Scudder Money Market (Class A Shares) . Scudder Government Securities (Class A Shares) . Scudder High Income (formerly Scudder High Yield) (Class A Shares) . Scudder Small Cap Growth (Class A Shares) . SVS Dreman High Return Equity (Class A Shares) Contract Value allocated to the Separate Account varies with the investment experience of the selected Subaccounts. The Fixed Account has fixed accumulations and benefits. We guarantee that Purchase Payments allocated to the Fixed Account earn not less than the minimum guaranteed rate. In our discretion, we may credit interest in excess of the minimum guaranteed rate. (See "Fixed Account Option," page 13.) The MVA Option also provides fixed accumulations. The MVA Option may not be available in all states. The MVA Option is only available during the Accumulation Period. You may allocate amounts to one or more Guarantee Periods. We may offer additional Guarantee Periods at our discretion. For new Contracts, we may limit the number of Guarantee Period options available to three (3). We credit interest daily to amounts allocated to the MVA Option. We declare the rate at our sole discretion. We guarantee amounts allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee Periods you select. These guaranteed amounts are subject to any applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance Charge. We will not change a Guaranteed Interest Rate for the duration of the Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee Periods are set at our discretion. At the end of a Guarantee Period, a new Guarantee Period for the same duration starts, unless you timely elect another Guarantee Period. The interests under the Contract relating to the MVA Option are registered under the Securities Act of 1933 but are not registered under the Investment Company Act of 1940. (See "The MVA Option," page 9.) 3 You bear the investment risk under the Contracts, unless Contract Values are allocated to: . the MVA Option and are guaranteed to receive the Guaranteed Interest Rate, subject to any Market Value Adjustment, or . the Fixed Account Option and are guaranteed to earn not less than the minimum guaranteed rate (see "Fixed Account Option"). Transfers between Subaccounts are permitted before and after annuitization, subject to certain limitations. A transfer from a Guarantee Period is subject to a Market Value Adjustment unless effected within 30 days after the existing Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account. (See "Transfers During the Accumulation Period" and "Transfers During the Annuity Period," pages 17 and 25, respectively.) You may withdraw Contract Value subject to Withdrawal Charges, any applicable market value adjustment and other specified conditions. (See "Withdrawals During the Accumulation Period," page 18.) We do not deduct sales charges from Purchase Payments. Each Contract Year, you may withdraw or surrender the Contract, without Withdrawal Charge, up to the greater of: . the excess of Contract Value over total Purchase Payments subject to Withdrawal Charges, minus prior withdrawals that were previously assessed a Withdrawal Charge, or . 10% of Contract Value. If you withdraw a larger amount, the excess Purchase Payments withdrawn are subject to a Withdrawal Charge. The Withdrawal Charge is: . 7% in the first Contribution Year, . 6% in the second Contribution Year, . 5% in the third and fourth Contribution Years, . 4% in the fifth Contribution Year, . 3% in the sixth Contribution Year, . 2% in the seventh Contribution Year, and . 0% thereafter. (See "Withdrawal Charge," page 21.) The Withdrawal Charge also applies at the annuitization of Accumulation Units in their seventh Contribution Year or earlier, except as set forth under "Withdrawal Charge." Withdrawals may be subject to income tax, a 10% penalty tax, and other tax consequences. Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue Code (the "Code"). (See "Federal Income Taxes," page 26.) Contract charges include: . mortality and expense risk, . administrative expenses, . records maintenance charges, . withdrawal charges, and . applicable premium taxes. See "Charges Against the Separate Account," page 21.) In addition, the investment advisers to the Funds deduct varying charges from the assets of the Funds for which they provide investment advisory services. (See the Funds' prospectuses for such information.) 4 The Contract may be purchased in connection with retirement plans qualifying either under Section 401 or 403(b) of the Code or as individual retirement annuities including Roth IRAs. We may limit Purchase Payments under qualified plans, other than IRAs, to lump-sum rollovers and transfers. The Contract is also available in connection with state and municipal deferred compensation plans and non-qualified deferred compensation plans. (See "Taxation of Annuities in General," page 27 and "Qualified Plans," page 29, respectively.) You may examine a Contract and return it for a refund during the "free look" period. 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 14.) 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. 5 SUMMARY OF EXPENSES - -------------------------------------------------------------------------------- The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract, or transfer cash value between investment options. State premium taxes may also be deducted. Contract Owner Transaction Expenses Sales Load Imposed on Purchases (as a percentage of Purchase Payments):.... None Maximum Withdrawal Charge /(1)/ (as a percentage of Purchase Payments):.... 7% Withdrawal Years of Withdrawal after Purchase Payment Charge ------------------------------------------ ---------- First year................................ 7.00% Second year............................... 6.00% Third year................................ 5.00% Fourth year............................... 5.00% Fifth year................................ 4.00% Sixth year................................ 3.00% Seventh year.............................. 2.00% Eight years and following................. 0.00% Maximum Transfer Fee:..................... $25/(2)/
- -------- /(1)/A Contract Owner may withdraw up to the greater of (i) the excess of Contract Value over total Purchase Payments subject to a withdrawal charge less prior withdrawals that were previously assessed a Withdrawal Charge and (ii) 10% of the Contract Value in any Contract Year without assessment of any Withdrawal charge. In certain circumstances we may reduce or waive the Withdrawal Charge. See "Withdrawal Charge." /(2)/We reserve the right to charge a fee of $25 for each transfer of Contract Value in excess of twelve transfers per calendar year. See "Transfers During the Accumulation Period." The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including Fund fees and expenses. Annual Records Maintenance Charge $30/(3)/ Separate Account Annual Expenses (as a percentage of average Separate Account Contract Value) Mortality and Expense Risk Charge:.......................... 1.25% Administration Charge:...................................... 0.15% -------- Total Separate Account Annual Expenses:..................... 1.40% ========
- -------- /(3)/The records maintenance charge applies to Contracts with Contract Value less than $50,000 on the date of assessment. In certain circumstances we may reduce or waive the annual records maintenance charge. See "Records Maintenance Charge." The next table shows the minimum and maximum total operating expenses charged by the Funds that you may pay periodically during the time that you own the Contract. More detail concerning each Fund's fees and expenses is contained in the prospectus for each Fund.
Minimum -- Maximum Total Annual Fund Operating Expenses/ (4)/ (expenses that are deducted from Funds assets, including management fees, distribution and/or service (12b-1) fees, and other expenses, prior to any fee waivers or expense reimbursements)................................. .54% -- 1.83%//
6 /(4)/The expenses shown are for the year ended December 31, 2002, and do not reflect any fee waivers or expense reimbursements. The advisers and/or other service providers of certain Funds have agreed to reduce their fees and/or reimburse the Fund's expenses in order to keep the Funds' expenses below specified limits. The expenses of certain Funds are reduced by contractual fee reduction and expense reimbursement arrangements that will remain in effect at least through May 1, 2003. Other Funds have voluntary fee reduction and/or expense reimbursement arrangements that may be terminated at any time. The minimum and maximum Total Annual Fund Operating Expenses for all Funds after all fee reductions and expense reimbursements are 0.54% and 1.83%, respectively. Each fee reduction and/or expense reimbursement arrangement is described in the relevant Fund's prospectus. THE FUND'S INVESTMENT MANAGER OR ADVISER PROVIDED THE ABOVE EXPENSES FOR THE FUNDS. WE HAVE NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION. - -------------------------------------------------------------------------------- EXAMPLE - -------------------------------------------------------------------------------- This Example is intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include Contract Owner transaction expenses, Contract fees, Separate Account annual expenses, and Fund fees and expenses. The Example assumes that you invest $10,000 in the Contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year and assumes the maximum fees and expenses of any of the Funds. In addition, this Example assumes no transfers were made and no premium taxes were deducted. If these arrangements were considered, the expenses shown would be higher. This Example also does not take into consideration any fee waiver or expense reimbursement arrangements of the Funds. If these arrangements were taken into consideration, the expenses shown would be lower. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: (1)If you surrender or annuitize your Contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ------ ------- ------- -------- $1,043 $1,546 $2,171 $3,686
(2)a. If you annuitize your Contract at the end of the available time period under Annuity Option 2, 3, 4, or under Annuity Option 1 for a period of 5 years or more /(5)/:
1 year 3 years 5 years 10 years ------ ------- ------- -------- $343 $1,046 $1,771 $3,686
b. If you annuitize your Contract at the end of the available time period under Annuity Option 1 for a period of less than 5 years /(5)/:
1 year 3 years 5 years 10 years ------ ------- ------- -------- $1,043 $1,546 $2,171 $3,686
(3)If you do not surrender your Contract at the end of the applicable time period:
1 year 3 years 5 years 10 years ------ ------- ------- -------- $343 $1,046 $1,771 $3,686
- -------- /(5)/Withdrawal Charges do not apply if the Contract is annuitized under Annuity Option 2, 3 or 4, or under Annuity Option 1 for a period of 5 years or more. The fee table and example should not be considered a representation of past or future expenses and charges of the Subaccounts. Your actual expenses may be greater or less than those shown. The example does not include the deduction of state premium taxes, which may be assessed before or upon annuitization or any taxes or penalties you may be required to pay if you surrender the Contract. Similarly, the 5% annual rate of return assumed in the example is not intended to be representative of past or future performance of any Subaccount. 7 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. Selected data for accumulation units outstanding as of the year ended December 31st for each period:
Subaccount 2002 2001 2000 1999 ---------- ------- ------- ------- ------- Templeton Developing Markets Securities Subaccount Accumulation unit value at beginning of period*............................ $ 8.860 $ 9.774 $14.585 $ 9.962 Accumulation unit value at end of period................................... $ 8.725 $ 8.860 $ 9.774 $14.585 Number of accumulation units outstanding at end of period (000's omitted).. 3 3 3 0 Janus Aspen Capital Appreciation Subaccount Accumulation unit value at beginning of period*............................ 8.459 10.951 13.573 9.649 Accumulation unit value at end of period................................... 7.035 8.459 10.951 13.573 Number of accumulation units outstanding at end of period (000's omitted).. 193 242 234 55 PIMCO Foreign Bond Subaccount Accumulation unit value at beginning of period*............................ 11.099 10.459 9.790 10.021 Accumulation unit value at end of period................................... 11.841 11.099 10.459 9.790 Number of accumulation units outstanding at end of period (000's omitted).. 18 35 46 25 PIMCO Low Duration Subaccount Accumulation unit value at beginning of period*............................ 11.366 10.707 10.111 10.011 Accumulation unit value at end of period................................... 11.998 11.366 10.707 10.111 Number of accumulation units outstanding at end of period (000's omitted).. 19 24 32 2 Scudder Bond Subaccount Accumulation unit value at beginning of period*............................ 11.100 10.644 9.763 10.044 Accumulation unit value at end of period................................... 11.785 11.100 10.644 9.763 Number of accumulation units outstanding at end of period (000's omitted).. 23 25 33 3 Scudder Growth and Income Subaccount Accumulation unit value at beginning of period*............................ 8.693 9.938 10.293 9.745 Accumulation unit value at end of period................................... 6.590 8.693 9.938 10.293 Number of accumulation units outstanding at end of period (000's omitted).. 120 132 127 29 Scudder International Subaccount Accumulation unit value at beginning of period*............................ 7.917 11.611 15.038 9.871 Accumulation unit value at end of period................................... 6.374 7.917 11.611 15.038 Number of accumulation units outstanding at end of period (000's omitted).. 17 18 18 1 Scudder Money Market #1 Subaccount Accumulation unit value at beginning of period*............................ 10.773 10.515 10.042 10.003 Accumulation unit value at end of period................................... 10.783 10.773 10.515 10.042 Number of accumulation units outstanding at end of period (000's omitted).. 3 6 12 0 Scudder Money Market #2 Subaccount Accumulation unit value at beginning of period*............................ 10.157 10.000 -- -- Accumulation unit value at end of period................................... 10.308 10.157 10.000 -- Number of accumulation units outstanding at end of period (000's omitted).. -- -- -- -- Scudder Government Securities Subaccount Accumulation unit value at beginning of period*............................ $11.508 $10.856 $ 9.924 $10.003 Accumulation unit value at end of period................................... $12.263 $11.508 $10.856 $ 9.924 Number of accumulation units outstanding at end of period (000's omitted).. 42 58 75 22 Scudder High Income (formerly Scudder High Yield) Subaccount Accumulation unit value at beginning of period*............................ $ 9.271 $ 9.160 $10.185 $10.018 Accumulation unit value at end of period................................... $ 9.115 9.271 9.160 10.185 Number of accumulation units outstanding at end of period (000's omitted).. 3 4 2 0 Scudder Small Cap Growth Subaccount Accumulation unit value at beginning of period*............................ 9.348 13.315 15.122 10.115 Accumulation unit value at end of period................................... 6.134 9.348 13.315 15.122 Number of accumulation units outstanding at end of period (000's omitted).. 15 19 20 5 SVS Dreman High Return Equity Subaccount Accumulation unit value at beginning of period*............................ 11.674 11.640 9.043 10.020 Accumulation unit value at end of period................................... 9.436 11.674 11.640 9.043 Number of accumulation units outstanding at end of period (000's omitted).. 87 90 96 25
- -------- * Commencement of Offering on March 12, 1999. ** Accumulation Unit Value at beginning of period is as of November 6, 1999 for Scudder Money Market Subaccount #1. (Scudder Money Market Subaccount #2 did not commence operations prior to December 31, 1999.) 8 KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS Kemper Investors Life Insurance Company We were organized in 1947 and are a stock life insurance company organized under the laws of the State of Illinois in 1947. 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 wholly-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. You may choose a different Guarantee Period by pre-authorized telephone instructions or by giving us written notice (See "Guarantee periods of the MVA Option" below). The MVA Option may not be available in all states. At our discretion, we may offer additional Guarantee Periods or limit, for new Contracts, the number of Guarantee Periods available to three. The amounts allocated to the MVA Option under the Contracts are invested under the 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. 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. We consider the return available on the instruments in which Contract proceeds are invested when establishing Guaranteed Interest Rates. This return is only one of many factors considered in establishing Guaranteed Interest Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest Rates.") Our investment strategy for the non-unitized separate account 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 invested assets portfolio at December 31, 2002 included approximately 85.7 percent in cash, short-term investments and investment grade fixed maturities, 2.4 percent in below investment grade (high risk) bonds, 4.6 percent in mortgage loans and other real estate-related investments and 7.3 percent in all other investments. 9 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, 2002. (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. Twelve 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. Not all Subaccounts may be available in all jurisdictions or under all Contracts. 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 . Franklin Templeton Variable Insurance Products Trust . Janus Aspen Series . PIMCO Variable Insurance Trust . Scudder Variable Series I . Scudder Variable Series II The Funds provide investment vehicles for variable life insurance and variable annuity contracts and, in the case of Janus Aspen Series and PIMCO Variable Insurance Trust, certain qualified retirement plans. 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 a Fund's response to any of those events or conflicts insufficiently protects Owners, we will take appropriate action. A Fund may 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. 10 The twelve Portfolios are summarized below: Franklin Templeton Variable Insurance Products Trust Templeton Developing Markets Securities Fund (Class 2 Shares) seeks long-term capital appreciation. The Fund invests primarily in emerging market equity securities. Janus Aspen Series Janus Aspen Capital Appreciation Portfolio seeks long-term growth of capital. PIMCO Variable Insurance Trust PIMCO Foreign Bond Portfolio (Administrative Class) seeks to maximize total return, consistent with preservation of capital and prudent investment management. PIMCO Low Duration Portfolio (Administrative Class) seeks to maximize total return, consistent with preservation of capital and prudent investment management. Scudder Variable Series I Scudder Bond Portfolio (Class A Shares) seeks to provide a high level of income consistent with a high quality portfolio of debt securities. Scudder Growth and Income Portfolio (Class A Shares) seeks long-term growth of capital, current income and growth of income. Scudder International Portfolio (Class A Shares) seeks long-term growth of capital primarily through diversified holdings of marketable foreign equity investments. Scudder Money Market Portfolio (Class A Shares) seeks to maintain stability of capital and, consistent therewith, to maintain the liquidity of capital and to provide current income. Scudder Variable Series II Scudder Government Securities Portfolio (Class A Shares) seeks high current income consistent with preservation of capital. Scudder High Income (formerly Scudder High Yield) Portfolio (Class A Shares) seeks to provide a high level of current income. Scudder Small Cap Growth Portfolio (Class A Shares) seeks maximum appreciation of investors' capital. SVS Dreman High Return Equity Portfolio (Class A Shares) seeks to achieve a high rate of total return. The Portfolios may not achieve their stated objective. 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. Templeton Asset Management Ltd. serves as the investment manager for the available portfolio of the Franklin Templeton Variable Insurance Products Trust. Janus Capital Management LLC (formerly Janus Capital Corporation) is the investment adviser for the available Portfolio of the Janus Aspen Series. Pacific Investment Management Company is the investment adviser for the two available Portfolios of the PIMCO Variable Insurance Trust. Deutsche Investment Management Americas Inc. ("DeIM") is the investment manager for the four available Portfolios of Scudder Variable Series I and the four available Portfolios of Scudder Variable Series II. Dreman Value Management L.L.C. ("DVM") serves as sub-adviser for the SVS Dreman High Return Equity Portfolio. Under the terms of the sub-advisory agreement, DVM manages the investment and reinvestment of that Portfolio's assets in accordance with the investment objectives, policies 11 and limitations and subject to the supervision of DeIM and the Board of Trustees. The investment advisers are paid fees for their services by the Funds they manage. We may receive compensation from the Funds or 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 may eliminate the shares of any of the Portfolios and 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 in view of the purposes of the Separate Account. We will not substitute any shares attributable to your interest in a 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 contracts, or permit a conversion between series or classes of contracts 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, in our discretion, 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, in our discretion, marketing, tax, or investment conditions warrant. We will notify all Owners of any such changes. If we deem it to be in the best interests of persons having voting rights under the Contract, the Separate Account may be: (a) operated as a management company under the 1940 Act; (b) deregistered under the 1940 Act in the event such registration is no longer required; or (c) 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 Bond Subaccount, Scudder Government Securities Subaccount, PIMCO Foreign Bond Subaccount, PIMCO Low Duration Subaccount, and Scudder High Income (formerly Scudder High Yield) 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 a 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 average annual 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 for the life of the Subaccount. We will show 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 the 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. 12 The Subaccounts' performance figures and Accumulation Unit values fluctuate. You may redeem Subaccount units at Accumulation Unit value, which may be more or less than original cost. The standardized performance figures reflect the deduction of all expenses and fees, including a prorated portion of the Records Maintenance Charge. Redemptions within the first seven years may be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after seven years. Yield, effective yield and nonstandardized total return figures do not include the effect of any Withdrawal Charge that may be imposed upon the redemption of units. In addition, nonstandardized total return figures do not include the effect of the Records Maintenance Charge. The nonstandardized performance figures reflect the deduction of all expenses and fees, excluding a prorated portion of the Records Maintenance Charge. Thus yield, effective yield and nonstandardized total return figures may be higher than if such charges were deducted. Standardized average annual total return figures include the effect of the applicable Withdrawal Charge that may be imposed at the end of the period. The Subaccounts may be compared to relevant indices and performance data from independent sources, including, but not limited to, the Dow Jones Industrial Average, the Standard & Poor's(R) 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(R) 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 that a Subaccount may purchase and the investments measured by the indexes. In particular, it should be noted that the comparative information with regard to the indexes will not reflect the deduction of any Contract charges or fees. Similarly, the indexes are unmanaged and do not reflect the fees and expenses of management and acquisition costs. In addition, certificates of deposit may offer fixed or variable yields and principal is guaranteed and may be insured. The units of the Subaccounts are not insured. Also, the value of each Subaccount 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. FIXED ACCOUNT OPTION Amounts allocated or transferred to the Fixed Account are part of our General Account, supporting insurance and annuity obligations. Interests in the Fixed Account are not registered under the Securities Act of 1933 ("1933 Act"), and the Fixed Account is not registered as an investment company under the Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed Account nor any interests therein generally are subject to the provisions of the 1933 or 1940 Acts. We have been advised that the staff of the SEC has not reviewed the disclosures in this Prospectus relating to the Fixed Account. Disclosures regarding the Fixed Account, however, may be subject to the general provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. Under the Fixed Account Option, we pay a fixed interest rate for stated periods. This Prospectus describes only the aspects of the Contract involving the Separate Account and the MVA Option, unless we refer to fixed accumulation and annuity elements. We guarantee that payments allocated to the Fixed Account earn a minimum fixed interest rate not less than the minimum rate allowed by state law. At our discretion, we may credit interest in excess of the minimum guaranteed rate. We reserve the right to change the rate of excess interest credited. We also reserve the right to declare different rates of excess interest depending on when amounts are allocated or transferred to the Fixed Account. As a result, amounts at any designated time may be credited with a different rate of excess interest than the rate previously credited to such amounts and to amounts allocated or transferred at any other designated time. 13 THE CONTRACTS A. General Information. The minimum initial Purchase Payment is $1,000, and the minimum subsequent Purchase Payment is $500. The minimum subsequent Purchase Payment is $100 if you authorize us to draw on an account via check or electronic debit. Cumulative Purchase Payments in excess of $1,000,000 require our prior approval. The Internal Revenue Code may also limit the maximum annual amount of Purchase Payments. An allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at least $500. 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 amounts allocated to the General Account and the Guarantee Periods on the date we receive the returned Contract, without any deduction for Withdrawal Charges or 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. During the Accumulation Period, you may assign the Contract or change a Beneficiary at any time by signing our form. No assignment or Beneficiary change is binding on us until we receive it. We assume no responsibility for the validity of the assignment or Beneficiary change. An assignment may subject you to immediate tax liability and a 10% tax penalty. (See "Tax Treatment of Withdrawals, Loans and Assignments.") Amounts payable during the Annuity Period may not be assigned or encumbered. 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 Annuitant's debts or obligations. You designate the Beneficiary. If you or the Annuitant die, and no designated Beneficiary or contingent beneficiary is alive at that time, we will pay your or the Annuitant's estate. Under a Qualified Plan Contract, the provisions of the applicable plan may prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan Contract may not be assigned. B. The Accumulation Period. 1. Application of Purchase Payments. You select the allocation of Purchase Payments to the Subaccount(s), Guarantee Periods, or Fixed Account. 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 as of 3:00 p.m. Central time on each day that the New York Stock Exchange is open for trading. Purchase Payments allocated to a Guarantee Period or to the Fixed Account begin earning interest one day after we receive them. However, with respect to initial Purchase Payments, the amount is credited only after we determine to issue the Contract, but no later than the second day after we receive the Purchase Payment. 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 and Guaranteed Retirement Income Benefit Charge (see "Contracts Issued Before May 1, 2002"). The number of Accumulation Units is reduced when the Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge are assessed. 14 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 five (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. We will issue a Contract without a signed application if: . a dealer provides us with application information, electronically or in writing, . we receive the initial Purchase Payment, and . you confirm in writing, after the Contract is delivered, that all information in the Contract is correct. Until a written confirmation is received by us, your ability to request transactions under the Contract will be limited. 2. Accumulation Unit Value. Each Subaccount has an Accumulation Unit value. When Purchase Payments or other amounts are allocated to a Subaccount, the number of units purchased is based on the Subaccount's Accumulation Unit value at the end of the current Valuation Period. When amounts are transferred out of or deducted from a Subaccount, units are redeemed 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: (1 + 2) - 3, where: (1) 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; (2) is the net asset value per share of the investment held in the Subaccount determined at the end of the preceding Valuation Period; and (3) is the factor representing the mortality and expense risk and administration charges. 3. Guarantee Periods of the MVA Option. You may allocate Purchase Payments to one or more Guarantee Periods with durations of one to ten years. Each Guarantee Period has a Guaranteed Interest Rate that will not change during the Guarantee Period. Interest is credited daily at the effective annual rate. The following example illustrates how we credit Guarantee Period interest. 15 EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION Purchase Payment........ $40,000 Guarantee Period........ 5 Years Guaranteed Interest Rate 1.55% Effective Annual Rate
Interest Credited Cumulative Year During Year Interest Credited ---- ----------------- ----------------- 1.. $620.00 $ 620.00 2.. 629.61 1,249.61 3.. 639.37 1,888.98 4.. 649.28 2,538.26 5.. 659.34 3,197.60
Accumulated value at the end of 5 years is: $40,000 + $3,197.60 = $43,197.60 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 and Withdrawal Charges 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. At the end of any Guarantee Period, we send written notice of the beginning of a new Guarantee Period. A new Guarantee Period for the same duration starts unless you elect another Guarantee Period within thirty days after the end of the terminating Guarantee Period. You may choose a different Guarantee Period by preauthorized telephone instructions or by giving us written notice. You should not select a new Guarantee Period extending beyond the Annuity Date. Otherwise, the guarantee period amount available for annuitization is subject to Market Value Adjustments and may be subject to Withdrawal Charges. (See "Market Value Adjustment" and "Withdrawal Charge" 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 1-800-621-5001 or write to Kemper Investors Life Insurance Company, Customer Service, at 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801 for the new Guaranteed Interest Rates. 4. 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 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 effectuated or when a Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are subject to Withdrawal Charges and Records Maintenance Charges and may be 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. 16 5. 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 . your Accumulated Guarantee Period Value in the MVA Option, plus . your interest in the Fixed Account. 6. Transfers During the Accumulation Period. During the Accumulation Period, you may transfer the Contract Value among the Subaccounts, the Guarantee Periods and the Fixed Account subject to the following provisions: . the amount transferred must be at least $100 unless the total Contract Value attributable to a Subaccount, Guarantee Period or Fixed Account is transferred; . the Contract Value remaining in a Subaccount, Guarantee Period or Fixed Account must be at least $500 unless the total value is transferred; . transfers may not be made from any Subaccount to the Fixed Account over the six months following any transfer from the Fixed Account into one or more Subaccounts; and . transfers from the Fixed Account may be made one time during the Contract Year during the thirty days following an anniversary of a Contract Year. We may charge a $25 fee for each transfer in excess of 12 transfers per calendar year. However, transfers made pursuant to the Asset Allocation and Dollar Cost Averaging programs do not count toward these 12 transfers. In addition, transfers of Guarantee Period Value are subject to Market Value Adjustment unless the transfer is made within thirty days of the end of the Guarantee Period. 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. 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 in 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. The following transfers must be requested through standard United States mail: . transfers in excess of $250,000 per Contract, per day, and . transfers into and out of the Scudder International Subaccount in excess of $50,000, per Contract per day. 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. If you authorize a third party to transact transfers on your behalf, we will reallocate the Contract Value pursuant to the authorized asset allocation program. However, we do not offer or participate in any asset allocation program and we take no responsibility for any third party asset allocation program. We may suspend or cancel acceptance of a third party's instructions at any time and may restrict the investment options available for transfer under third party authorizations. 17 You may elect to have transfers made automatically among the Subaccounts on an annual, semiannual or quarterly basis so that Contract Value is reallocated to match the percentage allocations in your predefined allocation elections. Transfers under this program are not subject to the $100 minimum transfer limitation. An election to participate in the automatic asset reallocation program must be in writing on our form and returned to us. 7. 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. 8. Withdrawals During the Accumulation Period. You may redeem some or all of the Contract Value and previous withdrawals and debt, plus or minus any applicable Market Value Adjustment and minus any Withdrawal Charge. Withdrawals will have tax consequences. (See "Federal Income Taxes.") A withdrawal of the entire Contract Value is called a surrender. Partial withdrawals and surrenders are subject to the following: In any Contract Year, you may withdraw or surrender the Contract, without Withdrawal Charge, up to the greater of: . the excess of Contract Value over total Purchase Payments subject to Withdrawal Charges, minus prior withdrawals that were previously assessed a Withdrawal Charge, or . 10% of the Contract Value. See "Contract Charges and Expenses--Withdrawal Charge" for a discussion of charges applicable to partial withdrawals and surrenders. 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 redeem Accumulation Units on a pro rata basis from all investment options in which you have an interest. Accumulation Units attributable to the earliest Contribution Years are redeemed first. Partial withdrawals are subject to the following: . Partial withdrawals are not permitted from the Fixed Account in the first Contract Year. . The minimum withdrawal is $100 (before any Market Value Adjustment), or your entire interest in the investment option(s) from which withdrawal is requested. . You must leave at least $500 in each investment option from which the withdrawal is requested, unless the total value is withdrawn. Election to withdraw shall be made in writing to us at 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 of the Accumulation Unit values, as calculated after we receive the request. The Withdrawal Value attributable to the Subaccounts is paid within seven (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, 18 . 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 and the Fixed Account, 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. Withdrawals are permitted from Contracts issued in connection with Section 403(b) Qualified Plans only under limited circumstances. (See "Federal Income Taxes.") A participant in the Texas Optional Retirement Program ("ORP") must obtain a certificate of termination from the participant's employer before a Contract can be redeemed. The Attorney General of Texas has ruled that participants in the ORP may redeem their interest in a Contract issued pursuant to the ORP only upon termination of employment in Texas public institutions of higher education, or upon retirement, death or total disability. In those states adopting similar requirements for optional retirement programs, we will follow similar procedures. 9. Market Value Adjustment. Any withdrawal, transfer or annuitization of Guarantee Period Values, unless effected during the "free look" period or within 30 days after a Guarantee Period ends, may be adjusted up or down by a Market Value Adjustment. The Market Value Adjustment applies before deduction of a Withdrawal Charge. The Market Value Adjustment reflects the relationship between (a) 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 (b) 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 Guarantee Period 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 Guarantee Period Value and results in a higher payment. The Market Value Adjustment (MVA) uses this formula: (1 + I) /t/365/ ------- MVA = GPV X -1 (1 + J)
Where: 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 balance of the Guarantee Period for the Guarantee Period Value subject to the Market Value Adjustment, rounded to the next higher number of complete years, and t is the number of days remaining in the Guarantee Period. For an illustration showing an upward and a downward adjustment, see Appendix A. 10. Guaranteed Death Benefit. We pay a death benefit to the Beneficiary if any of the following occurs during the Accumulation Period: . the Owner, or a joint owner, dies, . the Annuitant dies with no living contingent annuitant, or . the contingent annuitant dies after the Annuitant. 19 The amount of the death benefit depends on the age of the deceased Owner or Annuitant when the death benefit becomes payable. If the deceased Owner or Annuitant dies before age 91, we will pay the Beneficiary the greatest of the following less debt: . Contract Value, . Purchase Payments minus previous withdrawals, accumulated at 5.00% interest per year to the earlier of the deceased's age 80 or the date of death, plus Purchase Payments minus all withdrawals from age 80 to the date of death, or . the greatest anniversary value before death. The greatest anniversary value equals: . the highest of the Contract Values on each Contract anniversary prior to the deceased's age 81, plus the dollar amount of any Purchase Payments made since that anniversary, minus . withdrawals since that anniversary. We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after age 91. The Owner or Beneficiary (unless the Owner has already elected an Annuity Option), 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. The Death Benefit must be distributed within 5 years after the date of death unless an Annuity Option is elected or a surviving spouse elects to continue the Contract in accordance with the provisions described below. For Non-Qualified Plan Contracts or Individual Retirement Annuities, if the Beneficiary is the Owner's surviving spouse (or the Annuitant's surviving spouse if the Owner is not a natural person), the surviving spouse may elect to continue the Contract in lieu of taking a Death Benefit distribution. The spouse will become the successor Owner of the Contract subject to the following: . The Contract Value will be increased to reflect the amount of the Death Benefit. The difference will be credited to the Scudder Money Market Subaccount #1. . No withdrawal charges will apply on existing values in the Contract. However, Purchase Payments made after the original owner's death are subject to withdrawal charges. . Upon the death of the surviving spouse, the death benefit will be calculated from the time that the election to continue the Contract is made. A subsequent spouse will not be able to continue the Contract. The above option is subject to availability of this feature in your state. As an alternative to the above election, the surviving spouse may elect to continue a Non-Qualified Contract or an Individual Retirement Annuity without receiving the increase in Contract Value attributable to the Death Benefit. In this case, all rights, benefits and charges under the Contract will continue including any applicable Withdrawal Charges. CONTRACT CHARGES AND EXPENSES We deduct the following charges and expenses: . mortality and expense risk, . administrative expenses, . records maintenance charges, . withdrawal charges, and . applicable premium taxes. Subject to certain expense limitations, you indirectly bear investment management fees and other Fund expenses. 20 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 1.25% 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. The mortality risk we assume arises from two contractual obligations. First, if you or the Annuitant die before age 91 and before the Annuity Date, we may, in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit", above.) 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 Costs. We assess each Subaccount a daily asset charge for administrative costs at a rate of .15% per annum. This charge reimburses us for expenses incurred for administering the Contracts. These expenses include Owner inquiries, changes in allocations, Owner reports, Contract maintenance costs, and data processing costs. The administrative charge 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 costs of a particular Contract. 3. Records Maintenance Charge. We deduct an annual Records Maintenance Charge of $30 during the Accumulation Period. The charge is assessed: . at the end of each Contract Year, . on Contract surrender, and . upon annuitization. However, we do not deduct the Records Maintenance Charge for Contracts with Contract Value of at least $50,000 on the assessment date. This charge reimburses us for the expenses of establishing and maintaining Contract records. The Records Maintenance Charge reduces the net assets of each Subaccount, Guarantee Period and the Fixed Account. The Records Maintenance Charge is assessed equally among all investment options in which you have an interest. 4. Withdrawal Charge. We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal Charge covers Contract sales expenses, including commissions and other promotion and acquisition expenses. Each Contract Year, you may withdraw or surrender the Contract, without Withdrawal Charge, up to the greater of: . the excess of Contract Value over total Purchase Payments subject to Withdrawal Charges, minus prior withdrawals that were previously assessed a Withdrawal Charge, or . 10% of the Contract Value. 21 If you withdraw a larger amount, the excess Purchase Payments withdrawn are subject to a Withdrawal Charge. The Withdrawal Charge applies in the first seven Contribution Years following each Purchase Payment as follows:
Contribution Year Withdrawal Charge ----------------- ----------------- First............... 7% Second.............. 6% Third............... 5% Fourth.............. 5% Fifth............... 4% Sixth............... 3% Seventh............. 2% Eighth and following 0%
Purchase Payments are deemed surrendered in the order in which they were received. When a withdrawal is requested, you receive a check in the amount requested. If a Withdrawal Charge applies, Contract Value is reduced by the Withdrawal Charge, plus the dollar amount sent to you. Because Contribution Years are based on the date each Purchase Payment is made, you may be subject to a Withdrawal Charge, even though the Contract may have been issued many years earlier. (For additional details, see "Withdrawals During the Accumulation Period.") Subject to certain exceptions and state approvals, Withdrawal Charges are not assessed on withdrawals: . after you have been confined in a hospital or skilled health care facility for at least thirty days and you remain confined at the time of the request; . within thirty days following your discharge from a hospital or skilled health care facility after a confinement of at least thirty days; or . if you or the Annuitant become disabled after the Contract is issued and before age 65. Restrictions and provisions related to the nursing care or hospitalization disability waivers are described in Contract endorsements. The Withdrawal Charge compensates us for Contract distribution expense. Currently, we anticipate Withdrawal Charges will not fully cover distribution expenses. Unrecovered distribution expenses may be recovered from our general assets. Those assets may include proceeds from the mortality and expense risk charge. The Withdrawal Charge also applies at annuitization to amounts attributable to Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal Charge applies upon annuitization if you select Annuity Options 2, 3 or 4 or if payments under Annuity Option 1 are scheduled to continue for at least five years. See "The Annuity Period--Annuity Options" for a discussion of the Annuity Options available. 5. Investment Management Fees and Other Expenses. Each Portfolio's net asset value reflects the deduction of investment management fees, Rule 12b-1 fees and certain 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. 6. 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. See "Appendix--State Premium Tax Chart" in the Statement of Additional Information. 22 7. Exceptions. We may decrease the mortality and expense risk charge, the administration charge, and the Records Maintenance Charge without notice. However, we guarantee that they will not increase. We bear the risk that those charges will not cover our costs. On the other hand, should the 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 reduce or waive fees and charges, including but not limited to, the Records Maintenance Charge, the Withdrawal Charge, and mortality and expense risk and administrative charges, for certain sales that may result in cost savings, such as those where we incur lower sales expenses or perform fewer services because of economies due to the size of a group, the average contribution per participant, or the use of mass enrollment procedure. We may also reduce or waive fees and charges and/or credit additional amounts on Contracts issued to: . employees and registered representatives (and their families) of broker-dealers (or their affiliated financial institutions) that have entered into selling group agreements with IBS, and . officers, directors and employees (and their families) of KILICO and Scudder Variable Series I and II, their investment advisers and principal underwriters or certain affiliated companies, or to any trust, pension, profit-sharing or other benefit plan for such persons. 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. Annuity payments begin on the Annuity Date and under the selected Annuity Option. The Annuity Date must be at least one year after the Date of Issue. Subject to state variation, the Annuity Date may not be deferred beyond the later of the Annuitant's 91st birthday (100th birthday if the Contract is part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue. However, annuitization is delayed beyond the Annuity Date if we are making systematic withdrawals based on your life expectancy. In this case, annuitization begins when life expectancy withdrawals are stopped. 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. Annuity payments may be subject to a Withdrawal Charge. (For additional details, see "Withdrawal Charge.") 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 before the Annuitant's 91st birthday (100th birthday if the Contract is part of a Charitable Remainder Trust) or within ten (10) years after the Date of Issue, whichever is later. You may change the Annuity Option before the Annuity Date. If no other Annuity Option is elected, monthly annuity payments are made in accordance with Option 3 below with a ten (10) year period certain. Generally, annuity payments are made in monthly installments. However, we may make a lump sum payment if the first monthly payment is less than $20. In this case, we may change the frequency of payments to quarterly, semiannual or annual intervals so that the initial payment is at least $20. 23 The amount of periodic annuity payments may depend upon: . the Annuity Option selected; . the age and sex of the Annuitant; and . the investment experience of the selected Subaccount(s). 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. The age of the Annuitant also influences the amount of periodic annuity payments because an older Annuitant is expected to have a shorter life span, resulting in larger payments. The sex of the Annuitant influences the amount of periodic payments because females generally live longer than males, resulting in smaller payments. Finally, if you participate in a Subaccount with higher investment performance, it is likely you will receive a higher periodic payment. If you die before the Annuity Date, available Annuity Options are limited. Unless you have imposed restrictions, 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 Annuitant'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. If you elect variable annuitization under Option 1, the Annuitant may elect to cancel all or part of the variable annuity payments remaining due. We will then pay the discounted value of the remaining payments. Option 2--Life Income. Option 2 provides an annuity payable monthly over the lifetime of the Annuitant. If Option 2 is elected, annuity payments terminate automatically and immediately on the Annuitant'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 Annuitant'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. 24 Option 4--Joint and Survivor Annuity. Option 4 provides an annuity payable monthly while either Annuitant is living. Upon either Annuitant's death, the monthly income payable continues over the life of the surviving Annuitant at a percentage specified when Option 4 is elected. Annuity payments terminate automatically and immediately upon the surviving Annuitant'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 Fixed Account Contract Value or 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. Transfers during the Annuity Period are subject to certain limitations. 4. Transfers During the Annuity Period. During the Annuity Period, the Annuitant may, by written request, transfer Subaccount Value from one Subaccount to another Subaccount or to the Fixed Account, subject to the following limitations: . Transfers to a Subaccount 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 seven (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 seven (7) days before an annuity payment date, the transfer is effective during the Valuation Period after the annuity payment date. . Transfers to the Fixed Account are available only on an anniversary of the first Annuity Date. We must receive notice at least thirty (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 25 . the number of Accumulation Units credited at the end of the Valuation Period, minus . premium taxes and Withdrawal Charges. 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 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 Annuitant dies after the Annuity Date while the Contract is in force, the death proceeds, if any, depend 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 judicial decisions. 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. 26 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 Plan 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 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 one 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. Then, 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 the Annuitant has 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. 27 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 Partial withdrawals from a Non-Qualified Plan 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 amounts previously received from the Contract that were not includible in your income. 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. The Contract's death benefit may exceed Purchase Payments or Contract Value. As described in this Prospectus, we impose certain charges with respect to the death benefit. It is possible that those charges (or some portion) could be treated as a partial withdrawal. If the Policy includes the Guaranteed Retirement Income Benefit Endorsement (the "GRIB Endorsement"), 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 Endorsement, the Annuitant may elect to receive a lump sum payment after the Annuity Date. In the case of a Non-Qualified Plan Contract, the Company will treat a portion of such a lump sum payment as includible in income, and will determine the taxable portion of subsequent periodic 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 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. 28 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. 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 Plan 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 one 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 Plan Contract may be determined by combining some or all of the Non-Qualified Plan Contracts owned by an individual. For example, if a person purchases a Contract and also purchases 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 a person purchases 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 The Contracts are also available for use in connection with retirement plans which receive favorable treatment under sections 401, 403, 408, 408A or 457 of the Code ("Qualified Plans"). Such contracts are 29 referred to as "Qualified Contracts." Numerous special tax rules apply to the participants in Qualified Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to provide more than general information about use of the Contract with the various types of Qualified Plans. Persons intending to use the Contract in connection with qualified plans should consult a tax adviser. 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 features other than tax deferral, including the availability of lifetime annuity payments and death benefit protection. The tax rules applicable to Qualified Plans vary according to the type of plan and the 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. Also, loans from Qualified Contracts, where allowed, are subject to a variety of limitations, including restrictions as to the amount that may be borrowed, the duration of the loan, the number of allowable loans and the manner in which the loan must be repaid. (Owners should always consult their tax advisers and retirement plan fiduciaries prior to exercising their loan privileges.) Both the amount of the contribution that may be made, and the tax deduction or exclusion that the Owner may claim for such contribution, are limited under Qualified Plans. If this Contract is used with a Qualified Plan, the Owner and Annuitant generally are the same individual. If a joint Annuitant is named, all distributions made while the Annuitant is alive must be made to the Annuitant. Also, if a joint Annuitant is named who is not the Annuitant's spouse, the annuity options which are available 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" ("IRAs"), distributions of minimum amounts must generally begin by April 1 of the calendar year following the calendar year in which the owner attains age 701/2. An excise tax is imposed for 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 actual 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 purchased a Qualified Contract with a GRIB Endorsement 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 Endorsement. 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, for example, to a payment: . received after you reach age 591/2, . 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. 30 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." IRAs limit 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 generally 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. Employers and employees intending to use the Contract in connection with these plans should consult a tax adviser. 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 has reached age 701/2. All or part of an IRA may be converted into a Roth IRA without taking an actual distribution. An individual 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 Code Section 408A, from a Roth IRA is excludible from gross income. A qualified distribution includes a distribution made after you reach age 591/2, after your death, because of your disability, or made to a first-time homebuyer. A qualified distribution can only be made after the first five years after the year for which you (or your spouse) made a contribution to any Roth IRA established for your benefit. Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-Sharing Plans. The Code permits corporate employers to establish various types of tax-favored retirement plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh", permits self-employed individuals also to establish such tax-favored retirement plans for themselves and their employees. Such retirement plans may permit the purchase of the Contracts in order to provide benefits under the plans. The Contract provides a death benefit that in certain circumstances may exceed the greater of the Purchase Payments and the Contract Value. It is possible that such death benefit could be characterized as an incidental death benefit. There are limitations on the amount of incidental benefits that may be provided under pension and profit sharing plans. In addition, the provision of such benefits may result in current taxable income to participants. Employers intending to use the Contract in connection with such plans should seek competent advice. 31 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 taxable gross income. 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 a death benefit that in certain circumstances may exceed the greater of the Purchase Payments and the Contract Value. It is possible that such death benefit could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in currently taxable income to purchasers. In addition, there are limitations on the amount of incidental benefits that may be provided under a tax-sheltered annuity. Even if the death benefit under the Contract were characterized as an incidental death benefit, it is unlikely to violate those limits unless you also purchase a life insurance contract as part of your tax-sheltered annuity plan. 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, 1998. These amounts can be paid only if you have reached age 591/2., severed employment, 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 Code 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 Code 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. 2. Direct Rollovers If the Contract is used in connection with a retirement plan that is qualified under Sections 401(a), 403(a), or 403(b) of the Code or with an eligible government deferred compensation plan that is qualified under Code 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 the 20% withholding by electing a direct rollover. 32 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 contract features, charges and 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. 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 Annuitant 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 After each Contract anniversary, we send you a statement showing amounts credited to each Subaccount, to the Fixed Account Option and to the Guarantee Period Value. In addition, if you transfer amounts among the investment options or make additional payments, you 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 correspond to the Subaccounts in which you invest and a list of the securities held by that Portfolio. In addition, we calculate for you the portion of a total amount that must be invested in a selected Guarantee Period so that the portion grows to equal the original total amount at the expiration of the Guarantee Period. You may direct inquiries to the selling agent or may call 1-800-621-5001 or write to Kemper Investors Life Insurance Company, Customer Service, 1600 McConnor Parkway, Schaumburg, Illinois 60196-6801. 33 DOLLAR COST AVERAGING Under our Dollar Cost Averaging program, a predesignated portion of Subaccount Value is automatically transferred monthly, quarterly, semiannually or annually for a specified duration to other Subaccounts, Guarantee Periods and the Fixed Account. 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 no guarantee that DCA will produce that result. There is currently no charge for this service. The Dollar Cost Averaging program is available only during the Accumulation Period. You may also elect transfers from the Fixed Account on a monthly or quarterly basis for a minimum duration of one year. You may enroll any time by completing our Dollar Cost Averaging form. Transfers are made based on the date you specify. We must receive the enrollment form at least five (5) business days before the transfer date. If you participate in the Dollar Cost Averaging program, you may allocate all or a portion of the initial Purchase Payment to the Scudder Money Market Subaccount #2. This is the only Subaccount with no deduction for the 1.40% charge for mortality and expense risks and administrative costs. You must transfer all Subaccount Value out of Scudder Money Market Subaccount #2 within one year from the initial Purchase Payment. If you terminate Dollar Cost Averaging or do not deplete all Subaccount Value in Scudder Money Market Subaccount #2 within one year, we automatically transfer any remaining Subaccount Value to Scudder Money Market Subaccount #1. The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed Account. The total Contract Value in an account at the time Dollar Cost Averaging is elected must be at least equal to the amount designated to be transferred on each transfer date times the duration selected. Dollar Cost Averaging ends if: . the number of designated monthly transfers has been completed, . Contract Value in the transferring account is insufficient to complete the next transfer; the remaining amount is transferred, . we receive your written termination at least five (5) business days before the next transfer date, or . the Contract is surrendered or annuitized. If the Fixed Account balance is at least $10,000, you may elect automatic calendar quarter transfers of interest accrued in the Fixed Account to one or more of the Subaccounts or Guarantee Periods. You may enroll in this program any time by completing our Dollar Cost Averaging form. Transfers are made within five business days of the end of the calendar quarter. We must receive the enrollment form at least ten (10) days before the end of the calendar quarter. Dollar Cost Averaging is not available during the Annuity Period. 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, or amounts based on your life expectancy, from the Fixed Account, or from any of the Subaccounts or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis. The SWP is available when you request a minimum $100 periodic payment. A market value adjustment applies to any withdrawals under the SWP from a Guarantee Period, unless effected within 30 days after the Guarantee Period ends. SWP withdrawals from the Fixed Account are not available in the first Contract Year and are limited to the amount not subject to Withdrawal Charges. If the amounts distributed under the SWP from the Subaccounts or Guarantee Periods exceed the free withdrawal amount, the Withdrawal Charge is applied on any amounts exceeding the free withdrawal amount. 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 you or us. 34 EXPERTS The consolidated balance sheets of KILICO as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002, are incorporated in this Prospectus by reference to the Statement of Additional Information. The statements of assets, liabilities and contract owners' equity of the KILICO Variable Annuity Separate Account as of December 31, 2002, and the related statements of operations and changes in contract owners' equity for the periods indicated, are incorporated in this Prospectus by reference to the Statement of Additional Information. Both documents have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent 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 Frank Julian, our Associate General Counsel. 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 adviser regarding the tax consequences, as an assignment may be a taxable event. 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. We have filed registration statements (the "Registration Statements") relating to the Contracts with the SEC under the Securities Act of 1933. 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; Experts; Financial Statements; Report of Independent Accountants; Financial Statements of the Separate Account; Report of Independent Accountants; Financial Statements of KILICO; Appendix A State Premium Tax Chart. Please read the Statement of Additional Information in conjunction with this Prospectus. 35 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 BEFORE MAY 1, 2002 Guaranteed Retirement Income Benefit: General Guaranteed Retirement Income Benefit ("GRIB") was an optional Contract benefit available under Contracts issued on or after May 1, 2000 and before May 1, 2002. GRIB is not offered on Contracts issued on or after May 1, 2002. We reserve the right to begin offering GRIB at any time. GRIB provides a minimum fixed annuity guaranteed lifetime income to the Annuitant as described below. GRIB may be exercised only within thirty days after the seventh or later Contract anniversary. In addition, GRIB must be exercised between the Annuitant's 60th and 91st birthdays. However, if the Annuitant is age 44 or younger on the Date of Issue, GRIB may be exercised after the Contract's 15th Anniversary, even though the Annuitant is not yet 60 years old. GRIB may not be appropriate for Annuitants age 80 and older. State premium taxes may be assessed when you exercise GRIB. If you elected GRIB, the charge is 0.25% of Contract Value. We deduct a pro rata portion of the charge on the last business day of each calendar quarter. The quarterly charge is deducted pro rata from the investment options in which you have an interest. We no longer charge for GRIB after the Annuitant's 91st birthday. The GRIB charge is in addition to the Contract fees and expenses appearing in the "Summary of Expenses". GRIB may be discontinued after the seventh Contract anniversary by written notice to us. Once discontinued, GRIB may not be elected again. 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 this optional benefit. Annuity Payments with GRIB Annuity payments are based on the greater of: . the income provided by applying the GRIB base to the guaranteed annuity factors, and . the income provided by applying the Contract Value to the current annuity factors. The GRIB base is the greatest of: . Contract Value, . Purchase Payments minus previous withdrawals, accumulated at 5.00% interest per year to the earlier of the Annuitant's age 80 or the GRIB exercise date plus Purchase Payments minus all withdrawals from age 80 to the GRIB exercise date, and . the greatest anniversary value before the exercise date. The greatest anniversary value equals: . the highest of the Contract Values on each Contract anniversary prior to the Annuitant's age 81, plus . the dollar amount of any Purchase Payments made since that anniversary, minus . withdrawals since that anniversary. 36 The guaranteed annuity factors are based on the 1983a table projected using projection scale G, with interest at 2.5% (the "Annuity 2000" table). However, if GRIB is exercised on or after the 10th Contract anniversary, interest at 3.5% is assumed. 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. Because 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, but the age of the older Annuitant is used to determine the GRIB base. If you elect GRIB payable for the life of a single Annuitant, you may elect a period certain of 5, 10, 15, or 20 years. If the Annuitant dies before GRIB has been paid for the period elected, the remaining GRIB payments are paid as they fall due to the Beneficiary, if the Beneficiary is a natural person. If the Beneficiary is not a natural person, the remaining payments may be commuted at a minimum 2.5% interest rate and paid in a lump sum. If you elect 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. If both Annuitants die before GRIB has been paid for 25 years, the remaining GRIB payments are paid as they fall due to the Beneficiary, if the Beneficiary is a natural person. If the Beneficiary is not a natural person, the remaining payments may be commuted at a minimum 2.50% interest rate and paid in a lump sum. GRIB payments are also available on a quarterly, semi-annual or annual basis. We may make other annuity options available. Commutable Annuitization Option If you purchased your Contract on or after May 1, 2000, and you exercise the GRIB option to receive guaranteed benefits, you may elect to have payments made under a commutable annuitization option. Under the commutable annuitization option, partial lump sum payments are permitted, subject to the following requirements: . At the time you exercise the GRIB option, you must elect the commutable annuitization option in order to be eligible for the lump sum payments. . 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, or 20 year certain period that applies to the payout. . Lump sum payments are available once in each calendar year and may not be elected until one year after annuitization has started. . The Annuitant 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 Annuitant 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 Plan Contracts, partial lump sum payments of up to 100% of the present value of the remaining installments in the period certain may be made. 37 . 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 (3.5% if GRIB was exercised on or after the 10th Contract anniversary; 2.5% if exercised before that date) 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%
Effect of Death of Owner or Annuitant on GRIB The GRIB terminates upon the death of the Owner or the Annuitant (if the Owner is not a natural person) unless the Owner's or Annuitant's surviving spouse elects to continue the Contract as described in "Guaranteed Death Benefit" on pages 19-20 above. A spouse may continue only a Non-Qualified Contract or an Individual Retirement Annuity. If the spouse elects to continue the Contract as the new Owner and receive any increase in Contract Value attributable to the Death Benefit, the GRIB is modified as follows: The GRIB base is calculated from the time the election to continue the Contract is made. GRIB may not be exercised or canceled prior to the seventh Contract Year anniversary date following the spouse's election to continue the Contract. However, we will waive all other age restrictions that would apply to exercising GRIB. The spouse may also elect to discontinue GRIB within 30 days of the date the election to continue the Contract is made. If the spouse elects to continue the Contract without receiving any increase in Contract Value attributable to the Death Benefit, all rights, benefits and charges under the Contract, including the GRIB charge and the right to exercise GRIB based on the existing exercise period, will continue unchanged. ANNUAL REPORTS AND OTHER DOCUMENTS KILICO's Annual Report on Form 10-K for the year ended December 31, 2002 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 Securities 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 documents and reports under the Securities Exchange Act of 1934, including our annual and quarterly reports on Form 10-K and Form 10-Q, 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 1-888-477-9700. 38 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 and the Withdrawal Charge 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. No Withdrawal Charge applies to 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. These examples also show the Withdrawal Charge (if any) which would be calculated separately after the Market Value Adjustment. 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: -.0551589* = [ (1 + .05) ] /4/ [ (1 + .065) ] -1
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee Period Value: - 2,316.67 = -.0551589 X 42,000.00 The Market Adjusted Value would be: $39,683.33 = $42,000.00 - $2,316.67 A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in excess of the amount available as a free withdrawal. In this case, there are no prior withdrawals, so 10% of the Market Adjusted Value is not subject to a Withdrawal Charge. The Withdrawal Charge is thus: $2,142.90 = $39,683.33 X .90 X .06 Thus, the amount payable on a full withdrawal would be: $37,540.43 = $39,683.33 - $2,142.90 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: - $1,158.34 = - .0551589 X $21,000.00 The Market Adjusted Value would be: $19,841.66 = $21,000.00 - $1,158.34 - -------- *Actualcalculation utilizes 10 decimal places. 39 The Withdrawal Charge of 6% would apply to the Market Adjusted Value being withdrawn, less 10% of the full Market Adjusted Value as there are no prior withdrawals: $952.39 = ($19,841.46 - .10 X $39,683.33) X .06 Thus, the amount payable, net of Withdrawal Charges, on this partial withdrawal would be: $18,889.07 = $19,841.46 - $952.39 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: +.0390198= [ (1 + .05) ]/4/ [ (1 + .04) ] -1
The Market Value Adjustment is an increase of $1,638.83 to the Guarantee Period Value: $1,638.83 = $42,000.00 X .0390198 The Market Adjusted Value would be: $43,638.33 = $42,000.00 + $1,638.83 A Withdrawal Charge of 6% would apply to the Market Adjusted Value being withdrawn, less 10% of the full Market Adjusted Value, as there were no prior withdrawals: $2,356.47 = $43,638.33 X .90 X .06 Thus, the amount payable on withdrawal would be: $41,281.85 = $43,638.33 - $2,356.47 If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn (partial withdrawal of 50%), the Market Value Adjustment would be: $819.42 = $21,000.00 X .0390198 The Market Adjusted Value of $21,000.00 would be: $21,819.42 = $21,000.00 + $819.42 The Withdrawal Charge of 6% would apply to the Market Adjusted Value being withdrawn, less 10% of the full Market Adjusted Value as there are no prior withdrawals: $1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06 Thus, the amount payable, net of Withdrawal Charges, on this partial withdrawal would be: $20,772.08 = $21,819.42 - $1,047.34 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. 40 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 701/2 (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 701/2), 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 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. 41 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 or to a 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 are 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 are 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. 42 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 -------------------------- ---------------- 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 -------------------------- --------------- 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 $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. 43 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 have 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. 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 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. 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 a 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. 44 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. The Company reserves 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. 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 701/2. 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. 45 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 not apply. If such a rollover or transfer occurs before January 1, 1999, any portion of the amount rolled over or transferred which is required to be included in gross income will be so included ratably over the 4-taxable year period beginning with the taxable year in which the rollover or transfer is made. Pending legislation may modify these rules retroactively to January 1, 1998. 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 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 591/2, (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). 46 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 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 591/2, 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 591/2. 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 higher education expenses, certain medical expenses, or by an unemployed individual to pay health insurance premiums. O. 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, SIMPLE IRA or Roth 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.) 47 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 1. If contributions to the Contract are made by other than rollover contributions and direct transfers, the following information based on the charts shown on the next pages, which assumes you were to make a level contribution to the fixed account at the beginning of each year of $1,000 must be completed prior to your signing the enrollment application.
Lump Sum Termination At Lump Sum Termination End of Year Value of Contract* Age Value of Contract* ----------- -------------------- --- -------------------- 1 60 2 65 3 70 4 5
- -------- *Includesapplicable withdrawal charges as described in Item T below. 2. If contributions to the Contract are made by rollover contributions and/or direct transfers, the following information, based on the charts shown on the next page, and all of which assumes you make one contribution to the fixed account of $1,000 at the beginning of this year, must be completed prior to your signing the enrollment application.
Lump Sum Termination At Lump Sum Termination End of Year Value of Contract* Age Value of Contract* ----------- -------------------- --- -------------------- 1 60 2 65 3 70 4 5
- -------- *Includesapplicable withdrawal charges as described in Item T below. T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT) 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 1.40% per annum. 2. An annual records maintenance charge of $30.00 will be assessed ratably each quarter against the Separate Account, Fixed Account and Guarantee Periods. 3. Withdrawal (early annuitization) charges will be assessed based on the years elapsed since the Purchase Payments (in a given Contract Year) were received by KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3 to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years, 2%; over 7 years and thereafter, 0%. 4. The method used to compute and allocate the annual earnings is contained in the Prospectus under the heading "Accumulation Unit Value." 5. The growth in value of your Contract is neither guaranteed nor projected but is based on the investment experience of the Separate Account. 48 GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR. (TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF EACH YEAR.)
End of Termination End of Termination End of Termination End of Termination Year Values* Year Values* Year Values* Year Values* ---- ----------- ------ ----------- ------ ----------- ------ ----------- 1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26 2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30 3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20 4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89 5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41 6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86 7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46 8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50 9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40 10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65 11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87 12 13,904.03 25 36,171.26 38 68,871.45 13 15,329.79 26 38,265.04 39 71,946.23
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR. (TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
End of Termination End of Termination End of Termination End of Termination Year Values* Year Values* Year Values* Year Values* ---- ----------- ------ ----------- ------ ----------- ------ ----------- 1 $ 937 14 $1,000 27 $1,000 40 $1,000 2 946 15 1,000 28 1,000 41 1,000 3 955 16 1,000 29 1,000 42 1,000 4 955 17 1,000 30 1,000 43 1,000 5 964 18 1,000 31 1,000 44 1,000 6 973 19 1,000 32 1,000 45 1,000 7 982 20 1,000 33 1,000 46 1,000 8 1,000 21 1,000 34 1,000 47 1,000 9 1,000 22 1,000 35 1,000 48 1,000 10 1,000 23 1,000 36 1,000 49 1,000 11 1,000 24 1,000 37 1,000 50 1,000 12 1,000 25 1,000 38 1,000 13 1,000 26 1,000 39 1,000
- -------- *Includesapplicable withdrawal charges. 49 STATEMENT OF ADDITIONAL INFORMATION May 1, 2003 INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS FARMERS VARIABLE ANNUITY I Issued By KEMPER INVESTORS LIFE INSURANCE COMPANY and KILICO VARIABLE ANNUITY SEPARATE ACCOUNT 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, 2003. 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 .......................................................... 11 Experts ................................................................... 11 Financial Statements ...................................................... 11 Report of Independent Accountants ......................................... 12 Financial Statements of the Separate Account .............................. 13 Report of Independent Accountants ......................................... 47 Financial Statements of KILICO ............................................ 48 Appendix A State Premium Tax Chart ........................................ A-1 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, 2002, 2001 and 2000. The firm performed the annual audit of the financial statements of the Separate Account and KILICO for the years ended December 31, 2002, 2001 and 2000. 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 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 six and one-quarter percent (6.25%) of Purchase Payments. During 2002, 2001 and 2000, KILICO paid gross commissions of approximately $12 thousand, $68 thousand and $300 thousand, 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 Templeton Developing Markets Securities Subaccount, the PIMCO Foreign Bond Subaccount, the PIMCO Low Duration (formerly PIMCO Low Duration Bond) Subaccount, the Scudder Bond Subaccount, the Scudder Government Securities Subaccount and the Scudder High Income (formerly Scudder High Yield) Subaccount; and "yield" and "effective yield" information may be provided in the case of 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 the applicable Withdrawal Charge that may be imposed at the end of the period as well as all other recurring charges and fees applicable under the Contract to all Contract Owner accounts. Premium taxes are not included in the term charges. 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. 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. No standard formula has been 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 include the effect of the applicable Withdrawal Charge that may be imposed at the end of the period or the effect of the Records Maintenance Charge, and thus may be higher than if such charges were deducted. Premium taxes and Records Maintenance Charges are not included in the term 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 charge 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, three, five and ten years, if applicable, and a period covering the time shares of the underlying Portfolio has been held in a Subaccount (life of Subaccount). Nonstandardized total return may 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 (reduced by the applicable charges) 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 High Income (formerly Scudder High Yield) Subaccount. This performance information is stated to reflect that the Separate Account was reorganized on November 3, 1989 as a unit investment trust with Subaccounts investing in corresponding Portfolios of the Fund. 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 Government Securities Subaccount and the Scudder High Income (formerly Scudder High Yield) Subaccount is computed in accordance with a standard method prescribed by rules of the Securities and Exchange Commission. The yields for the Scudder Government Securities Subaccount and the Scudder High Income (formerly Scudder High Yield) Subaccount, based upon the one month period ended March 31, 2003, were 0.57% and 7.81%, 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 Withdrawal Charges or 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 Separate Account's portfolio are not included in the calculation. The Scudder Money Market #1 yield for the seven-day period ended March 31, 2003 was -0.43% and average portfolio maturity was 58 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 Scudder Money Market #1 Subaccounts' effective yield for the seven day period ended March 31, 2003 was -0.43%. 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. 2 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. The standardized performance figures include the deduction of all expenses and fees, including a prorated portion of the Records Maintenance Charge. Redemptions within the first seven years after purchase may be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after seven years. Yield, effective yield and nonstandardized total return do not reflect the effect of the Withdrawal Charge or premium taxes that may be imposed upon the redemption of units. In addition, nonstandardized total return figures do not include the effect of the Records Maintenance Charge. Thus, yield, effective yield and nonstandardized total return figures may be higher than if these charges were deducted. Standardized average annual total return reflects the effect of the applicable Withdrawal Charge (but not premium tax) that may be imposed at the end of the period in question. 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 following tables include standardized average annual total return and nonstandardized total return quotations for various periods as of December 31, 2002. 3 PERFORMANCE FIGURES (as of December 31, 2002) (Standardized and Non-Standardized)
- ---------------------------------------------------------------------------------------------------------------------------------- Average Annual Total Return (1) Total Return (2) (Non-Standardized) (Standardized) - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative Inception Year-To-Date Ending % Annualized % Annualized % Date % Return (3) Value (4) Return Return Return - ---------------------------------------------------------------------------------------------------------------------------------- Franklin Templeton Developing Markets Securities Subaccount (6) -1.53% Life of Subaccount 3/12/1999 34,900 -12.75% -3.55% -4.78% Life of Portfolio 5/1/1997 18,498 -53.75% -12.71% N/A Ten Years N/A N/A N/A N/A Five Years 27,781 -30.55% -7.03% N/A Three Years 23,928 -40.18% -15.74% -17.11% One Year 39,390 -1.53% -1.53% -7.79% - ---------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Capital Appreciation Subaccount -16.84% Life of Subaccount 3/22/1999 28,138 -29.65% -8.88% -10.07% Life of Portfolio 5/1/1997 66,781 66.95% 9.46% N/A Ten Years N/A N/A N/A N/A Five Years 53,241 33.10% 5.89% N/A Three Years 20,732 -48.17% -19.67% -20.99% One Year 33,265 -16.84% -16.84% -22.14% - ---------------------------------------------------------------------------------------------------------------------------------- PIMCO Foreign Bond Subaccount 6.68% Life of Subaccount 3/12/1999 47,364 18.41% 4.60% 3.27% Life of Portfolio 3/31/1999 47,267 18.17% 4.54% 3.22% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 48,379 20.95% 6.54% 4.87% One Year 42,674 6.68% 6.68% -0.10% - ---------------------------------------------------------------------------------------------------------------------------------- PIMCO Low Duration Subaccount 5.57% Life of Subaccount 3/12/1999 47,993 19.98% 4.94% 3.61% Life of Portfolio 3/31/1999 47,950 19.88% 4.94% 3.61% Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 47,467 18.67% 5.87% 4.20% One Year 42,227 5.57% 5.57% -1.14% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder Bond Subaccount 6.17% Life of Subaccount 4/7/1999 47,139 17.85% 4.49% 3.16% Life of Portfolio 7/16/1985 115,801 189.50% 6.27% N/A Ten Years 65,607 64.02% 5.07% N/A Five Years 49,574 23.93% 4.39% N/A Three Years 48,285 20.71% 6.48% 4.80% One Year 42,468 6.17% 6.17% -0.58% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder Growth & Income Subaccount -24.19% Life of Subaccount 5/29/1998 25,857 -35.36% -9.06% -9.87% Life of Portfolio 5/2/1994 59,128 47.82% 4.61% N/A Ten Years N/A N/A N/A N/A Five Years 28,245 -29.39% -6.72% N/A Three Years 25,610 -35.97% -13.81% -15.21% One Year 30,324 -24.19% -24.19% -29.02% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder International Subaccount -19.49% Life of Subaccount 5/29/1998 25,414 -36.47% -9.40% -10.21% Life of Portfolio 5/1/1987 71,033 77.58% 3.73% N/A Ten Years 53,598 34.00% 2.97% N/A Five Years 30,228 -24.43% -5.45% N/A Three Years 16,954 -57.62% -24.88% -26.14% One Year 32,202 -19.49% -19.49% -24.63% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder Money Market Subaccount 0.09% Life of Subaccount 3/12/1999 43,131 7.83% 2.42% 0.87% Life of Portfolio 7/16/1985 76,789 91.97% 3.80% N/A Ten Years 53,445 33.61% 2.94% N/A Five Years 46,072 15.18% 2.87% N/A Three Years 42,951 7.38% 2.40% 0.78% One Year 40,036 0.09% 0.09% -6.27% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder Government Securities Subaccount 6.56% Life of Subaccount 11/3/1989 86,891 117.23% 6.07% 6.04% Life of Portfolio 9/3/1987 98,887 147.22% 6.08% N/A Ten Years 66,645 66.61% 5.24% 5.20% Five Years 51,804 29.51% 5.31% 4.49% Three Years 49,425 23.56% 7.31% 5.62% One Year 42,624 6.56% 6.56% -0.21% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder High Income (formerly Scudder High Yield) Subaccount (5) -1.68% Life of Subaccount 4/6/1982 213,743 434.36% 8.42% 8.41% Life of Portfolio 4/6/1982 213,743 434.36% 8.42% 8.41% Ten Years 57,966 44.91% 3.78% 3.74% Five Years 35,355 -11.61% -2.44% -3.22% Three Years 35,797 -10.51% -3.63% -5.17% One Year 39,328 -1.68% -1.68% -7.93% - ---------------------------------------------------------------------------------------------------------------------------------- Scudder Small Cap Growth Subaccount -34.38% Life of Subaccount 5/2/1994 55,649 39.12% 3.88% 3.84% Life of Portfolio 5/2/1994 55,649 39.12% 3.88% 3.84% Ten Years N/A N/A N/A N/A Five Years 25,137 -37.16% -8.87% -9.63% Three Years 16,225 -59.44% -25.98% -27.22% One Year 26,246 -34.38% -34.38% -38.58% - ---------------------------------------------------------------------------------------------------------------------------------- SVS Dreman High Return Equity Subaccount -19.17% Life of Subaccount 6/1/1998 38,375 -4.06% -0.90% -1.75% Life of Portfolio 5/4/1998 37,268 -6.83% -1.51% N/A Ten Years N/A N/A N/A N/A Five Years N/A N/A N/A N/A Three Years 41,737 4.34% 1.43% -0.18% One Year 32,333 -19.17% -19.17% -24.32% - ----------------------------------------------------------------------------------------------------------------------------------
The performance data quoted for the Subaccounts is based on past performance and is not representative of future results. Investments return and principal value will fluctuate so that unit values, when redeemed, may be worth more or less than their original cost. See page 1 for additional information. 4 PERFORMANCE FIGURES--NOTES * N/A Not Applicable (1) The Non-Standardized Total Return figures quoted are based on a hypothetical $40,000 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. (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. (3) The Year to Date percentage return figures quoted are based on the change in unit values. (4) The Ending Values quoted are based on a $40,000 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) The high yield potential offered by this Subaccount reflects the substantial risks associated with investments in high-yield bonds. (6) Performance of Class 2 Shares for periods after May 1, 1997 reflects Class 2's higher annual fees and expenses resulting from its Rule 12b-1 plan. Maximum annual plan expenses are 0.25%. Past expense reductions by the portfolio's manager increased returns. 5 The following tables illustrate an assumed $40,000 investment in shares of certain Subaccounts. The ending value does not include the effect of the applicable Withdrawal Charge that may be imposed at the end of the period, and thus may be higher than if such charge were deducted. Each table covers the period from the inception date of each Portfolio to December 31, 2002. FRANKLIN TEMPLETON DEVELOPING MARKETS SECURITIES SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1997 ........................................................ $ 26,634 1998 ........................................................ 20,741 1999 ........................................................ 30,922 2000 ........................................................ 20,723 2001 ........................................................ 18,785 2002 ........................................................ 18,498 JANUS ASPEN CAPITAL APPRECIATION SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1997 ........................................................ $ 50,173 1998 ........................................................ 78,235 1999 ........................................................ 128,849 2000 ........................................................ 103,958 2001 ........................................................ 80,302 2002 ........................................................ 66,781 PIMCO FOREIGN BOND SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1999 ........................................................ $ 39,081 2000 ........................................................ 41,751 2001 ........................................................ 44,306 2002 ........................................................ 47,267 PIMCO LOW DURATION SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1999 ........................................................ $ 40,407 2000 ........................................................ 42,790 2001 ........................................................ 45,421 2002 ........................................................ 47,950 SCUDDER BOND SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1985 ........................................................ $ 42,748 6 1986 ......................................................... 47,334 1987 ......................................................... 47,250 1988 ......................................................... 49,145 1989 ......................................................... 54,117 1990 ......................................................... 57,674 1991 ......................................................... 66,903 1992 ......................................................... 70,603 1993 ......................................................... 78,257 1994 ......................................................... 73,480 1995 ......................................................... 85,651 1996 ......................................................... 86,839 1997 ......................................................... 93,437 1998 ......................................................... 98,204 1999 ......................................................... 95,930 2000 ......................................................... 102,553 2001 ......................................................... 109,071 2002 ......................................................... 115,801 SCUDDER GROWTH AND INCOME SUBACCOUNT Year Ended Total 12/31 Value 1994 ......................................................... $ 41,578 1995 ......................................................... 54,021 1996 ......................................................... 65,077 1997 ......................................................... 83,736 1998 ......................................................... 88,512 2000 ......................................................... 89,159 2001 ......................................................... 77,994 2002 ......................................................... 59,128 SCUDDER INTERNATIONAL SUBACCOUNT Year Ended Total 12/31 Value 1987 ......................................................... $ 35,409 1988 ......................................................... 40,768 1989 ......................................................... 55,419 1990 ......................................................... 50,462 1991 ......................................................... 55,468 1992 ......................................................... 53,012 1993 ......................................................... 72,052 1994 ......................................................... 70,457 1995 ......................................................... 77,209 1996 ......................................................... 87,390 1997 ......................................................... 93,997 1998 ......................................................... 109,981 1999 ......................................................... 167,592 2000 ......................................................... 129,399 2001 ......................................................... 88,235 2002 ......................................................... 71,033 7 SCUDDER MONEY MARKET SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1985 ......................................................... $ 41,035 1986 ......................................................... 42,868 1987 ......................................................... 44,800 1988 ......................................................... 47,318 1989 ......................................................... 50,806 1990 ......................................................... 54,043 1991 ......................................................... 56,399 1992 ......................................................... 57,472 1993 ......................................................... 58,118 1994 ......................................................... 59,454 1995 ......................................................... 61,954 1996 ......................................................... 64,214 1997 ......................................................... 66,670 1998 ......................................................... 69,234 1999 ......................................................... 71,514 2000 ......................................................... 74,563 2001 ......................................................... 76,720 2002 ......................................................... 76,789 SCUDDER GOVERNMENT SECURITIES SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1987 ......................................................... $ 40,113 1988 ......................................................... 40,803 1989 ......................................................... 46,079 1990 ......................................................... 49,938 1991 ......................................................... 56,802 1992 ......................................................... 59,351 1993 ......................................................... 62,354 1994 ......................................................... 59,715 1995 ......................................................... 70,195 1996 ......................................................... 71,044 1997 ......................................................... 76,353 1998 ......................................................... 80,597 1999 ......................................................... 80,029 2000 ......................................................... 87,546 2001 ......................................................... 92,800 2002 ......................................................... 98,887 SCUDDER HIGH INCOME (FORMERLY SCUDDER HIGH YIELD) SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1982 ......................................................... $ 49,487 1983 ......................................................... 56,067 1984 ......................................................... 62,325 1985 ......................................................... 74,906 1986 ......................................................... 87,079 1987 ......................................................... 91,017 8 1988 ......................................................... 104,107 1989 ......................................................... 101,410 1990 ......................................................... 84,555 1991 ......................................................... 126,846 1992 ......................................................... 147,452 1993 ......................................................... 174,666 1994 ......................................................... 168,562 1995 ......................................................... 195,336 1996 ......................................................... 219,548 1997 ......................................................... 241,708 1998 ......................................................... 241,834 1999 ......................................................... 238,841 2000 ......................................................... 210,198 2001 ......................................................... 217,394 2002 ......................................................... 213,743 SCUDDER SMALL CAP GROWTH SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1994 ......................................................... $ 41,215 1995 ......................................................... 52,902 1996 ......................................................... 66,871 1997 ......................................................... 88,557 1998 ......................................................... 103,390 1999 ......................................................... 137,190 2000 ......................................................... 120,796 2001 ......................................................... 84,811 2002 ......................................................... 55,649 SVS DREMAN HIGH RETURN EQUITY SUBACCOUNT Year Ended Total 12/31 Value - ----- ----- 1998 ......................................................... $ 40,766 1999 ......................................................... 35,717 2000 ......................................................... 45,973 2001 ......................................................... 46,105 2002 ......................................................... 37,268 9 TAX-DEFERRED ACCUMULATION NON-QUALIFIED ANNUITY CONVENTIONAL After-tax contributions SAVINGS PLAN and tax-deferred earnings After-tax ------------------------- contributions Taxable Lump and taxable No Withdrawals Sum Withdrawal 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 8% return used is for illustrative purposes only, and is not reflective of current market conditions. 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 Contracts. 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 annuity charges and expenses: 1.25% mortality and expense risk; .15% administration charges; 7% maximum deferred withdrawal 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. [IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]. 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. 10 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. EXPERTS The consolidated balance sheets of KILICO as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002, the statements of assets, liabilities and contract owners' equity of the KILICO Variable Annuity Separate Account as of December 31, 2002, and the related statements of operations and changes in contract owners' equity for the periods indicated, have been included herein in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as 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 assets attributable to other variable annuity contracts offered by KILICO through the Separate Account. 11 Report of Independent Accountants To the Board of Directors and Stockholder of Kemper Investors Life Insurance Company and Contract Owners of the Kemper Investors Life Insurance Company Variable Annuity Separate Account: In our opinion, the accompanying statements of assets, liabilities and contract owners' equity and the related statements of operations and of changes in contract owners' equity present fairly, in all material respects, the financial position of the subaccounts of the Kemper Investors Life Insurance Company 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, Dreyfus I.P. Mid Cap Stock, Fidelity VIP Equity Income, Fidelity VIP Growth, Fidelity VIP II Asset Manager, Fidelity VIP II Contrafund, Fidelity VIP II Index 500, Templeton Developing Markets Securities, ING VP Emerging Markets, ING VP Natural Resources Trust, INVESCO VIF-Utilities, Janus Aspen Aggressive Growth, Janus Aspen Balanced, Janus Aspen Capital Appreciation, Janus Aspen Growth, Janus Aspen Growth and Income, Janus Aspen Worldwide Growth, J.P. Morgan Small Company, PIMCO Foreign Bond, PIMCO Low Duration, 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 Variable Series I), Scudder Aggressive Growth, Scudder Blue Chip, Scudder Contrarian Value, Scudder Global Blue Chip, Scudder Government Securities, Scudder Growth, Scudder High Income, Scudder Horizon 10+, Scudder Horizon 20+, Scudder Horizon 5, Scudder International Select Equity, Scudder Investment Grade Bond, Scudder Money Market (Scudder Variable Series II), Scudder New Europe, Scudder Small Cap Growth, Scudder Strategic Income, Scudder Technology Growth, Scudder Total Return, SVS Davis Venture Value, SVS Dreman Financial Services, SVS Dreman High Return Equity, SVS Dreman Small Cap Value, SVS Eagle Focused Large Cap Growth, SVS Focus Value + Growth, SVS Index 500, SVS INVESCO Dynamic Growth, SVS Janus Growth and Income, SVS Janus Growth Opportunities, SVS Oak Strategic Equity and SVS Turner Mid-Cap Growth) at December 31, 2002 and the results of each of their operations and the changes in each of their contract owners' equity for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Kemper Investors Life Insurance 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 direct confirmation of portfolio shares owned at December 31, 2002 with the underlying funds, provide a reasonable basis for our opinion. Chicago, Illinois February 24, 2003 12 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
The Alger American Fund ------------------------------------------------------------------------------------- Alger American Alger American Alger American Alger American Alger American Small Balanced Growth Leveraged AllCap MidCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value $ 90,038 15,061 48,717 7,528 3,314 Dividends and other receivables - - - - 2 ------------------------------------------------------------------------------------- Total assets 90,038 15,061 48,717 7,528 3,316 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 2 2 - 2 - ------------------------------------------------------------------------------------- Contract owners' equity $ 90,036 15,059 48,717 7,526 3,316 ===================================================================================== Accumulation Period $ 90,009 15,028 48,717 7,526 3,282 Annuity Period 27 31 - - 34 ------------------------------------------------------------------------------------- Total Contract Owners' Equity $ 90,036 15,059 48,717 7,526 3,316 ===================================================================================== Units Outstanding 10,165 445 9,225 383 174 ===================================================================================== American Century Variable Portfolios, Inc. Credit Suisse Trust -------------------------------------- ------------------------------------------ American Century Credit Suisse Trust VP Income & American Century Credit Suisse Trust Global Post- Growth VP Value Emerging Markets Venture Capital Subaccount Subaccount Subaccount Subaccount -------------------------------------- ------------------------------------------ ASSETS Investments in underlying portfolio funds, at current market value 14,725 23,974 19,372 11,395 Dividends and other receivables 8 22 - - -------------------------------------- ------------------------------------------ Total assets 14,733 23,996 19,372 11,395 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 6 15 24 - -------------------------------------- ------------------------------------------ Contract owners' equity 14,727 23,981 19,348 11,395 ====================================== ========================================== Accumulation Period 14,711 23,945 19,335 11,394 Annuity Period 16 36 13 1 -------------------------------------- ------------------------------------------ Total Contract Owners' Equity 14,727 23,981 19,348 11,395 ====================================== ========================================== Units Outstanding 2,918 3,642 2,581 1,990 ====================================== ========================================== The Dreyfus Socially Dreyfus Responsible Investment Growth Fund, Inc. Portfolios ------------------------------------- Dreyfus Socially Responsible Dreyfus I.P. Mid Growth Cap Stock Subaccount Subaccount ------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 11,680 100,874 Dividends and other receivables - - ------------------------------------- Total assets 11,680 100,874 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 1 - ------------------------------------- Contract owners' equity 11,679 100,874 ===================================== Accumulation Period 11,667 100,757 Annuity Period 12 117 ------------------------------------- Total Contract Owners' Equity 11,679 100,874 ===================================== Units Outstanding 1,731 10,438 =====================================
See accompanying notes to financial statements 13 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
Fidelity Variable Insurance Products Fund Fidelity Variable Insurance Products Fund II --------------------------------------------------------------------------------- Fidelity VIP Fidelity VIP Fidelity VIP II Fidelity VIP II Fidelity VIP II Equity Income Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 44,979 53,804 5,884 54,039 97,675 Dividends and other receivables - - 1 30 - --------------------------------------------------------------------------------- Total assets 44,979 53,804 5,885 54,069 97,675 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 45 7 1 15 11 --------------------------------------------------------------------------------- Contract owners' equity 44,934 53,797 5,884 54,054 97,664 ================================================================================= Accumulation Period 44,861 53,729 5,642 53,953 97,312 Annuity Period 73 68 242 101 352 --------------------------------------------------------------------------------- Total Contract Owners' Equity 44,934 53,797 5,884 54,054 97,664 ================================================================================= Units Outstanding 1,845 1,600 292 2,401 940 ================================================================================= Franklin Templeton INVESCO Variable Variable Insurance ING VP Emerging ING VP Natural Investment Funds, Products Trust Markets Fund, Inc. Resources Trust Inc. ------------------ ------------------ ------------------ ------------------ Templeton Developing ING VP Emerging ING VP Natural INVESCO VIF- Markets Securities Markets Fund, Inc. Resources Trust Utilities Subaccount Subaccount Subaccount Subaccount ------------------ ------------------ ------------------ ------------------ ASSETS Investments in underlying portfolio funds, at current market value 29 5,246 3,033 8,747 Dividends and other receivables - 3 - - ------------------ ------------------ ------------------ ------------------ Total assets 29 5,249 3,033 8,747 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 13 - - ------------------ ------------------ ------------------ ------------------ Contract owners' equity 29 5,236 3,033 8,747 ================== ================== ================== ================== Accumulation Period 29 5,203 3,033 8,747 Annuity Period - 33 - - ------------------ ------------------ ------------------ ------------------ Total Contract Owners' Equity 29 5,236 3,033 8,747 ================== ================== ================== ================== Units Outstanding 3 807 242 1,638 ================== ================== ================== ================== Janus Aspen Series --------------------------------------------------------------------------------- Janus Aspen Janus Aspen Janus Aspen Capital Janus Aspen Aggressive Growth Balanced Appreciation Growth Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 56,680 141,595 1,356 110,057 Dividends and other receivables - 223 - 3 --------------------------------------------------------------------------------- Total assets 56,680 141,818 1,356 110,060 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 14 9 - 39 --------------------------------------------------------------------------------- Contract owners' equity 56,666 141,809 1,356 110,021 ================================================================================= Accumulation Period 56,625 140,722 1,356 109,817 Annuity Period 41 1,087 - 204 --------------------------------------------------------------------------------- Total Contract Owners' Equity 56,666 141,809 1,356 110,021 ================================================================================= Units Outstanding 3,312 5,660 193 9,555 =================================================================================
See accompanying notes to financial statements. 14 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
J.P. Morgan Janus Aspen Series Series Trust II ---------------------------------- ----------------- Janus Aspen Growth and Janus Aspen JP Morgan Small Income Worldwide Growth Company Subaccount Subaccount Subaccount ---------------------------------- ----------------- ASSETS Investments in underlying portfolio funds, at current market value 43,037 134,037 8,264 Dividends and other receivables 3 2 1 ---------------------------------- ----------------- Total assets 43,040 134,039 8,265 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 8 - ---------------------------------- ----------------- Contract owners' equity 43,040 134,031 8,265 ================================== ================= Accumulation Period 42,968 133,743 8,251 Annuity Period 72 288 14 ---------------------------------- ----------------- Total Contract Owners' Equity 43,040 134,031 8,265 ================================== ================= Units Outstanding 3,720 5,892 800 ================================== ================= PIMCO Variable Insurance Trust ---------------------------------- PIMCO Foreign PIMCO Low Bond Duration Subaccount Subaccount ---------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 210 231 Dividends and other receivables - - ---------------------------------- Total assets 210 231 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - - ---------------------------------- Contract owners' equity 210 231 ================================== Accumulation Period 210 231 Annuity Period - - ---------------------------------- Total Contract Owners' Equity 210 231 ================================== Units Outstanding 18 19 ================================== 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 20,833 17,198 36,569 64,169 Dividends and other receivables - - - 2 ------------------------------------------------------------------------------ Total assets 20,833 17,198 36,569 64,171 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - - - - ------------------------------------------------------------------------------ Contract owners' equity 20,833 17,198 36,569 64,171 ============================================================================== Accumulation Period 20,833 17,198 36,559 64,146 Annuity Period - - 10 25 ------------------------------------------------------------------------------ Total Contract Owners' Equity 20,833 17,198 36,569 64,171 ============================================================================== Units Outstanding 5,790 2,214 5,041 7,117 ============================================================================== Scudder Variable Series I ------------------------------------------------------------------------------- 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 37,291 49,863 83,411 30 Dividends and other receivables - - 3 - ------------------------------------------------------------------------------- Total assets 37,291 49,863 83,414 30 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - - 5 - ------------------------------------------------------------------------------- Contract owners' equity 37,291 49,863 83,409 30 =============================================================================== Accumulation Period 37,291 49,863 83,330 30 Annuity Period - - 79 - ------------------------------------------------------------------------------- Total Contract Owners' Equity 37,291 49,863 83,409 30 =============================================================================== Units Outstanding 5,766 6,232 12,444 3 ===============================================================================
See accompanying notes to financial statements. 15 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ---------------------------------------------------------------------------- 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 27,890 78,109 113,614 22,865 Dividends and other receivables - - 15 - ---------------------------------------------------------------------------- Total assets 27,890 78,109 113,629 22,865 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 7 32 - ---------------------------------------------------------------------------- Contract owners' equity 27,890 78,102 113,597 22,865 ============================================================================ Accumulation Period 27,890 78,014 113,279 22,861 Annuity Period - 88 318 4 ---------------------------------------------------------------------------- Total Contract Owners' Equity 27,890 78,102 113,597 22,865 ============================================================================ Units Outstanding 4,070 16,215 35,977 2,745 ============================================================================ Scudder Variable Series II ------------------------------------------------------------------------- Scudder Scudder Government Scudder High International Select Securities Scudder Growth Income Equity Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 237,393 178,929 179,654 75,036 Dividends and other receivables - 1 40 20 ------------------------------------------------------------------------- Total assets 237,393 178,930 179,694 75,056 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 30 87 22 9 ------------------------------------------------------------------------- Contract owners' equity 237,363 178,843 179,672 75,047 ========================================================================= Accumulation Period 236,662 177,440 178,313 74,751 Annuity Period 701 1,403 1,359 296 ------------------------------------------------------------------------- Total Contract Owners' Equity 237,363 178,843 179,672 75,047 ========================================================================= Units Outstanding 50,525 54,587 40,754 36,850 ========================================================================= Scudder Variable Series II ------------------------------------------------------- Scudder Investment Grade Scudder Money Scudder New Bond Market Europe Subaccount Subaccount Subaccount ------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 99,494 306,169 - Dividends and other receivables - 167 - ------------------------------------------------------- Total assets 99,494 306,336 - LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 12 25 - ------------------------------------------------------- Contract owners' equity 99,482 306,311 - ======================================================= Accumulation Period 99,241 304,968 - Annuity Period 241 1,343 - ------------------------------------------------------- Total Contract Owners' Equity 99,482 306,311 - ======================================================= Units Outstanding 17,704 54,362 - ======================================================= Scudder Variable Series II ----------------------------------------------------- Scudder Scudder Small Scudder Strategic Technology Cap Growth Income Growth Subaccount Subaccount Subaccount ----------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 100,134 24,572 145,612 Dividends and other receivables 5 1 12 ----------------------------------------------------- Total assets 100,139 24,573 145,624 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 14 - - ----------------------------------------------------- Contract owners' equity 100,125 24,573 145,624 ===================================================== Accumulation Period 99,950 24,521 145,579 Annuity Period 175 52 45 ----------------------------------------------------- Total Contract Owners' Equity 100,125 24,573 145,624 ===================================================== Units Outstanding 45,002 2,400 28,007 =====================================================
See accompanying notes to financial statements. 16 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY DECEMBER 31, 2002 (IN THOUSANDS)
Scudder Variable Series II --------------------------------------------------------------------------------------- SVS Dreman Scudder Total SVS Davis Financial SVS Dreman High SVS Dreman Return Venture Value Services Return Equity Small Cap Value Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 416,331 113,301 56,572 316,952 149,098 Dividends and other receivables 59 2 - 1 - --------------------------------------------------------------------------------------- Total assets 416,390 113,303 56,572 316,953 149,098 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 364 - - - 45 --------------------------------------------------------------------------------------- Contract owners' equity 416,026 113,303 56,572 316,953 149,053 ======================================================================================= Accumulation Period 412,677 113,250 56,565 316,767 148,881 Annuity Period 3,349 53 7 186 172 --------------------------------------------------------------------------------------- Total Contract Owners' Equity 416,026 113,303 56,572 316,953 149,053 ======================================================================================= Units Outstanding 83,840 14,493 5,697 33,048 43,904 ======================================================================================= Scudder Variable Series II --------------------------------------------------------------------- SVS Eagle Focused Large SVS Focus Value SVS INVESCO Cap Growth + Growth SVS Index 500 Dynamic Growth Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 40,566 39,176 146,427 18,257 Dividends and other receivables - 25 1 - --------------------------------------------------------------------- Total assets 40,566 39,201 146,428 18,257 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables - 7 - - --------------------------------------------------------------------- Contract owners' equity 40,566 39,194 146,428 18,257 ===================================================================== Accumulation Period 40,566 38,934 146,417 18,257 Annuity Period - 260 11 - --------------------------------------------------------------------- Total Contract Owners' Equity 40,566 39,194 146,428 18,257 ===================================================================== Units Outstanding 6,095 16,459 23,118 3,074 ===================================================================== Scudder Variable Series II --------------------------------------------------------------------- SVS Janus SVS Janus SVS Oak SVS Turner Growth and Growth Strategic Mid-Cap Income Opportunities Equity Growth Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- ASSETS Investments in underlying portfolio funds, at current market value 105,210 75,716 31,408 46,432 Dividends and other receivables - - - - --------------------------------------------------------------------- Total assets 105,210 75,716 31,408 46,432 LIABILITIES AND CONTRACT OWNERS' EQUITY Liabilities - Other payables 2 - - - --------------------------------------------------------------------- Contract owners' equity 105,208 75,716 31,408 46,432 ===================================================================== Accumulation Period 105,145 75,712 31,408 46,432 Annuity Period 63 4 - - --------------------------------------------------------------------- Total Contract Owners' Equity 105,208 75,716 31,408 46,432 ===================================================================== Units Outstanding 17,677 17,795 7,019 7,947 =====================================================================
See accompanying notes to financial statements. 17 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
The Alger American Fund -------------------------------------------------------------------------------------- Alger American Alger American Alger American Alger American Leveraged Alger American Small Balanced Growth AllCap MidCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------------------- REVENUE Dividend income $ 1,545 8 5 - - EXPENSES Mortality and expense risk charges 1,275 244 853 93 48 -------------------------------------------------------------------------------------- Net investment income (loss) 270 (236) (848) (93) (48) -------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,724) (5,922) (10,217) (517) (580) Change in unrealized appreciation (depreciation) of investments (12,083) (1,809) (15,593) (1,930) (478) -------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (13,807) (7,731) (25,810) (2,447) (1,058) -------------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations $ (13,537) (7,967) (26,658) (2,540) (1,106) ====================================================================================== American Century Variable Portfolios, Inc. Credit Suisse Trust -------------------------------- -------------------------------- American Credit Suisse Century VP American Credit Suisse Trust Global Income & Century Trust Emerging Post-Venture Growth VP Value Markets Capital Subaccount Subaccount Subaccount Subaccount -------------------------------- -------------------------------- REVENUE Dividend income 53 1,638 41 - EXPENSES Mortality and expense risk charges 87 367 281 189 -------------------------------- -------------------------------- Net investment income (loss) (34) 1,271 (240) (189) -------------------------------- -------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (1,032) (1,707) (3,126) (3,595) Change in unrealized appreciation (depreciation) of investments (154) (4,403) (155) (2,109) -------------------------------- -------------------------------- Net realized and unrealized gain (loss) on investments (1,186) (6,110) (3,281) (5,704) -------------------------------- -------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (1,220) (4,839) (3,521) (5,893) ================================ ================================ The Dreyfus Socially Dreyfus Repsonsible Variable Growth Fund, Investment Inc. Fund -------------------------------- Dreyfus Socially Dreyfus Responsible I.P. Mid Growth Cap Stock Subaccount Subaccount -------------------------------- REVENUE Dividend income 31 303 EXPENSES Mortality and expense risk charges 188 1,408 -------------------------------- Net investment income (loss) (157) (1,105) -------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,019) (1,459) Change in unrealized appreciation (depreciation) of investments (1,822) (13,674) -------------------------------- Net realized and unrealized gain (loss) on investments (4,841) (15,133) -------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (4,998) (16,238) ================================
See accompanying notes to financial statements. 18 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Fidelity Variable Insurance Products Fund Fidelity Variable Insurance Products Fund II -------------------------------------------------------------------------------------- Fidelity Fidelity Fidelity Fidelity VIP Fidelity VIP VIP II VIP II VIP II Equity Income Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------------------- REVENUE Dividend income 1,918 171 264 493 1,517 EXPENSES Mortality and expense risk charges 650 878 85 781 1,454 -------------------------------------------------------------------------------------- Net investment income (loss) 1,268 (707) 179 (288) 63 -------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (5,414) (21,392) (1,015) (6,546) (20,822) Change in unrealized appreciation (depreciation) of investments (6,231) (3,782) 67 (130) (9,476) -------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (11,645) (25,174) (948) (6,676) (30,298) -------------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (10,377) (25,881) (769) (6,964) (30,235) ====================================================================================== Franklin Templeton ING VP INVESCO Variable Emerging ING VP Natural Variable Insurance Markets Fund, Resources Investment Products Trust Inc. Trust Funds, Inc. -------------- -------------- -------------- -------------- Templeton ING VP Developing Emerging Markets Markets Fund, ING VP Natural INVESCO Securities Inc. Resources Trust VIF-Utilities Subaccount Subaccount Subaccount Subaccount -------------- -------------- -------------- -------------- REVENUE Dividend income - - 6 46 EXPENSES Mortality and expense risk charges - 76 41 118 -------------- -------------- -------------- -------------- Net investment income (loss) - (76) (35) (72) -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments - (1,282) (236) (604) Change in unrealized appreciation (depreciation) of investments - 600 132 (1,356) -------------- -------------- -------------- -------------- Net realized and unrealized gain (loss) on investments - (682) (104) (1,960) -------------- -------------- -------------- -------------- Net increase (decrease) in contract owners' equity resulting from operations - (758) (139) (2,032) ============== ============== ============== ============== Janus Aspen Series -------------------------------------------------------------------- Janus Aspen Janus Aspen Aggressive Janus Aspen Capital Janus Aspen Growth Balanced Appreciation Growth Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income - 3,698 10 - EXPENSES Mortality and expense risk charges 823 1,970 24 1,943 -------------------------------------------------------------------- Net investment income (loss) (823) 1,728 (14) (1,943) -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (45,198) (10,277) (381) (58,656) Change in unrealized appreciation (depreciation) of investments 23,096 (3,888) 66 13,071 -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (22,102) (14,165) (315) (45,585) -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (22,925) (12,437) (329) (47,528) ====================================================================
See accompanying notes to financial statements. 19 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
J.P. Morgan Series Janus Aspen Series Trust II PIMCO Variable Insurance Trust -------------------------------- -------------- ------------------------------- Janus Aspen Janus Aspen JP Morgan Growth and Worldwide Small PIMCO Foreign PIMCO Low Income Growth Company Bond Duration Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------- -------------- ------------------------------- REVENUE Dividend income 451 1,484 23 13 10 EXPENSES Mortality and expense risk charges 797 2,189 156 5 3 -------------------------------- -------------- ------------------------------- Net investment income (loss) (346) (705) (133) 8 7 -------------------------------- -------------- ------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,292) (40,937) (1,763) 10 3 Change in unrealized appreciation (depreciation) of investments (11,247) (11,177) (1,417) 2 4 -------------------------------- -------------- ------------------------------- Net realized and unrealized gain (loss) on investments (14,539) (52,114) (3,180) 12 7 -------------------------------- -------------- ------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (14,885) (52,819) (3,313) 20 14 ================================ ============== =============================== Scudder Variable Series I -------------------------------------------------------------------- Scudder Scudder 21st Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income - 973 143 - EXPENSES Mortality and expense risk charges 334 219 591 994 -------------------------------------------------------------------- Net investment income (loss) (334) 754 (448) (994) -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (3,006) (142) (4,866) (4,706) Change in unrealized appreciation (depreciation) of investments (10,296) 425 (10,389) (11,367) -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (13,302) 283 (15,255) (16,073) -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (13,636) 1,037 (15,703) (17,067) ==================================================================== Scudder Variable Series I -------------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- REVENUE Dividend income 430 - 727 - EXPENSES Mortality and expense risk charges 599 711 1,322 - -------------------------------------------------------------------- Net investment income (loss) (169) (711) (595) - -------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (4,502) (1,491) (11,981) - Change in unrealized appreciation (depreciation) of investments (7,635) (12,243) (1,962) - -------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (12,137) (13,734) (13,943) - -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (12,306) (14,445) (14,538) - ====================================================================
See accompanying notes to financial statements. 20 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II --------------------------------------------------------------------------------------------- Scudder Scudder Scudder Scudder Scudder Aggressive Scudder Contrarian Global Government Scudder High Growth Blue Chip Value Blue Chip Securities Growth Income Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------------------------------- REVENUE Dividend income 154 349 1,898 148 6,147 - 17,861 EXPENSES Mortality and expense risk charges 459 1,251 1,726 325 2,656 3,017 2,336 --------------------------------------------------------------------------------------------- Net investment income (loss) (305) (902) 172 (177) 3,491 (3,017) 15,525 --------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (8,938) (4,896) (5,313) (1,894) 2,549 (85,980) (27,655) Change in unrealized appreciation (depreciation) of investments (4,144) (18,545) (18,105) (2,234) 6,173 1,769 10,241 --------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (13,082) (23,441) (23,418) (4,128) 8,722 (84,211) (17,414) --------------------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (13,387) (24,343) (23,246) (4,305) 12,213 (87,228) (1,889) ============================================================================================= Scudder Variable Series II ---------------------------------------------------------------------------------- Scudder Scudder Scudder Scudder International Investment Scudder Scudder Small Strategic Select Equity Grade Bond Money Market New Europe Cap Growth Income Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------------- REVENUE Dividend income 312 2,569 4,956 180 - 411 EXPENSES Mortality and expense risk charges 888 1,142 4,288 220 1,615 259 ---------------------------------------------------------------------------------- Net investment income (loss) (576) 1,427 668 (40) (1,615) 152 ---------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (22,137) 470 - (6,124) (54,429) 381 Change in unrealized appreciation (depreciation) of investments 12,519 3,597 - 1,325 1,841 1,226 ---------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (9,618) 4,067 - (4,799) (52,588) 1,607 ---------------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (10,194) 5,494 668 (4,839) (54,203) 1,759 ==================================================================================
See accompanying notes to financial statements. 21 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ------------------------------------------------------------------ SVS Dreman Scudder Scudder SVS Davis SVS Dreman High Technology Total Venture Financial Return Growth Return Value Services Equity Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ REVENUE Dividend income 197 14,184 149 474 4,158 EXPENSES Mortality and expense risk charges 2,424 6,397 1,542 815 4,556 ------------------------------------------------------------------ Net investment income (loss) (2,227) 7,787 (1,393) (341) (398) ------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (28,246) (67,376) (2,338) 580 (1,747) Change in unrealized appreciation (depreciation) of investments (54,303) (29,917) (17,214) (6,584) (71,516) ------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (82,549) (97,293) (19,552) (6,004) (73,263) ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (84,776) (89,506) (20,945) (6,345) (73,661) ================================================================== Scudder Variable Series II ------------------------------------------------------------------- SVS Eagle SVS Dreman Focused SVS Focus SVS INVESCO Small Cap Large Value SVS Index Dynamic Value Cap Growth + Growth 500 Growth Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------- REVENUE Dividend income 539 - 254 799 - EXPENSES Mortality and expense risk charges 2,054 595 629 2,161 274 ------------------------------------------------------------------- Net investment income (loss) (1,515) (595) (375) (1,362) (274) ------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments 3,050 (3,402) (7,198) (11,328) (1,184) Change in unrealized appreciation (depreciation) of investments (28,127) (11,050) (7,620) (30,105) (6,540) ------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (25,077) (14,452) (14,818) (41,433) (7,724) ------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (26,592) (15,047) (15,193) (42,795) (7,998) =================================================================== Scudder Variable Series II ------------------------------------------------------- SVS Janus SVS Janus SVS Oak SVS Turner Growth and Growth Strategic Mid-Cap Income Opportunities Equity Growth Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------- REVENUE Dividend income 694 - - EXPENSES Mortality and expense risk charges 1,578 1,200 488 677 ------------------------------------------------------- Net investment income (loss) (884) (1,200) (488) (677) ------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sale of investments (5,257) (6,881) (3,441) (2,235) Change in unrealized appreciation (depreciation) of investments (21,939) (25,884) (15,438) (17,485) ------------------------------------------------------- Net realized and unrealized gain (loss) on investments (27,196) (32,765) (18,879) (19,720) ------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (28,080) (33,965) (19,367) (20,397) =======================================================
See accompanying notes to financial statements. 22 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
The Alger American Fund ------------------------------------------------------------------ Alger Alger Alger Alger American American Alger American American American Leveraged MidCap Small Balanced Growth AllCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ OPERATIONS Net investment Income (loss) $ 270 (236) (848) (93) (48) Net realized gain (loss) on sale of Investments (1,724) (5,922) (10,217) (517) (580) Change in unrealized appreciation (depreciation) of investments (12,083) (1,809) (15,593) (1,930) (478) ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (13,537) (7,967) (26,658) (2,540) (1,106) ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 15,601 3,549 10,314 3,483 1,421 Net transfer (to) from affiliate and subaccounts 8,194 (866) (5,513) 2,186 (325) Payments for redemptions (3,984) (1,434) (2,632) (470) (307) Guaranteed retirement income benefit fees, maintenance fees, and other fees (257) (24) (182) (8) (6) Annuity payout reserve adjustment (2) (1) - - 2 ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 19,552 1,224 1,987 5,191 785 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 6,015 (6,743) (24,671) 2,651 (321) CONTRACT OWNERS' EQUITY Beginning of period 84,021 21,802 73,388 4,875 3,637 ------------------------------------------------------------------ End of period $ 90,036 15,059 48,717 7,526 3,316 ================================================================== The Dreyfus Socially American Responsible Dreyfus Century Variable Growth Investment Portfolios, Inc. Credit Suisse Trust Fund, Inc. Portfolios ----------------------- ------------------------ -------------------------- Credit American Credit Suisse Century Suisse Trust Dreyfus VP Income American Trust Global Post Socially Dreyfus & Century Emerging Venture Responsible I.P. Mid Growth VP Value Markets Capital Growth Cap Stock Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------- ------------------------ ------------------------- OPERATIONS Net investment Income (loss) (34) 1,271 (240) (189) (157) (1,105) Net realized gain (loss) on sale of Investments (1,032) (1,707) (3,126) (3,595) (3,019) (1,459) Change in unrealized appreciation (depreciation) of investments (154) (4,403) (155) (2,109) (1,822) (13,674) ----------------------- ------------------------ ------------------------ Net increase (decrease) in contract owners' equity resulting from operations (1,220) (4,839) (3,521) (5,893) (4,998) (16,238) ----------------------- ------------------------ ------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,806 6,965 3,646 3,741 2,612 17,744 Net transfer (to) from affiliate and subaccounts 9,435 1,079 3,400 (5) (728) 18,564 Payments for redemptions (647) (2,666) (756) (390) (824) (3,356) Guaranteed retirement income benefit fees, maintenance fees, and other fees (58) (35) (58) (40) (37) (292) Annuity payout reserve adjustment 8 22 (24) - (1) - ----------------------- ------------------------ ------------------------ Net increase (decrease) from contract owners' equity transactions 10,544 5,365 6,208 3,306 1,022 32,660 ----------------------- ------------------------ ------------------------ Total increase (decrease) in contract owners' equity 9,324 526 2,687 (2,587) (3,976) 16,422 CONTRACT OWNERS' EQUITY Beginning of period 5,403 23,455 16,661 13,982 15,655 84,452 ----------------------- ------------------------ ------------------------ End of period 14,727 23,981 19,348 11,395 11,679 100,874 ======================= ======================== ========================
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, 2002 (in thousands)
Fidelity Variable Fidelity Variable Insurance Products Fund Insurance Products Fund II ------------------------------------------------------------------------ Fidelity Fidelity Fidelity Fidelity VIP Fidelity VIP VIP II VIP II VIP II Equity Income Growth Asset Manager Contrafund Index 500 Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------ OPERATIONS Net investment income (loss) 1,268 (707) 179 (288) 63 Net realized gain (loss) on sale of investments (5,414) (21,392) (1,015) (6,546) (20,822) Change in unrealized appreciation (depreciation) of investments (6,231) (3,782) 67 (130) (9,476) ------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (10,377) (25,881) (769) (6,964) (30,235) ------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 7,841 10,414 736 5,865 12,103 Net transfer (to) from affiliate and subaccounts 3,741 (5,280) (627) (1,095) (19,384) Payments for redemptions (6,271) (6,887) (677) (6,242) (11,947) Guaranteed retirement income benefit fees, maintenance fees, and other fees (97) (122) (8) (54) (125) Annuity payout reserve adjustment (34) (2) (1) 30 (6) ------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 5,180 (1,877) (577) (1,496) (19,359) ------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity (5,197) (27,758) (1,346) (8,460) (49,594) CONTRACT OWNERS' EQUITY Beginning of period 50,131 81,555 7,230 62,514 147,258 ------------------------------------------------------------------------ End of period 44,934 53,797 5,884 54,054 97,664 ======================================================================== Franklin INVESCO Templeton ING VP ING VP Variable Variable Emerging Natural Investment Insurance Markets Resources Funds, Products Trust Fund, Inc. Trust Inc. -------------- ---------- ---------- ------------ Templeton ING VP ING VP Developing Emerging Natural Markets Markets Resource INVESCO VIF- Securities Fund, Inc. Trust Utilities Subaccount Subaccount Subaccount Subaccount -------------- ---------- ---------- ------------ OPERATIONS Net investment income (loss) - (76) (35) (72) Net realized gain (loss) on sale of investments - (1,282) (236) (604) Change in unrealized appreciation (depreciation) of investments - 600 132 (1,356) -------------- ---------- ---------- ------------ Net increase (decrease) in contract owners' equity resulting from operations - (758) (139) (2,032) -------------- ---------- ---------- ------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales - 402 302 1,625 Net transfer (to) from affiliate and subaccounts (1) 942 (191) 2,613 Payments for redemptions - (514) (273) (258) Guaranteed retirement income benefit fees, maintenance fees, and other fees - (6) (3) (26) Annuity payout reserve adjustment - 3 - - -------------- ---------- ---------- ------------ Net increase (decrease) from contract owners' equity transactions (1) 827 (165) 3,954 -------------- ---------- ---------- ------------ Total increase (decrease) in contract owners' equity (1) 69 (304) 1,922 CONTRACT OWNERS' EQUITY Beginning of period 30 5,167 3,337 6,825 -------------- ---------- ---------- ------------ End of period 29 5,236 3,033 8,747 ============== ========== ========== ============ Janus Aspen Series ----------------------------------------------------- Janus Aspen Janus Aspen Janus Aggressive Janus Aspen Capital Aspen Growth Balanced Appreciation Growth Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------- OPERATIONS Net investment income (loss) (823) 1,728 (14) (1,943) Net realized gain (loss) on sale of investments (45,198) (10,277) (381) (58,656) Change in unrealized appreciation (depreciation) of investments 23,096 (3,888) 65 13,071 ----------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (22,925) (12,437) (329) (47,528) ----------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 9,012 16,300 35 9,737 Net transfer (to) from affiliate and subaccounts (4,605) (9,125) (175) (27,088) Payments for redemptions (6,406) (14,416) (213) (14,460) Guaranteed retirement income benefit fees, maintenance fees, and other fees (99) (117) (5) (256) Annuity payout reserve adjustment (8) 223 - (22) ----------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (2,106) (7,135) (358) (32,089) ----------------------------------------------------- Total increase (decrease) in contract owners' equity (25,031) (19,572) (687) (79,617) CONTRACT OWNERS' EQUITY Beginning of period 81,697 161,381 2,043 189,638 ----------------------------------------------------- End of period 56,666 141,809 1,356 110,021 =====================================================
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, 2002 (in thousands)
J.P. Morgan Pimco Variable Insurance Janus Aspen Series Series Trust II Trust ------------------------------- --------------- ------------------------ Janus Aspen Pimco Growth and Janus Aspen JP Morgan Small Foreign Pimco Low Income Worldwide Growth Company Bond Duration Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------- --------------- ------------------------ OPERATIONS Net investment income (loss) (346) (705) (133) 8 7 Net realized gain (loss) on sale of investments (3,292) (40,937) (1,763) 10 3 Change in unrealized appreciation (depreciation) of investments (11,247) (11,177) (1,417) 2 4 ------------------------------- --------------- ------------------------ Net increase (decrease) in contract owners' equity resulting from operations (14,885) (52,819) (3,313) 20 14 ------------------------------- --------------- ------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 1,180 16,315 3,791 2 3 Net transfer (to) from affiliate and subaccounts (13,392) (24,441) (1,468) (35) (21) Payments for redemptions (4,250) (17,000) (1,425) (165) (43) Guaranteed retirement income benefit fees, maintenance fees, and other fees (145) (167) (59) - - Annuity payout reserve adjustment 3 2 1 - - ------------------------------- --------------- ------------------------ Net increase (decrease) from contract owners' equity transactions (16,604) (25,291) 840 (198) (61) ------------------------------- --------------- ------------------------ Total increase (decrease) in contract owners' equity (31,489) (78,110) (2,473) (178) (47) CONTRACT OWNERS' EQUITY Beginning of period 74,529 212,141 10,738 388 278 ------------------------------- --------------- ------------------------ End of period 43,040 134,031 8,265 210 231 =============================== =============== ======================== Scudder Variable Series I --------------------------------------------------------------------- Scudder 21st Scudder Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount --------------------------------------------------------------------- OPERATIONS Net investment income (loss) (334) 754 (448) (994) Net realized gain (loss) on sale of investments (3,006) (142) (4,866) (4,706) Change in unrealized appreciation (depreciation) of investments (10,296) 425 (10,389) (11,367) --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (13,636) 1,037 (15,703) (17,067) --------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,417 3,933 7,059 8,241 Net transfer (to) from affiliate and subaccounts 2,796 880 2,047 1,678 Payments for redemptions (742) (2,008) (2,051) (3,067) Guaranteed retirement income benefit fees, maintenance fees, and other fees (70) (102) (115) (207) Annuity payout reserve adjustment - - - 2 --------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 8,401 2,703 6,940 6,647 --------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (5,235) 3,740 (8,763) (10,420) CONTRACT OWNERS' EQUITY Beginning of period 26,068 13,458 45,332 74,591 --------------------------------------------------------------------- End of period 20,833 17,198 36,569 64,171 ===================================================================== Scudder Variable Series I -------------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------- OPERATIONS Net investment income (loss) (169) (711) (595) - Net realized gain (loss) on sale of investments (4,502) (1,491) (11,981) - Change in unrealized appreciation (depreciation) of investments (7,635) (12,243) (1,962) - -------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (12,306) (14,445) (14,538) - -------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,602 15,272 14,697 - Net transfer (to) from affiliate and subaccounts 1,735 6,138 9,059 19 Payments for redemptions (2,254) (1,487) (7,790) (54) Guaranteed retirement income benefit fees, maintenance fees, and other fees (115) (158) (293) - Annuity payout reserve adjustment - - 3 - -------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 5,968 19,765 15,676 (35) -------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (6,338) 5,320 1,138 (35) CONTRACT OWNERS' EQUITY Beginning of period 43,629 44,543 82,271 65 -------------------------------------------------------------------- End of period 37,291 49,863 83,409 30 ====================================================================
See accompanying notes to financial statements. 25 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
Scudder Variable Series II ------------------------------------------------------------------------------ Scudder Aggressive Scudder Scudder Global Growth Scudder Blue Chip Contrarian Value Blue Chip Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------ OPERATIONS Net investment income (loss) (305) (902) 172 (177) Net realized gain (loss) on sale of investments (8,938) (4,896) (5,313) (1,894) Change in unrealized appreciation (depreciation) of investments (4,144) (18,545) (18,105) (2,234) ------------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (13,387) (24,343) (23,246) (4,305) ------------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 4,595 10,004 12,265 3,410 Net transfer (to) from affiliate and subaccounts (1,574) 311 8,089 1,899 Payments for redemptions (1,731) (4,798) (11,925) (942) Guaranteed retirement income benefit fees, maintenance fees, and other fees (97) (227) (245) (63) Annuity payout reserve adjustment - (7) (16) - ------------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 1,193 5,283 8,168 4,304 ------------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity (12,194) (19,060) (15,078) (1) CONTRACT OWNERS' EQUITY Beginning of period 40,084 97,162 128,675 22,866 ------------------------------------------------------------------------------ End of period 27,890 78,102 113,597 22,865 ============================================================================== Scudder Variable Series II ----------------------------------------------------------------------------- Scudder Scudder Scudder Government Scudder High International Investment Grade Securities Scudder Growth Income Select Equity Bond Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 3,491 (3,017) 15,525 (576) 1,427 Net realized gain (loss) on sale of investments 2,549 (85,980) (27,655) (22,137) 470 Change in unrealized appreciation (depreciation) of investments 6,173 1,769 10,241 12,519 3,597 ----------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 12,213 (87,228) (1,889) (10,194) 5,494 ----------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 24,071 12,590 11,455 4,417 13,631 Net transfer (to) from affiliate and subaccounts 60,831 (17,224) 1,659 16,239 21,053 Payments for redemptions (20,032) (30,881) (20,860) (8,495) (5,577) Guaranteed retirement income benefit fees, maintenance fees, and other fees (339) (283) (246) (97) (196) Annuity payout reserve adjustment (30) (85) 20 9 (5) ----------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 64,501 (35,883) (7,972) 12,073 28,906 ----------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 76,714 (123,111) (9,861) 1,879 34,400 CONTRACT OWNERS' EQUITY Beginning of period 160,649 301,954 189,533 73,168 65,082 ----------------------------------------------------------------------------- End of period 237,363 178,843 179,672 75,047 99,482 ============================================================================= Scudder Variable Series II ---------------------------------------------------------------------------- Scudder Scudder Money Scudder New Scudder Small Scudder Strategic Technology Market Europe Cap Growth Income Growth Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 668 (40) (1,615) 152 (2,227) Net realized gain (loss) on sale of investments - (6,124) (54,429) 381 (28,246) Change in unrealized appreciation (depreciation) of investments - 1,325 1,841 1,226 (54,303) ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 668 (4,839) (54,203) 1,759 (84,776) ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 134,454 3,746 16,468 2,287 20,336 Net transfer (to) from affiliate and subaccounts (64,194) (14,015) (3,665) 10,038 (1,847) Payments for redemptions (171,434) (573) (10,774) (956) (5,157) Guaranteed retirement income benefit fees, maintenance fees, and other fees (694) (41) (223) (55) (533) Annuity payout reserve adjustment (2) - (13) 1 12 ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (101,870) (10,883) 1,793 11,315 12,811 ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (101,202) (15,722) (52,410) 13,074 (71,965) CONTRACT OWNERS' EQUITY Beginning of period 407,513 15,722 152,535 11,499 217,589 ---------------------------------------------------------------------------- End of period 306,311 - 100,125 24,573 145,624 ============================================================================
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, 2002 (in thousands)
Scudder Variable Series II ---------------------------------------------------------------------- Scudder Total SVS Davis SVS Dreman SVS Dreman High Return Venture Value Financial Services Return Equity Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------- OPERATIONS Net investment income (loss) 7,787 (1,393) (341) (398) Net realized gain (loss) on sale of investments (67,376) (2,338) 580 (1,747) Change in unrealized appreciation (depreciation) of investments (29,917) (17,214) (6,584) (71,516) ---------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (89,506) (20,945) (6,345) (73,661) ---------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 21,722 31,773 9,510 76,138 Net transfer (to) from affiliate and subaccounts (18,531) 18,412 4,625 47,150 Payments for redemptions (63,771) (3,070) (2,684) (12,194) Guaranteed retirement income benefit fees, maintenance fees, and other fees (537) (327) (164) (930) Annuity payout reserve adjustment (331) 2 - 1 ---------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (61,448) 46,790 11,287 110,165 ---------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (150,954) 25,845 4,942 36,504 CONTRACT OWNERS' EQUITY Beginning of period 566,980 87,458 51,630 280,449 ---------------------------------------------------------------------- End of period 416,026 113,303 56,572 316,953 ====================================================================== Scudder Variable Series II ----------------------------------------------------------------- SVS Eagle SVS Dreman Focused Large SVS Focus Value Small Cap Value Cap Growth + Growth SVS Index 500 Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- OPERATIONS Net investment income (loss) (1,515) (595) (375) (1,362) Net realized gain (loss) on sale of investments 3,050 (3,402) (7,198) (11,328) Change in unrealized appreciation (depreciation) of investments (28,127) (11,050) (7,620) (30,105) ----------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (26,592) (15,047) (15,193) (42,795) ----------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 27,923 11,203 5,423 44,667 Net transfer (to) from affiliate and subaccounts 42,493 7,710 1,430 3,595 Payments for redemptions (8,253) (1,073) (4,206) (3,950) Guaranteed retirement income benefit fees, maintenance fees, and other fees (355) (125) (89) (442) Annuity Payout Reserve Adjustment (44) - 19 1 ----------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 61,764 17,715 2,577 43,871 ----------------------------------------------------------------- Total increase (decrease) in contract owners' equity 35,172 2,668 (12,616) 1,076 CONTRACT OWNERS' EQUITY Beginning of period 113,881 37,898 51,810 145,352 ----------------------------------------------------------------- End of period 149,053 40,566 39,194 146,428 ================================================================= Scudder Variable Series II -------------------------------------------------------------------------- SVS INVESCO SVS Janus SVS Janus SVS Oak SVS Turner Dynamic Growth Growth Strategic MidCap Growth and Income Opportunities Equity Growth Subaccount Subaccount Subaccount Subaccount Subaccount -------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (274) (884) (1,200) (488) (677) Net realized gain (loss) on sale of investments (1,184) (5,257) (6,881) (3,441) (2,235) Change in unrealized appreciation (depreciation) of investments (6,540) (21,939) (25,884) (15,438) (17,485) -------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (7,998) (28,080) (33,965) (19,367) (20,397) -------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6,389 26,252 14,687 11,879 15,286 Net transfer (to) from affiliate and subaccounts 668 5,302 4,545 4,500 11,982 Payments for redemptions (410) (3,705) (3,314) (946) (959) Guaranteed retirement income benefit fees, maintenance fees, and other fees (58) (327) (249) (100) (145) Annuity Payout Reserve Adjustment - (2) - - - -------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 6,589 27,520 15,669 15,333 26,164 -------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (1,409) (560) (18,296) (4,034) 5,767 CONTRACT OWNERS' EQUITY Beginning of period 19,666 105,768 94,012 35,442 40,665 -------------------------------------------------------------------------- End of period 18,257 105,208 75,716 31,408 46,432 ==========================================================================
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, 2001 (in thousands)
The Alger American Fund ---------------------------------------------------------------------------- Alger Alger Alger Alger American American American Alger American American Small Balanced Growth Leveraged AllCap MidCap Growth Capitalization Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) $ 335 2,706 1,002 753 (32) Net realized gain (loss) on sale of investments (222) (6,907) (4,875) (825) (3,455) Change in unrealized appreciation (depreciation) of investments (731) 1,100 (4,932) 111 1,692 ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (618) (3,101) (8,805) 39 (1,795) ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 56,892 4,011 39,755 1,334 1,059 Net transfer (to) from affiliate and subaccounts 15,478 1,884 4,227 3,551 30 Payments for redemptions (1,409) (1,476) (2,424) (53) (442) ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 70,961 4,419 41,558 4,832 647 ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 70,343 1,318 32,753 4,871 (1,148) CONTRACT OWNERS' EQUITY Beginning of period 13,678 20,484 40,635 4 4,785 ---------------------------------------------------------------------------- End of period $ 84,021 21,802 73,388 4,875 3,637 ============================================================================ American Century Variable Portfolios, Inc. Credit Suisse Funds ------------------------------------- ---------------------------------- American Century Credit Suisse VP Income & American Century Credit Suisse Global Post- Growth VP Value Emerging Markets Venture Capital Subaccount Subaccount Subaccount Subaccount ------------------------------------- ---------------------------------- OPERATIONS Net investment income (loss) (41) (176) (185) (122) Net realized gain (loss) on sale of investments (482) 495 (1,775) (626) Change in unrealized appreciation (depreciation) of investments 9 1,267 579 (2,242) ------------------------------------- ---------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (514) 1,586 (1,381) (2,990) ------------------------------------- ---------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 844 4,086 8,319 8,103 Net transfer (to) from affiliate and subaccounts 749 15,893 86 227 Payments for redemptions (567) (1,090) (340) (286) ------------------------------------- ---------------------------------- Net increase (decrease) from contract owners' equity transactions 1,026 18,889 8,065 8,044 ------------------------------------- ---------------------------------- Total increase (decrease) in contract owners' equity 512 20,475 6,684 5,054 CONTRACT OWNERS' EQUITY Beginning of period 4,891 2,980 9,977 8,928 ------------------------------------- ---------------------------------- End of period 5,403 23,455 16,661 13,982 ===================================== ================================== The Dreyfus Socially Dreyfus Responsible Investment Growth Fund, Inc. Portfolios ------------------------------------- Dreyfus Socially Responsible Dreyfus I.P. Growth Fund MidCap Stock Subaccount Subaccount ------------------------------------- OPERATIONS Net investment income (loss) (188) (335) Net realized gain (loss) on sale of investments (1,049) (86) Change in unrealized appreciation (depreciation) of investments (2,190) 1,728 ----------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3,427) 1,307 ----------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 7,247 51,129 Net transfer (to) from affiliate and subaccounts 1,594 19,611 Payments for redemptions (705) (992) ----------------------------------- Net increase (decrease) from contract owners' equity transactions 8,136 69,748 ----------------------------------- Total increase (decrease) in contract owners' equity 4,709 71,055 CONTRACT OWNERS' EQUITY Beginning of period 10,946 13,397 ----------------------------------- End of period 15,655 84,452 ===================================
See accompanying notes to financial statements. 28 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 (in thousands)
Fidelity Variable Insurance Products Fund Fidelity Variable Insurance Products Fund II ------------------------------------------------------------------------------------------------ Fidelity VIP Equity Fidelity VIP II Fidelity VIP II Fidelity VIP II Index Income Fidelity VIP Growth Asset Manager Contrafund 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 Funds, Products Trust Inc. ------------------ ----------------- Templeton Developing Invesco VIF Markets Securities Utilities Subaccount Subaccount (a) ------------------ ----------------- OPERATIONS Net investment income (loss) - 47 Net realized gain (loss) on sale of investments (1) (323) Change in unrealized appreciation (depreciation) of investments (2) (154) ------------------ ----------------- Net increase (decrease) in contract owners' equity resulting from operations (3) (430) ------------------ ----------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 2 5,405 Net transfer (to) from affiliate and subaccounts - 1,915 Payments for redemptions (2) (65) ------------------ ----------------- Net increase (decrease) from contract owners' equity transactions - 7,255 ------------------ ----------------- Total increase (decrease) in contract owners' equity (3) 6,825 CONTRACT OWNERS' EQUITY Beginning of period 33 - ------------------ ----------------- End of period 30 6,825 ================== ================= Janus Aspen Series ----------------------------------------------------------------------------------------------- Janus Aspen Janus Aspen Janus Aspen Janus Aspen Capital Janus Aspen Growth and Janus Aspen Aggressive Growth Balanced Appreciation Growth Income Worlddwide Growth Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (1,359) 2,089 (9) (2,689) (198) (2,445) Net realized gain (loss) on sale of investments (53,957) (1,697) (138) (24,674) 1,190 803 Change in unrealized appreciation (depreciation) of investments (3,877) (10,970) (446) (45,271) (15,755) (69,116) Net increase (decrease) in contract owners' equity resulting from operations (59,193) (10,578) (593) (72,634) (14,763) (70,758) ----------------------------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 15,276 16,805 80 16,023 1,741 25,115 Net transfer (to) from affiliate and subaccounts (14,797) (3,392) 91 (24,635) (9,913) (32,891) Payments for redemptions (6,650) (12,492) (102) (14,613) (3,892) (16,475) ----------------------------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (6,171) 921 69 (23,225) (12,064) (24,251) ----------------------------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (65,364) (9,657) (524) (95,859) (26,827) (95,009) CONTRACT OWNERS' EQUITY Beginning of period 147,061 171,038 2,567 285,497 101,356 307,150 ----------------------------------------------------------------------------------------------- End of period 81,697 161,381 2,043 189,638 74,529 212,141 ===============================================================================================
See accompanying notes to financial statements (a) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 29 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY FOR THE YEAR ENDED 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, Inc. 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 --------------------------------- PIMCO Foreign PIMCO Low Bond Duration Bond Subaccount Subaccount --------------------------------- OPERATIONS Net investment income (loss) 12 14 Net realized gain (loss) on sale of investments 2 3 Change in unrealized appreciation (depreciation) of investments 12 2 --------------------------------- Net increase (decrease) in contract owners' equity resulting from operations 26 19 --------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 6 2 Net transfer (to) from affiliate and subaccounts (85) (55) Payments for redemptions (40) (27) --------------------------------- Net increase (decrease) from contract owners' equity transactions (119) (80) --------------------------------- Total increase (decrease) in contract owners' equity (93) (61) CONTRACT OWNERS' EQUITY Beginning of period 481 339 --------------------------------- End of period 388 278 ================================= Scudder Variable Series I ----------------------------------------------------------------- Scudder 21st Scudder Capital Scudder Global Century Growth Scudder Bond Growth Discovery Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- OPERATIONS Net investment income (loss) (180) 119 3,153 107 Net realized gain (loss) on sale of investments (433) 104 (1,068) 61 Change in unrealized appreciation (depreciation) of investments (837) (23) (8,582) (15,681) ----------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (1,450) 200 (6,497) (15,513) ----------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 17,085 4,004 22,254 32,278 Net transfer (to) from affiliate and subaccounts 6,570 8,667 3,615 10,335 Payments for redemptions (298) (753) (1,284) (2,017) ----------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 23,357 11,918 24,585 40,596 ----------------------------------------------------------------- Total increase (decrease) in contract owners' equity 21,907 12,118 18,088 25,083 CONTRACT OWNERS' EQUITY Beginning of period 4,161 1,340 27,244 49,508 ----------------------------------------------------------------- End of period 26,068 13,458 45,332 74,591 ================================================================= Scudder Variable Series I --------------------------------------------------------------- Scudder Growth Scudder Health Scudder Scudder Money and Income Sciences International Market Subaccount Subaccount(b) Subaccount Subaccount --------------------------------------------------------------- OPERATIONS Net investment income (loss) 513 (25) 10,843 3 Net realized gain (loss) on sale of investments (1,026) (4) (26,888) - Change in unrealized appreciation (depreciation) of investments (2,976) 1,606 (2,774) - --------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (3,489) 1,577 (18,819) 3 --------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 18,888 32,945 39,682 9 Net transfer (to) from affiliate and subaccounts 5,061 10,307 5,342 (48) Payments for redemptions (912) (286) (2,621) (22) --------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 23,037 42,966 42,403 (61) --------------------------------------------------------------- Total increase (decrease) in contract owners' equity 19,548 44,543 23,584 (58) CONTRACT OWNERS' EQUITY Beginning of period 24,081 - 58,687 123 --------------------------------------------------------------- End of period 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. 30 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 Global Aggressive Growth Scudder Blue Chip Contrarian Value Blue Chip Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------- OPERATIONS Net investment income (loss) (142) (768) 226 117 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 increase (decrease) in contract owners' equity resulting from operations (6,891) (12,732) 587 (2,192) ------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 19,927 41,555 34,423 13,651 Net transfer (to) from affiliate and subaccounts 3,534 11,326 15,252 1,631 Payments for redemptions (1,298) (5,360) (9,600) (516) ------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 22,163 47,521 40,075 14,766 ------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity 15,272 34,789 40,662 12,574 CONTRACT OWNERS' EQUITY Beginning of period 24,812 62,373 88,013 10,292 ------------------------------------------------------------------------- End of period 40,084 97,162 128,675 22,866 ========================================================================= Scudder Variable Series II ----------------------------------------------------------------- Scudder Government Scudder Horizon Securities Scudder Growth Scudder High Yield 10+ Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- OPERATIONS Net investment income (loss) 2,428 27,435 18,836 1,121 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 increase (decrease) in contract owners' equity resulting from operations 5,860 (98,051) 3,595 (178) ----------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 68,231 33,092 29,931 483 Net transfer (to) from affiliate and subaccounts 27,492 (12,697) 9,089 (13,207) Payments for redemptions (11,615) (44,679) (26,200) (454) ----------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 84,108 (24,284) 12,820 (13,178) ----------------------------------------------------------------- Total increase (decrease) in contract owners' equity 89,968 (122,335) 16,415 (13,356) CONTRACT OWNERS' EQUITY Beginning of period 70,681 424,289 173,118 13,356 ----------------------------------------------------------------- End of period 160,649 301,954 189,533 - ================================================================= Scudder Variable Series II ---------------------------------------------------------------------------- Scudder Scudder Scudder Horizon International Investment Scudder Money 20+ Scudder Horizon 5 Research Grade Bond Market Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------- OPERATIONS Net investment income (loss) 559 420 13,366 902 5,627 Net realized gain (loss) on sale of investments (1,456) (617) (26,243) 420 - Change in unrealized appreciation (depreciation) of investments 623 166 (13,717) (239) - ---------------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (274) (31) (26,594) 1,083 5,627 ---------------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 367 232 9,594 28,647 467,417 Net transfer (to) from affiliate and subaccounts (8,018) (7,140) (5,250) 15,137 (113,554) Payments for redemptions (398) (498) (11,880) (4,263) (96,321) ---------------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions (8,049) (7,406) (7,536) 39,521 257,542 ---------------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (8,323) (7,437) (34,130) 40,604 263,169 CONTRACT OWNERS' EQUITY Beginning of period 8,323 7,437 107,298 24,478 144,344 ---------------------------------------------------------------------------- End of period - - 73,168 65,082 407,513 ============================================================================
See accompanying notes to financial statements 31 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 New Scudder Small Scudder Small Scudder Strategic Technology Europe Cap Growth Cap Value Income Growth Subaccount Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------ OPERATIONS Net investment income (loss) (39) 19,821 (687) (69) (2,251) Net realized gain (loss) on sale of investments (1,407) (32,119) 897 248 (1,442) Change in unrealized appreciation (depreciation) of investments (1,282) (43,474) 10,183 25 (60,716) ------------------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (2,728) (55,772) 10,393 204 (64,409) ------------------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 10,800 39,205 45,871 6,159 70,793 Net transfer (to) from affiliate and subaccounts 4,252 (1,696) 29,421 2,441 117,727 Payments for redemptions (344) (14,122) (4,126) (519) (4,359) ------------------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 14,708 23,387 71,166 8,081 184,161 ------------------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 11,980 (32,385) 81,559 8,285 119,752 CONTRACT OWNERS' EQUITY Beginning of period 3,742 184,920 32,322 3,214 97,837 ------------------------------------------------------------------------------ End of period 15,722 152,535 113,881 11,499 217,589 ============================================================================== Scudder Variable Series II --------------------------------------------------------------------- Scudder Total SVS Dreman SVS Dreman High SVS Dynamic Return Financial Services Return Equity Growth Subaccount Subaccount Subaccount Subaccount(c) --------------------------------------------------------------------- OPERATIONS Net investment income (loss) 31,911 (97) (907) (29) Net realized gain (loss) on sale of investments (11,356) 749 228 (158) Change in unrealized appreciation (depreciation) of investments (65,762) (1,843) 928 1,128 --------------------------------------------------------------------- Net increase (decrease) in contract owners' equity resulting from operations (45,207) (1,191) 249 941 --------------------------------------------------------------------- CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 55,750 29,969 167,852 15,136 Net transfer (to) from affiliate and subaccounts 24,024 6,846 54,385 3,698 Payments for redemptions (71,022) (1,177) (5,557) (109) --------------------------------------------------------------------- Net increase (decrease) from contract owners' equity transactions 8,752 35,638 216,680 18,725 --------------------------------------------------------------------- Total increase (decrease) in contract owners' equity (36,455) 34,447 216,929 19,666 CONTRACT OWNERS' EQUITY Beginning of period 603,435 17,183 63,520 - --------------------------------------------------------------------- End of period 566,980 51,630 280,449 19,666 ===================================================================== Scudder Variable Series II ------------------------------------------------------------------ SVS Focus Value SVS Focused SVS Growth and SVS Growth + Growth Large Cap Growth Income Opportunities Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------ OPERATIONS Net investment income (loss) 2,443 (160) (565) (981) Net realized gain (loss) on sale of investments (1,975) (458) (344) (932) Change in unrealized appreciation (depreciation) of investments (7,822) (1,113) (5,511) (16,177) ------------------------------------------------------------------ Net increase (decrease) in contract owners' equity resulting from operations (7,354) (1,731) (6,420) (18,090) ------------------------------------------------------------------ CONTRACT OWNERS' EQUITY TRANSACTIONS Proceeds from sales 16,182 25,144 63,069 52,213 Net transfer (to) from affiliate and subaccounts 3,645 7,756 16,830 14,805 Payments for redemptions (4,088) (470) (1,914) (1,711) ------------------------------------------------------------------ Net increase (decrease) from contract owners' equity transactions 15,739 32,430 77,985 65,307 ------------------------------------------------------------------ Total increase (decrease) in contract owners' equity 8,385 30,699 71,565 47,217 CONTRACT OWNERS' EQUITY Beginning of period 43,425 7,199 34,203 46,795 ------------------------------------------------------------------ End of period 51,810 37,898 105,768 94,012 ==================================================================
See accompanying notes to financial statements (c) For the period (commencement of operations): May 1, 2001 - December 31, 2001. 32 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. 33 KILICO VARIABLE ANNUITY SEPARATE ACCOUNT NOTES TO FINANCIAL STATEMENTS (1) 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. Under applicable insurance law, the assets and liabilities of the Separate Account are clearly identified and distinguished from KILICO's other assets and liabilities. The portion of the Separate Account's assets applicable to the variable annuity contracts is not chargeable with liabilities arising out of any other business KILICO may conduct. 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"), Zurich Preferred Plus individual and group variable and market value adjusted deferred annuity contracts ("Zurich Preferred Plus"), Scudder ZS4 individual and group variable and market value adjusted deferred annuity contracts ("Scudder ZS4") and Zurich Archway individual and group variable and market value adjusted deferred annuity contracts ("Zurich Archway"). 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 Trust, 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 ING VP Emerging Markets Fund, Inc., the ING VP 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 Trust, 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 Trust, 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. 34 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 Trust, 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 Scudder ZS4 contracts have forty 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 Trust, the Dreyfus Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc., the INVESCO Variable Investment Funds, Inc., the Scudder Variable Series I and the Scudder Variable Series II, all of which are open-end diversified management investment companies. The Zurich Archway 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 Trust, 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 Scudder New Europe fund was closed by the investment manager of the Scudder Variable Series II effective November 1, 2002. All monies not reallocated by contract owners by this date were transferred to Scudder International Select Equity subaccount. Deutsche Asset Management, formerly Zurich Scudder Investments, Inc. ("ZSI"), formally an affiliated company, is the investment manager of the Scudder Variable Series I and the Scudder Variable Series II series of funds. On April 8, 2002, ZFS announced the completion of the sale of ZSI to Deutsche Bank ("DB"). DB acquired 100% of ZSI, with the exception of ZSI's UK operations, Threadneedle Investments. See respective contract Prospectus of each product for further description and benefits. (2) SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATION The investments are stated at current market value, which is based on the closing net asset value at December 31, 2002. SECURITY TRANSACTIONS 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. 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 affect 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. 35 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 revenues, expenses, 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. ANNUITY PAYOUTS Net assets allocated to contracts in the annuity payout period are computed according to the 1983a Individual Annuitant Mortality Table. The assumed investment return is 2.5 percent unless the annuitant elects otherwise, in which case the rate may vary from 2.5 percent to 7.75 percent, as regulated by the laws of respective states. The mortality risk is fully born by Kemper Investors Life Insurance Company and may result in additional amounts being transferred into the variable annuity account by Kemper Investors Life Insurance Company to cover greater longevity of annuitants than expected. Conversely, if amounts allocated exceed amounts required, transfers may be made to the insurance company. (3) PURCHASES AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales of investments for the year ended December 31, 2002, are as follows (in thousands):
PURCHASES SALES --------------------------- THE ALGER AMERICAN FUND: Alger American Balanced Subaccount ..................................... $ 7,843 $ 6,120 Alger American Growth Subaccount ....................................... 17,176 11,254 Alger American Leveraged AllCap Subaccount ............................. 20,969 10,751 Alger American MidCap Growth Subaccount ................................ 3,164 2,647 Alger American Small Capitalization Subaccount ......................... 18,123 17,543 AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: American Century VP Income & Growth Subaccount ......................... 5,584 4,552 American Century VP Value Subaccount ................................... 19,255 17,548 CREDIT SUISSE TRUST: Credit Suisse Trust Emerging Markets Subaccount ........................ 11,009 7,883 Credit Suisse Trust Global Post-Venture Capital Subaccount ............. 5,829 2,234 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.: Dreyfus Socially Responsible Growth Subaccount ......................... 6,972 3,953 DREYFUS INVESTMENT PORTFOLIOS: Dreyfus I.P. Mid Cap Stock Subaccount .................................. 9,873 8,415 FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity Income Subaccount .................................. 31,377 25,962 Fidelity VIP Growth Subaccount ......................................... 61,253 39,860 FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Fidelity VIP II Asset Manager Subaccount ............................... 6,156 5,141 Fidelity VIP II Contrafund Subaccount .................................. 41,978 35,432 Fidelity VIP II Index 500 Subaccount ................................... 113,837 93,016
36 (3) PURCHASES AND SALES OF INVESTMENTS (CONTINUED)
PURCHASES SALES -------------------------- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST: Templeton Developing Markets Securities Subaccount ..................... $ 2 $ 1 ING VP EMERGING MARKETS FUND, INC.: ING VP Emerging Markets Subaccount ..................................... 6,197 4,915 ING VP NATURAL RESOURCES TRUST: ING VP Natural Resources Trust Subaccount .............................. 3,363 3,127 INVESCO VARIABLE INVESTMENT FUNDS, INC.: INVESCO VIF-Utilities Subaccount ....................................... 3,657 3,053 JANUS ASPEN SERIES: Janus Aspen Aggressive Growth Subaccount ............................... 86,979 41,782 Janus Aspen Balanced Subaccount ........................................ 102,415 92,138 Janus Aspen Capital Appreciation Subaccount ............................ 877 496 Janus Aspen Growth Subaccount .......................................... 150,540 91,884 Janus Aspen Growth and Income Subaccount ............................... 21,768 18,477 Janus Aspen Worldwide Growth Subaccount ................................ 222,616 181,679 J.P. MORGAN SERIES TRUST II: J.P. Morgan Small Company Subaccount ................................... 14,891 13,128 PIMCO VARIABLE INSURANCE TRUST: PIMCO Foreign Bond Subaccount .......................................... 200 210 PIMCO Low Duration Subaccount .......................................... 78 81 SCUDDER VARIABLE SERIES I: Scudder 21st Century Growth Subaccount ................................. 6,446 3,441 Scudder Bond Subaccount ................................................ 10,624 10,482 Scudder Capital Growth Subaccount ...................................... 10,180 5,314 Scudder Global Discovery Subaccount .................................... 11,471 6,765 Scudder Growth and Income Subaccount ................................... 18,418 13,916 Scudder Health Sciences Subaccount ..................................... 8,204 6,714 Scudder International Subaccount ....................................... 1,007,646 995,664 Scudder Money Market Subaccount ........................................ 71 71 SCUDDER VARIABLE SERIES II: Scudder Aggressive Growth Subaccount ................................... 21,273 12,335 Scudder Blue Chip Subaccount ........................................... 18,804 13,909 Scudder Contrarian Value Subaccount .................................... 48,349 43,035 Scudder Global Blue Chip Subaccount .................................... 8,144 6,250 Scudder Government Securities Subaccount ............................... 63,702 66,252 Scudder Growth Subaccount .............................................. 222,481 136,500 Scudder High Income Subaccount ......................................... 150,004 122,349 Scudder International Select Equity Subaccount ......................... 65,337 43,201 Scudder Investment Grade Bond Subaccount ............................... 16,885 17,355 Scudder Money Market Subaccount ........................................ 1,461,545 1,461,545 Scudder New Europe Subaccount .......................................... 26,488 20,363 Scudder Small Cap Growth Subaccount .................................... 142,790 88,361 Scudder Strategic Income Subaccount .................................... 10,266 10,647 Scudder Technology Growth Subaccount ................................... 45,302 17,056 Scudder Total Return Subaccount ........................................ 360,083 292,706
37 (3) PURCHASES AND SALES OF INVESTMENTS (CONTINUED)
PURCHASES SALES ----------- ----------- SCUDDER VARIABLE SERIES II (CONTINUED): SVS Davis Venture Value Subaccount ..................................... $ 15,517 $ 13,179 SVS Dreman Financial Services Subaccount ............................... 8,327 8,906 SVS Dreman High Return Equity Subaccount ............................... 23,318 21,571 SVS Dreman Small Cap Value Subaccount .................................. 40,981 44,031 SVS Eagle Focused Large Cap Growth Subaccount .......................... 8,461 5,059 SVS Focus Value + Growth Subaccount .................................... 21,348 14,150 SVS Index 500 Subaccount ............................................... 42,312 30,985 SVS INVESCO Dynamic Growth Subaccount .................................. 7,280 6,096 SVS Janus Growth and Income Subaccount ................................. 15,832 10,575 SVS Janus Growth Opportunities Subaccount .............................. 13,114 6,233 SVS Oak Strategic Equity Subaccount .................................... 13,714 10,272 SVS Turner Mid-Cap Growth Subaccount ................................... 9,190 6,955
(4) EXPENSES AND RELATED PARTY TRANSACTIONS 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 following contracts with a daily asset charge for mortality and expense risk and administrative costs: Kemper Advantage III flexible payment contracts an aggregate of one percent (1.00%) per annum. Kemper Advantage III periodic payment contracts an aggregate of one and three-tenths percent (1.30%) per annum. Scudder Passport contracts an aggregate of one and one-quarter percent (1.25%) per annum. Scudder Destinations contracts an aggregate of one and four-tenths percent (1.40%) per annum. Farmers Variable Annuity I contracts an aggregate of one and four-tenths percent (1.40%) per annum. Zurich Preferred contracts an aggregate of one and one-quarter percent (1.25%) per annum. Zurich Preferred Plus contracts an aggregate of one and one-half percent (1.50%) per annum. Scudder ZS4 contracts an aggregate of one and seven-tenths percent (1.70%) per annum. Zurich Archway contracts an aggregate of one and seven-tenths percent (1.70%) 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 $36 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. KILICO also assesses against each Scudder Passport, Scudder Destinations, Farmers Variable Annuity I, Scudder ZS4 and Zurich Archway 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 and $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, Zurich Preferred Plus, Scudder ZS4 and Zurich Archway 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. During the year ended December 31, 2002, 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 38 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. Investors Brokerage Services, Inc. and PMG Securities, Inc., wholly-owned subsidiaries of KILICO, are the principal underwriters for the Separate Account. (5) CHANGES IN UNITS OUTSTANDING The changes in units outstanding for the year ended December 31, 2002 were as follows (in thousands):
NET INCREASE UNITS ISSUED UNITS REDEEMED (DECREASE) -------------- -------------- -------------- THE ALGER AMERICAN FUND: Alger American Balanced Subaccount 8,101 6,141 1,960 Alger American Growth Subaccount 252 230 22 Alger American Leveraged AllCap Subaccount 5,885 5,717 168 Alger American MidCap Growth Subaccount 355 145 210 Alger American Small Capitalization Subaccount 1,207 1,152 55 AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: American Century VP Income & Growth Subaccount 3,313 1,248 2,065 American Century VP Value Subaccount 3,896 3,325 571 CREDIT SUISSE TRUST: Credit Suisse Trust Emerging Markets Subaccount 3,173 2,529 644 Credit Suisse Trust Global Post-Venture Capital Subaccount 1,494 1,090 404 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC: Dreyfus Socially Responsible Growth Subaccount 1,052 941 111 DREYFUS INVESTMENT PORTFOLIOS: Dreyfus I.P. Mid Cap Stock Subaccount 9,897 7,000 2,897 FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity Income Subaccount 930 744 186 Fidelity VIP Growth Subaccount 630 673 (43) FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Fidelity VIP II Asset Manager Subaccount 102 133 (31) Fidelity VIP II Contrafund Subaccount 885 959 (74) Fidelity VIP II Index 500 Subaccount 345 492 (147) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST: Templeton Developing Markets Securities Subaccount 1 1 0 ING VP EMERGING MARKETS FUND, INC.: ING VP Emerging Markets Subaccount 611 517 94 ING VP NATURAL RESOURCES TRUST: ING VP Natural Resources Trust Subaccount 119 134 (15) INVESCO VARIABLE INVESTMENT FUNDS, INC.: INVESCO VIF-Utilities Subaccount 3,431 2,797 634
39 (5) CHANGES IN UNITS OUTSTANDING (CONTINUED)
NET INCREASE UNITS ISSUED UNITS REDEEMED (DECREASE) -------------- -------------- -------------- JANUS ASPEN SERIES: Janus Aspen Aggressive Growth Subaccount 1,452 1,536 (84) Janus Aspen Balanced Subaccount 1,558 1,828 (270) Janus Aspen Capital Appreciation Subaccount 389 438 (49) Janus Aspen Growth Subaccount 3,899 6,593 (2,694) Janus Aspen Growth and Income Subaccount 1,719 2,983 (1,264) Janus Aspen Worldwide Growth Subaccount 2,958 3,921 (963) J.P. MORGAN SERIES TRUST II: J.P. Morgan Small Company Subaccount 1,358 1,361 (3) PIMCO VARIABLE INSURANCE TRUST: PIMCO Foreign Bond Subaccount 85 102 (17) PIMCO Low Duration Subaccount 43 48 (5) SCUDDER VARIABLE SERIES I: Scudder 21st Century Growth Subaccount 6,334 4,741 1,593 Scudder Bond Subaccount 2,094 1,714 380 Scudder Capital Growth Subaccount 3,382 2,693 689 Scudder Global Discovery Subaccount 4,749 4,168 581 Scudder Growth and Income Subaccount 4,972 4,320 652 Scudder Health Sciences Subaccount 6,424 4,414 2,010 Scudder International Subaccount 140,500 138,139 2,361 Scudder Money Market Subaccount 4 7 (3) SCUDDER VARIABLE SERIES II: Scudder Aggressive Growth Subaccount 3,397 3,326 71 Scudder Blue Chip Subaccount 8,421 9,032 (611) Scudder Contrarian Value Subaccount 13,582 17,038 (3,456) Scudder Global Blue Chip Subaccount 2,641 2,176 465 Scudder Government Securities Subaccount 38,240 29,363 8,877 Scudder Growth Subaccount 8,300 19,296 (10,996) Scudder High Income Subaccount 27,915 32,435 (4,520) Scudder International Select Equity Subaccount 15,466 18,269 (2,803) Scudder Investment Grade Bond Subaccount 14,398 12,146 2,252 Scudder Money Market Subaccount 1,059,200 1,133,637 (74,437) Scudder New Europe Subaccount 3,192 5,583 (2,391) Scudder Small Cap Growth Subaccount 49,142 53,749 (4,607) Scudder Strategic Income Subaccount 3,920 3,094 826 Scudder Technology Growth Subaccount 15,587 13,042 2,545 Scudder Total Return Subaccount 10,317 26,363 (16,046) SVS Davis Venture Value Subaccount 16,239 11,039 5,200 SVS Dreman Financial Services Subaccount 4,811 3,805 1,006 SVS Dreman High Return Equity Subaccount 30,845 21,435 9,410 SVS Dreman Small Cap Value Subaccount 39,866 29,945 9,921 SVS Eagle Focused Large Cap Growth Subaccount 5,982 3,933 2,049 SVS Focus Value + Growth Subaccount 5,198 7,614 (2,416) SVS Index 500 Subaccount 26,664 21,122 5,542 SVS INVESCO Dynamic Growth Subaccount 3,274 2,456 818 SVS Janus Growth and Income Subaccount 15,764 12,010 3,754 SVS Janus Growth Opportunities Subaccount 12,792 10,114 2,678 SVS Oak Strategic Equity Subaccount 8,384 6,072 2,312 SVS Turner Mid-Cap Growth Subaccount 8,766 5,468 3,298
40 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS A summary of unit values and units outstanding for variable annuity contracts, net investment income ratios and the expense ratios, excluding expenses of the underlying funds, for each of the two years in the period ended December 31, 2002, follows.
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- THE ALGER AMERICAN FUND: Alger American Balanced Subaccount: 2002 10,165 $ 8.857 $ 9.684 $ 90,036 1.78% 1.40% 2.05% -5.43% -0.08% 2001 8,205 10.240 10.240 84,021 1.99% 1.40% 1.40% -3.29% -3.29% Alger American Growth Subaccount: 2002 445 8.649 34.560 15,059 0.04% 1.00% 3.00% -33.66% -7.97% 2001 423 40.912 52.093 21,732 14.04% 1.00% 3.00% -12.95% 13.13% Alger American Leveraged AllCap Subaccount: 2002 9,225 5.281 8.763 48,717 0.01% 1.40% 2.05% -34.82% -4.68% 2001 9,057 8.103 8.103 73,387 3.24% 1.40% 1.40% -17.09% -17.09% Alger American MidCap Growth Subaccount 2002 383 9.079 19.771 7,526 N/A 1.00% 3.00% -30.24% -1.39% 2001 173 28.092 28.342 4,678 33.96% 1.00% 3.00% -8.01% -4.13% Alger American Small Capitalization Subaccount 2002 174 9.454 23.018 3,316 N/A 1.00% 3.00% -26.96% 2.53% 2001 119 16.250 31.513 3,635 0.05% 1.00% 3.00% -30.78% -13.54% AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: American Century VP Income & Growth Subaccount 2002 2,918 4.947 9.514 14,727 0.53% 1.00% 3.00% -20.99% 1.88% 2001 853 6.323 6.395 5,410 0.83% 1.00% 3.00% -9.82% -8.37% American Century VP Value Subaccount 2002 3,642 6.224 9.636 23,981 6.91% 1.00% 3.00% -14.55% 1.63% 2001 3,071 7.350 7.723 23,380 0.53% 1.00% 3.00% 7.38% 11.70% CREDIT SUISSE TRUST: Credit Suisse Trust Emerging Markets Subaccount 2002 2,581 7.203 8.660 19,348 0.23% 1.00% 3.00% -13.34% -4.47% 2001 1,937 8.326 8.611 16,663 N/A 1.00% 3.00% -11.37% -10.51% Credit Suisse Trust Global Post-Venture Capital Subaccount 2002 1,990 5.725 8.299 11,395 N/A 1.40% 2.05% -35.07% -8.69% 2001 1,586 8.818 8.818 13,982 N/A 1.40% 1.40% -29.62% -29.62% THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.: Dreyfus Socially Responsible Growth Subaccount 2002 1,731 5.299 19.078 11,679 0.23% 1.00% 3.00% -29.93% -29.65% 2001 1,620 7.563 27.119 15,699 0.07% 1.00% 3.00% -23.91% -16.84% DREYFUS INVESTMENT PORTFOLIOS: Dreyfus I.P. Mid Cap Stock Subaccount 2002 10,438 9.522 9.664 100,874 0.33% 1.40% 2.05% -13.70% 1.58% 2001 7,541 11.199 11.199 84,453 0.27% 1.40% 1.40% -4.60% -4.60%
41 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity Income Subaccount 2002 1,845 $ 9.334 $ 25.609 $ 44,934 4.04% 1.00% 3.00% -17.77% 0.96% 2001 1,659 22.475 31.143 50,216 5.91% 1.00% 3.00% -6.46% -5.90% Fidelity VIP Growth Subaccount 2002 1,600 9.210 35.347 53,797 0.25% 1.00% 3.00% -30.80% 0.59% 2001 1,643 33.204 51.078 81,527 6.97% 1.00% 3.00% -19.03% -13.14% FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Fidelity VIP II Asset Manager Subaccount 2002 292 19.957 20.546 5,884 4.03% 1.00% 2.80% -10.56% -9.63% 2001 323 22.326 22.736 7,226 5.70% 1.00% 2.80% -5.40% -5.05% Fidelity VIP II Contrafund Subaccount 2002 2,401 9.558 23.079 54,054 0.85% 1.00% 3.00% -10.25% 0.22% 2001 2,475 19.897 25.714 62,588 3.63% 1.00% 3.00% -13.68% -5.32% Fidelity VIP II Index 500 Subaccount 2002 940 9.460 106.090 97,664 1.24% 1.00% 3.00% -23.02% 1.56% 2001 1,087 127.922 137.84 146,877 1.10% 1.00% 3.00% -13.75% -9.67% FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST: Templeton Developing Markets Securities Subaccount 2002 3 8.725 8.725 29 N/A 1.40% 1.40% -1.53% -1.53% 2001 3 8.860 8.860 30 N/A 1.40% 1.40% -12.68% -12.68% ING VP EMERGING MARKETS FUND, INC.: ING VP Emerging Markets Fund Subaccount 2002 807 4.635 6.628 5,236 N/A 1.00% 2.80% -11.15% -10.23% 2001 713 7.247 7.384 5,432 21.69% 1.00% 2.80% -11.67% -11.31% ING VP NATURAL RESOURCES TRUST: ING VP Natural Resources Trust Subaccount 2002 242 12.422 12.826 3,033 0.19% 1.00% 2.80% -4.06% -3.07% 2001 257 12.958 13.232 3,252 N/A 1.00% 2.80% -17.13% -16.77% INVESCO VARIABLE INVESTMENT FUNDS, INC.: INVESCO VIF-Utilities Subaccount 2002 1,638 5.340 9.919 8,747 0.59% 1.40% 2.05% -21.42% 4.21% 2001 1,004 6.796 6.796 6,825 0.92% 1.40% 1.40% -32.30% -32.30% JANUS ASPEN SERIES: Janus Aspen Aggressive Growth Subaccount 2002 3,312 9.491 17.494 56,666 N/A 1.00% 3.00% -28.65% 1.24% 2001 3,396 21.725 24.518 81,659 N/A 1.00% 3.00% -40.63% -23.00% Janus Aspen Balanced Subaccount 2002 5,660 9.836 25.699 141,809 2.44% 1.00% 3.00% -7.37% 0.33% 2001 5,930 22.896 27.744 161,184 2.59% 1.00% 3.00% -6.17% -4.07%
42 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- JANUS ASPEN SERIES (CONTINUED): Janus Aspen Capital Appreciation Subaccount 2002 193 $ 7.035 $ 7.035 $ 1,356 0.59% 1.40% 1.40% -16.84% -16.84% 2001 242 8.459 8.459 2,043 1.17% 1.40% 1.40% -23.67% -23.67% Janus Aspen Growth Subaccount 2002 9,555 7.687 17.102 110,021 N/A 1.00% 3.00% -27.24% -16.12% 2001 12,249 10.607 23.504 189,564 0.25% 1.00% 3.00% -26.05% -21.32% Janus Aspen Growth and Income Subaccount 2002 3,720 11.570 11.570 43,040 0.77% 1.40% 1.40% -22.62% -22.62% 2001 4,984 14.953 14.953 74,529 1.32% 1.40% 1.40% -14.57% -14.57% Janus Aspen Worldwide Growth Subaccount 2002 5,892 8.991 23.259 134,031 0.86% 1.00% 3.00% -26.24% -3.80% 2001 6,855 28.344 31.533 212,598 0.45% 1.00% 3.00% -23.77% -16.33% J.P. MORGAN SERIES TRUST II: J.P. Morgan Small Company Subaccount 2002 800 9.176 10.538 8,265 0.24% 1.00% 3.00% -22.43% 0.82% 2001 803 12.972 13.584 10,764 0.03% 1.00% 3.00% -9.54% -3.47% PIMCO VARIABLE INSURANCE TRUST: PIMCO Foreign Bond Subaccount 2002 18 11.841 11.841 210 4.34% 1.40% 1.40% 6.68% 6.68% 2001 35 11.099 11.099 389 4.37% 1.40% 1.40% 6.77% 6.77% PIMCO Low Duration Subaccount 2002 19 11.998 11.998 231 3.94% 1.40% 1.40% 5.57% 5.57% 2001 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 2002 5,790 3.598 9.232 20,833 N/A 1.40% 2.05% -42.07% -1.78% 2001 4,197 6.211 6.211 26,068 N/A 1.40% 1.40% -24.15% -24.15% Scudder Bond Subaccount 2002 2,214 7.424 11.785 17,198 6.35% 1.00% 3.00% 5.54% 6.17% 2001 1,834 7.034 11.100 13,450 3.25% 1.00% 3.00% 2.42% 5.47% Scudder Capital Growth Subaccount 2002 5,041 7.124 14.451 36,569 0.35% 1.00% 3.00% -29.89% -24.13% 2001 4,352 10.201 20.611 45,339 9.97% 1.00% 3.00% -20.72% -14.48% Scudder Global Discovery Subaccount 2002 7,117 9.017 9.402 64,171 N/A 1.40% 2.05% -17.62% -6.11% 2001 6,536 11.412 11.412 74,591 1.60% 1.40% 1.40% -25.64% -25.64% Scudder Growth and Income Subaccount 2002 5,766 6.464 9.274 37,291 1.06% 1.40% 2.05% -24.19% -0.70% 2001 5,114 8.527 8.693 43,629 2.74% 1.40% 1.40% -13.30% -12.52% Scudder Health Sciences Subaccount 2002 6,232 8.002 10.906 49,863 N/A 1.40% 2.05% -24.16% 1.28% 2001 4,222 10.551 10.551 44,542 N/A 1.40% 1.40% 5.51% 5.51%
43 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- SCUDDER VARIABLE SERIES I (CONTINUED): Scudder International Subaccount 2002 12,444 $ 6.354 $ 8.882 $ 83,409 0.88% 1.00% 3.00% -19.49% -17.17% 2001 10,083 7.892 10.723 82,158 16.43% 1.00% 3.00% -32.11% -23.44% Scudder Money Market Subaccount 2002 3 10.308 10.783 30 N/A 1.40% 1.40% 0.09% 1.49% 2001 6 10.773 10.773 65 4.26% 1.40% 1.40% 2.41% 2.41% SCUDDER VARIABLE SERIES II: Scudder Aggressive Growth Subaccount 2002 4,070 6.853 9.837 27,890 0.45% 1.40% 2.05% -27.08% -1.85% 2001 3,999 10.022 10.022 40,084 0.85% 1.40% 1.40% -22.84% -22.84% Scudder Blue Chip Subaccount 2002 16,215 0.896 9.379 78,102 0.40% 1.25% 2.05% -23.08% -3.11% 2001 16,826 1.164 9.680 97,162 0.36% 1.25% 1.40% -16.97% -16.86% Scudder Contrarian Value Subaccount 2002 35,977 1.484 9.162 113,597 1.57% 1.00% 2.80% -16.69% -16.05% 2001 39,433 1.799 10.913 128,715 1.50% 1.00% 2.80% 0.46% 0.85% Scudder Global Blue Chip Subaccount 2002 2,745 8.331 9.319 22,865 0.65% 1.40% 2.05% -10.43% -7.08% 2001 2,280 10.029 10.029 22,866 2.07% 1.40% 1.40% 1.40% 1.40% Scudder Government Securities Subaccount 2002 50,525 1.275 12.676 237,363 3.09% 1.00% 3.00% 5.67% 6.56% 2001 41,648 1.218 11.896 160,645 3.48% 1.00% 3.00% 3.52% 6.64% Scudder Growth Subaccount 2002 54,587 1.360 9.431 178,843 N/A 1.00% 3.00% -30.28% 0.73% 2001 65,583 1.951 8.272 302,393 8.78% 1.00% 3.00% -23.67% -14.32% Scudder High Income Subaccount 2002 40,754 0.778 10.239 179,672 9.68% 1.00% 3.00% -2.50% 5.29% 2001 45,274 0.805 9.271 189,316 11.65% 1.00% 3.00% -2.72% 1.61% Scudder International Select Equity Subaccount 2002 36,850 1.299 9.202 75,047 0.42% 1.00% 2.80% -15.22% -1.69% 2001 39,653 1.547 7.918 72,774 16.11% 1.00% 2.80% -25.53% -25.18% Scudder Investment Grade Bond Subaccount 2002 17,704 1.188 12.110 99,482 3.12% 1.00% 3.00% 5.63% 6.52% 2001 15,452 1.135 11.369 64,981 3.41% 1.00% 3.00% 2.24% 4.66% Scudder Money Market Subaccount 2002 54,362 0.990 12.056 306,311 1.39% 1.00% 3.00% -0.86% 1.36% 2001 128,799 1.008 11.894 407,432 3.31% 1.00% 3.00% 0.94% 3.85% Scudder New Europe Subaccount 2002 - N/A N/A - 2.29% 1.40% 1.40% N/A N/A 2001 2,391 6.576 6.576 15,722 1.33% 1.40% 1.40% -30.83% -30.83% Scudder Small Cap Growth Subaccount 2002 45,002 0.817 9.660 100,125 N/A 1.00% 3.00% -34.93% 1.94% 2001 49,609 1.267 9.348 152,170 12.86% 1.00% 3.00% -32.12% -16.19%
44 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- SCUDDER VARIABLE SERIES II (CONTINUED): Scudder Strategic Income Subaccount 2002 2,400 $ 1.204 $ 11.507 $ 24,573 2.28% 1.25% 1.40% 9.77% 9.93% 2001 1,574 1.095 10.483 11,501 0.61% 1.25% 1.40% 3.78% 3.92% Scudder Technology Growth Subaccount 2002 28,007 0.575 9.317 145,624 0.11% 1.00% 3.00% -36.79% 2.62% 2001 25,462 0.920 9.079 217,576 0.18% 1.00% 3.00% -33.63% -7.58% Scudder Total Return Subaccount 2002 83,840 1.624 9.636 416,026 2.89% 1.00% 3.00% -16.22% -9.23% 2001 99,886 1.939 10.615 566,841 6.75% 1.00% 3.00% -7.39% -5.62% SVS Davis Venture Value Subaccount 2002 14,493 7.816 9.666 113,303 0.15% 1.40% 2.05% -16.95% 1.47% 2001 9,293 9.412 9.412 87,458 N/A 1.40% 1.40% -5.88% -5.88% SVS Dreman Financial Services Subaccount 2002 5,697 9.562 9.930 56,572 0.88% 1.40% 2.05% -9.78% -0.02% 2001 4,691 11.006 11.006 51,630 0.97% 1.40% 1.40% -6.17% -6.17% SVS Dreman High Return Equity Subaccount 2002 33,048 9.436 9.591 316,953 1.39% 1.40% 2.05% -19.17% -1.19% 2001 23,638 11.674 11.865 280,450 0.60% 1.40% 1.40% -0.34% 0.29% SVS Dreman Small Cap Value Subaccount 2002 43,904 1.116 8.945 149,053 0.41% 1.00% 2.80% -13.13% -12.10% 2001 33,983 1.285 10.177 113,833 N/A 1.00% 2.80% 16.04% 16.49% SVS Eagle Focused Large Cap Growth Subaccount 2002 6,095 6.652 9.142 40,566 N/A 1.40% 2.05% -28.35% -2.40% 2001 4,046 9.367 9.367 37,898 N/A 1.40% 1.40% -18.10% -18.10% SVS Focus Value + Growth Subaccount 2002 16,459 1.106 9.366 39,194 0.56% 1.00% 2.80% -27.38% -4.81% 2001 18,875 1.538 9.839 51,767 6.41% 1.00% 2.80% -15.56% -15.21% SVS Index 500 Subaccount 2002 23,118 6.334 9.461 146,428 0.55% 1.40% 2.05% -23.41% 1.62% 2001 17,576 8.270 8.270 145,352 0.29% 1.40% 1.40% -13.27% -13.27% SVS INVESCO Dynamic Growth Subaccount 2002 3,074 5.940 9.589 18,257 N/A 1.40% 2.05% -31.87% 4.47% 2001 2,256 8.718 8.718 19,666 N/A 1.40% 1.40% -12.82% -12.82% SVS Janus Growth and Income Subaccount 2002 17,677 5.952 9.235 105,208 0.66% 1.40% 2.05% -21.65% -0.56% 2001 13,923 7.597 7.597 105,768 0.42% 1.40% 1.40% -13.50% -13.50% SVS Janus Growth Opportunities Subaccount 2002 17,795 4.255 9.603 75,716 N/A 1.40% 2.05% -31.58% 1.35% 2001 15,117 6.219 6.219 94,012 N/A 1.40% 1.40% -24.75% -24.75%
45 (6) UNIT VALUES AND FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- UNIT FAIR VALUE NET INVESTMENT EXPENSE RATIO(b) TOTAL RETURN(c) UNITS ----------------- ASSETS(d) INCOME ---------------- ---------------- (000s) LOWEST HIGHEST (000s) RATIO(a) LOWEST HIGHEST LOWEST HIGHEST -------- -------- -------- --------- ---------- ------- ------- ------- ------- SCUDDER VARIABLE SERIES II (CONTINUED): SVS Oak Strategic Equity Subaccount 2002 7,019 $ 4.474 $ 9.015 $ 31,408 N/A 1.40% 2.05% -40.57% 1.52% 2001 4,707 7.529 7.529 35,442 N/A 1.40% 1.40% -24.71% -24.71% SVS Turner Mid-Cap Growth Subaccount 2002 7,947 5.842 9.446 46,432 N/A 1.40% 2.05% -33.21% 0.48% 2001 4,649 8.748 8.748 40,665 N/A 1.40% 1.40% -12.52% -12.52%
(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 (before rounding for this presentation), which reflects the changes in the underlying fund values and reductions related to the Expense Ratio, for the period indicated. (d) Net Assets equals Contract Owners' Equity. 46 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Kemper Investors Life Insurance Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholder's equity and cash flows present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and its subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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 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. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, as of December 31, 2002. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 21, 2003 47 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, December 31, 2002 2001 ------------ ------------ Assets Fixed maturity securities, available-for-sale, at fair value (amortized cost: December 31, 2002, $3,313,920; December 31, 2001, $3,057,139)............... $ 3,420,773 $ 3,094,560 Equity securities (cost: December 31, 2002, $52,627; December 31, 2001, $65,473).................................................................... 58,615 67,731 Short-term investments........................................................ -- 159,105 Joint venture mortgage loans.................................................. 114,061 104,303 Third-party mortgage loans.................................................... 57,985 63,897 Other real estate-related investments......................................... 5,645 8,240 Policy loans.................................................................. 223,888 239,787 Other invested assets......................................................... 2,491 20,799 ----------- ----------- Total investments......................................................... 3,883,458 3,758,422 Cash.......................................................................... 47,436 57,374 Accrued investment income..................................................... 148,549 140,762 Reinsurance recoverable....................................................... 433,566 240,536 Deferred insurance acquisition costs.......................................... 431,915 381,506 Value of business acquired.................................................... 53,600 75,806 Goodwill...................................................................... -- 178,418 Other intangible assets....................................................... 5,502 6,261 Deferred income taxes......................................................... 73,228 95,688 Federal income tax receivable................................................. 11,232 13,866 Receivable on sales of securities............................................. -- 2,100 Fixed assets.................................................................. 3,179 5,619 Other assets and receivables.................................................. 27,241 24,717 Assets held in separate accounts.............................................. 13,547,376 13,108,753 ----------- ----------- Total assets.............................................................. $18,666,282 $18,089,828 =========== =========== Liabilities Future policy benefits........................................................ $ 4,111,063 $ 3,634,161 Other policyholder benefits and funds payable................................. 203,159 436,449 Other accounts payable and liabilities........................................ 80,905 92,472 Liabilities related to separate accounts...................................... 13,547,376 13,108,753 ----------- ----------- Total liabilities......................................................... 17,942,503 17,271,835 ----------- ----------- 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.................................................... 841,633 804,347 Accumulated other comprehensive income........................................ 54,009 16,551 Retained deficit.............................................................. (174,363) (5,405) ----------- ----------- Total stockholder's equity................................................ 723,779 817,993 ----------- ----------- Total liabilities and stockholder's equity................................ $18,666,282 $18,089,828 =========== ===========
See accompanying notes to consolidated financial statements. 48 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Year Ended December 31, ------------------------------- 2002 2001 2000 --------- --------- --------- Revenue Net investment income................................................ $ 228,330 $ 269,419 $ 257,470 Realized investment gains (losses)................................... (779) 20,660 (8,277) Premium income....................................................... 1,002 486 8,394 Separate account fees and charges.................................... 110,013 70,993 68,293 Other income......................................................... 42,196 36,739 35,030 --------- --------- --------- Total revenue.................................................... 380,762 398,297 360,910 --------- --------- --------- Benefits and Expenses Interest credited to policyholders................................... 152,945 159,127 152,289 Claims incurred and other policyholder benefits...................... 62,613 21,933 13,718 Taxes, licenses and fees............................................. 19,244 10,714 17,861 Commissions.......................................................... 111,461 179,585 114,162 Operating expenses................................................... 67,474 66,026 61,671 Deferral of insurance acquisition costs.............................. (96,509) (166,202) (104,608) Amortization of insurance acquisition costs.......................... 34,941 18,052 23,231 Amortization of value of business acquired........................... 20,751 15,606 19,926 Goodwill impairment.................................................. 156,511 -- -- Amortization of goodwill............................................. -- 12,744 12,744 Amortization of other intangible assets.............................. 759 961 368 --------- --------- --------- Total benefits and expenses...................................... 530,190 318,546 311,362 --------- --------- --------- Income (loss) before income tax expense (benefit) and cumulative effect of accounting change, net of tax............................ (149,428) 79,751 49,548 Income tax expense (benefit)......................................... (2,377) 28,154 1,247 --------- --------- --------- Net income (loss) before cumulative effect of accounting change, net of tax............................................................. (147,051) 51,597 48,301 Cumulative effect of accounting change, net of tax................... (21,907) -- -- --------- --------- --------- Net income (loss)................................................ $(168,958) $ 51,597 $ 48,301 ========= ========= =========
See accompanying notes to consolidated financial statements. 49 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
Year Ended December 31, ----------------------------- 2002 2001 2000 --------- -------- -------- Net income (loss)............................................................. $(168,958) $ 51,597 $ 48,301 --------- -------- -------- Other comprehensive income (loss), before tax: Unrealized holding gains (losses) on investments arising during period: Unrealized holding gains on investments.................................... 80,067 54,155 61,487 Adjustment to value of business acquired................................... (1,786) (5,914) (3,400) Adjustment to deferred insurance acquisition costs......................... (15,344) (1,050) (230) --------- -------- -------- Total unrealized holding gains on investments arising during period............................................................... 62,937 47,191 57,857 --------- -------- -------- Less reclassification adjustments for items included in net income (loss): Adjustment for (gains) losses included in realized investment gains (losses)................................................................. 19,394 (9,203) (24,583) Adjustment for amortization of premium on fixed maturities included in net investment income.................................................... (9,400) (5,732) (4,538) Adjustment for (gains) losses included in amortization of value of business acquired........................................................ (331) (1,705) 214 Adjustment for (gains) losses included in amortization of insurance acquisition costs........................................................ (4,185) 6,395 13 --------- -------- -------- Total reclassification adjustments for items included in net income (loss)..................................................... 5,478 (10,245) (28,894) --------- -------- -------- Other comprehensive income, before related income tax expense (benefit)................................................................... 57,459 57,436 86,751 Related income tax expense (benefit).......................................... 20,001 8,167 (1,350) --------- -------- -------- Other comprehensive income, net of tax.............................. 37,458 49,269 88,101 --------- -------- -------- Comprehensive income (loss)......................................... $(131,500) $100,866 $136,402 ========= ======== ========
See accompanying notes to consolidated financial statements. 50 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
Year Ended December 31, ------------------------------ 2002 2001 2000 --------- -------- --------- Capital stock, beginning and end of period........................ $ 2,500 $ 2,500 $ 2,500 --------- -------- --------- Additional paid-in capital, beginning of period................... 804,347 804,347 804,347 Capital contributions from parent................................. 37,286 -- -- --------- -------- --------- Additional paid-in-capital, end of period......................... 841,633 804,347 804,347 --------- -------- --------- Accumulated other comprehensive income (loss), beginning of period 16,551 (32,718) (120,819) Other comprehensive income, net of tax............................ 37,458 49,269 88,101 --------- -------- --------- End of period.................................................. 54,009 16,551 (32,718) --------- -------- --------- Retained deficit, beginning of period............................. (5,405) (44,002) (56,023) Net income (loss)................................................. (168,958) 51,597 48,301 Dividends to parent............................................... -- (13,000) (36,280) --------- -------- --------- End of period.................................................. (174,363) (5,405) (44,002) --------- -------- --------- Total stockholder's equity................................. $ 723,779 $817,993 $ 730,127 ========= ======== =========
See accompanying notes to consolidated financial statements. 51 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ----------------------------------- 2002 2001 2000 ----------- ----------- --------- Cash flows from operating activities Net income (loss).................................................. $ (168,958) $ 51,597 $ 48,301 Reconciliation of net income (loss) to net cash from operating activities: Realized investment (gains) losses............................. 779 (20,660) 8,277 Interest credited and other charges............................ 188,926 169,084 142,344 Deferred insurance acquisition costs, net...................... (61,569) (148,150) (81,377) Amortization of value of business acquired..................... 20,751 15,606 19,926 Amortization of goodwill....................................... -- 12,744 12,744 Goodwill impairment............................................ 156,511 -- -- Amortization of discount and premium on investments............ 9,400 5,731 4,538 Amortization of other intangible assets........................ 759 961 368 Deferred income taxes.......................................... 2,458 16,927 (25,930) Net change in current federal income taxes..................... 2,634 (5,063) (18,593) Benefits and premium taxes due related to separate account business-owned life insurance................................ 11,521 (6,392) (61,476) Funds withheld account transfer................................ (222,500) -- -- Cumulative effect of accounting change, net of tax............. 21,907 -- -- Change in premium suspense..................................... (43,625) 41,938 657 Other, net..................................................... (13,116) (36,818) 41,720 ----------- ----------- --------- Net cash flow from operating activities..................... (94,122) 97,505 91,499 ----------- ----------- --------- Cash flows from investing activities Cash from investments sold or matured: Fixed maturity securities held to maturity..................... 198,824 281,664 170,465 Fixed maturity securities sold prior to maturity............... 2,307,588 1,331,168 589,933 Equity securities.............................................. 17,435 -- 1,271 Mortgage loans, policy loans and other invested assets......... 76,382 60,495 73,177 Cost of investments purchased or loans originated: Fixed maturity securities...................................... (2,757,149) (1,481,699) (569,652) Equity securities.............................................. (4,244) -- (1,264) Mortgage loans, policy loans and other invested assets......... (48,722) (41,395) (47,109) Investment in subsidiaries..................................... -- (2,690) (4,899) Short-term investments, net........................................ 159,105 (143,205) 26,491 Net change in receivable and payable for securities transactions... 12,928 6,186 (4,786) Net change in other assets......................................... 2,440 2,248 (5,141) ----------- ----------- --------- Net cash from investing activities.......................... (35,413) 12,772 228,486 ----------- ----------- --------- Cash flows from financing activities Policyholder account balances: Deposits....................................................... 601,045 680,106 608,363 Withdrawals.................................................... (505,674) (733,521) (881,888) Capital contributions.............................................. 37,286 -- -- Dividends to parent................................................ -- (13,000) (36,280) Cash overdrafts.................................................... (13,060) (20,589) 11,906 ----------- ----------- --------- Net cash from financing activities.......................... 119,597 (87,004) (297,899) ----------- ----------- --------- Net increase (decrease) in cash............................. (9,938) 23,273 22,086 Cash, beginning of period............................................. 57,374 34,101 12,015 ----------- ----------- --------- Cash, end of period................................................... $ 47,436 $ 57,374 $ 34,101 =========== =========== =========
See accompanying notes to consolidated financial statements. 52 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 Life Insurance Company of New York ("ZLICONY"), formerly Zurich Kemper Life Insurance Company of New York, a 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 also owns the PMG group of companies ("PMG"), acquired in 2000, and Investors Brokerage Services, Inc. The Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"), a non-operating holding company. Kemper is a wholly-owned subsidiary of Zurich Holding Company of America ("ZHCA"), a holding company. ZHCA 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 2001 and 2000 consolidated financial statements in order for them to conform to the 2002 presentation. The accompanying consolidated financial statements of the Company as of and for the years ended December 31, 2002, 2001 and for the three years in the period ended December 31, 2002, have been prepared in conformity with Accounting Principles Generally Accepted in the United States of America ("GAAP"). Estimates The preparation of financial statements in conformity with GAAP 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 and equity securities, the valuation allowance for deferred income taxes, the calculation of fair value disclosures for certain financial instruments and future policy benefit reserves. Goodwill and other intangibles In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 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 no longer be amortized, but be tested, at least annually, for impairment at the reporting unit level. In conjunction with management's focus on line of business operations, the Company's goodwill was tested for impairment at the life insurance and annuities operating segment level based on the guidance under SFAS 142. As a result of the testing performed, an impairment of $21.9 million was recorded in the annuities segment as of June 30, 2002 due to more conservative growth assumptions based on the market's volatility over the last few years. The fair value of that segment was estimated using expected present value of future cash flows for both current business in-force and future production estimates. 53 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In September 2002, the board of directors of the Company's indirect, 100% shareholder, Zurich Financial Services Group ("the Group"), approved a plan designed to improve the profitability of the Group and its subsidiaries. Under this plan, the Group considered a number of strategic options, the completion of which could have a significant impact on the recoverability of the carrying value of certain assets. Among the assets affected by the approval of the plan is the goodwill associated with the 1996 acquisition of the Zurich Life companies by ZFS. The Company filed its Form 10-Q for the period ended June 30, 2002 prior to the Group board's action. As a result, the Company recorded the complete write-down of the remaining goodwill of $156.5 million in the third quarter of 2002, the period during which the Company became aware of this action by the Group's board of directors. Other definite-lived, intangible assets of $7.6 million, recorded in 2001 and 2000 in connection with the purchase of PMG, continue to be 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 business acquired. The estimated amortization and accretion of interest for the value of business acquired for each of the years through December 31, 2007 are as follows:
Projected Beginning Accretion Of Ending Year Ended December 31, Balance Amortization Interest Balance ----------------------- --------- ------------ ------------ ------- (in thousands) 2000 (actual)..... $113,111 $(26,805) $6,879 $93,185 2001 (actual)..... 93,185 (21,394) 5,788 77,579 2002 (actual)..... 77,579 (24,464) 3,713 56,828 2003.............. 56,828 (12,977) 3,073 46,924 2004.............. 46,924 (11,795) 2,479 37,608 2005.............. 37,608 (9,585) 2,000 30,023 2006.............. 30,023 (8,321) 1,584 23,286 2007.............. 23,286 (7,624) 1,201 16,863
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 $3.2 million as of December 31, 2002 and by $1.8 million as of December 31, 2001. This adjustment increased the value of business acquired by $2.4 million as of December 31, 2000. Accumulated other comprehensive income decreased by approximately $2.1 million as of December 31, 2002 and $1.2 million as of December 31, 2001, due to this adjustment and increased accumulated other comprehensive income by approximately $1.6 million as of December 31, 2000. Life insurance revenue and expenses Revenue for annuities, variable life insurance and interest-sensitive life insurance products consists of investment income and realized capital gains, policy charges such as mortality, expense and surrender charges, 54 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and expense loads for premium taxes on certain contracts. Expenses consist of benefits in excess of account balances and interest credited to contracts, policy maintenance costs and amortization of deferred insurance acquisition costs and value of business acquired. 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 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 to cover the present value of future benefits for policies that were deemed to have elected annuitization. In accordance with current GAAP guidance, no additional liabilities for future policy benefits related to guaranteed living benefits have been established. 55 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Current interest rates credited during the contract accumulation period range from 0.5 percent to 12.0 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.5 percent. For contracts that have annuitized, interest rates used in determining the present value of future payments range principally from 2.5 percent to 4.5 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 6.0 percent to 7.3 percent over 20 years. Guaranty fund assessments The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 2002 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 securities 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, net of any applicable reserves or write-downs. 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 and unrealized losses are tax benefited. However, the tax benefits from unrealized losses are offset by a valuation allowance, where appropriate. 56 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Derivative instruments The Company is party to an interest rate swap agreement with Zurich Capital Markets, Inc. ("ZCM"), an affiliated counterparty. The Company invests primarily in fixed rate investments. A floating rate funding agreement was reinsured in 2000 and the Company subsequently entered into an interest rate swap agreement. 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 2002, the Company paid $3.8 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 December 31, 2002, and 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 $8.1 million and $5.0 million, respectively. 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 will file a consolidated federal income tax return with Zurich Holding Company of America, beginning with the 2002 tax year. 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 received a federal income tax refund of $2.7 million in 2002 and paid taxes of $19.8 million and $43.9 million directly to the United States Treasury Department during 2001 and 2000, respectively. 57 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (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, 2002 U.S. treasury securities and obligations of U.S. government agencies and authorities..................... $ 265,400 $ 260,287 $ 5,140 $ (26) Obligations of states and political subdivisions, special revenue and nonguaranteed....................... 19,873 19,073 800 -- Debt securities issued by foreign Governments............. 4,793 4,506 287 -- Corporate securities...................................... 2,137,716 2,062,712 90,030 (15,026) Mortgage and asset-backed securities...................... 992,990 967,342 35,972 (10,324) ---------- ---------- -------- -------- Total fixed maturity securities....................... $3,420,773 $3,313,920 $132,229 $(25,376) ========== ========== ======== ======== Equity securities......................................... $ 58,615 $ 52,627 $ 5,988 $ -- ========== ========== ======== ======== 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) ========== ========== ======== ======== Equity securities......................................... $ 67,731 $ 65,473 $ 2,261 $ -- ========== ========== ======== ========
The carrying value and amortized cost of fixed maturity investments, by contractual maturity at December 31, 2002, 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..................................................... $ 63,112 $ 62,223 Over one year through five years..................................... 806,702 774,553 Over five years through ten years.................................... 1,312,277 1,265,409 Over ten years....................................................... 245,692 244,393 Securities not due at a single maturity date, primarily mortgage- and asset-backed securities(1)......................................... 992,990 967,342 ---------- ---------- Total fixed maturity securities............................... $3,420,773 $3,313,920 ========== ==========
- -------- (1) Weighted average maturity of 3.4 years. 58 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Proceeds from sales of investments in fixed maturity securities prior to maturity were $2,307.6 million, $1,331.2 million and $589.9 million during 2002, 2001 and 2000, respectively. Gross gains of $81.2 million, $32.9 million and $8.6 million and gross losses, including write-downs of fixed maturity securities, of $65.8 million, $28.6 million and $20.8 million were realized on sales and maturities in 2002, 2001 and 2000, respectively. Pre-tax write-downs amounted to $18.5 million, $15.5 million and $11.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. At December 31, 2002, the Company held $102.3 million in mortgage loan investments in Delta Wetlands, which exceeded 10 percent of the Company's stockholder's equity at December 31, 2002. Excluding agencies of the U.S. government, no other individual investment exceeded 10 percent of the Company's stockholder's equity at December 31, 2002. At December 31, 2002, securities carried at approximately $5.3 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. The Company recorded write-downs totaling $9.5 million and $8.6 million in 2002 and 2001, respectively, related to their securitized financial assets. The Company did not have any write-downs in 2000 related to their securitized financial assets. 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 recorded fixed maturity write-downs on other than securitized financial assets of $9.0 million, $6.9 million and $11.4 million in 2002, 2001 and 2000, respectively. 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; 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 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 $177.7 million real estate portfolio at December 31, 2002 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 2002 and 2001, total impaired real estate-related loans were as follows:
December 31, December 31, 2002 2001 ------------ ------------ (in millions) Impaired loans without reserves--gross $ 4.8 $ 7.3 Impaired loans with reserves--gross... 10.8 11.3 ----- ----- Total gross impaired loans..... 15.6 18.6 Reserves related to impaired loans.... (2.7) (2.7) Write-downs related to impaired loans. (3.5) (3.5) ----- ----- Net impaired loans............. $ 9.4 $12.4 ===== =====
59 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company had an average balance of $13.6 million and $65.3 million in impaired loans for 2002 and 2001, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 2002 and 2001, loans on nonaccrual status, before reserves and write-downs, amounted to $10.6 million and $13.0 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. Net Investment Income The sources of net investment income were as follows:
2002 2001 2000 -------- -------- -------- (in thousands) Interest on fixed maturity securities............ $186,034 $214,505 $223,964 Dividends on equity securities................... 4,508 4,598 4,573 Income from short-term investments............... 1,479 2,332 3,433 Income from mortgage loans....................... 15,598 30,771 6,091 Income from policy loans......................... 23,189 19,394 20,088 Income from other real estate-related investments 13 27 99 Income from other loans and investments.......... 951 646 2,455 -------- -------- -------- Total investment income................... 231,772 272,273 260,703 Investment expense............................... 3,442 2,854 3,233 -------- -------- -------- Net investment income..................... $228,330 $269,419 $257,470 ======== ======== ========
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 and the project's inclusion by the CALFED Bay-Delta Program ("CALFED") as a potential early implementation project. CALFED is a collaborative effort of state and federal agencies working to find solutions for California's water management issues. Taken together, these facts supported, 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 the loans were on non-accrual status. The release of the general reserve allowance generated a realized gain of $16.4 million in 2001. 60 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net Realized Investment Gains (Losses) Net realized investment gains (losses) for the years ended December 31, 2002, 2001 and 2000, were as follows:
2002 2001 2000 -------- ------- -------- (in thousands) Real estate-related..................................... $ 961 $16,081 $ 1,711 Fixed maturity securities............................... 15,444 4,284 (12,185) Equity securities....................................... 346 262 245 Other................................................... (17,530) 33 1,952 -------- ------- -------- Realized investment gains (losses) before income tax expense (benefit).................................. (779) 20,660 (8,277) Income tax expense (benefit)............................ (273) 7,231 (2,897) -------- ------- -------- Net realized investment gains (losses)........... $ (506) $13,429 $ (5,380) ======== ======= ========
The other losses, net, for 2002 consist primarily of a write-down on a leveraged lease that covers two aircraft. The aircraft are leased by United Airlines ("UAL") and were written down to zero subsequent to UAL filing Chapter 11 bankruptcy in the fourth quarter of 2002. The pre-tax write-down totaled $17.5 million. 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, 2002, 2001 and 2000 were as follows:
December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ (in thousands) Fixed maturity securities................... $ 69,432 $69,970 $89,421 Equity and other securities................. 641 (879) 1,187 Adjustment to deferred insurance acquisition costs..................................... (11,159) (7,446) (243) Adjustment to value of business acquired.... (1,455) (4,209) (3,614) -------- ------- ------- Unrealized gain (loss) before income tax expense (benefit)...................... 57,459 57,436 86,751 Income tax expense (benefit)................ 20,001 8,167 (1,350) -------- ------- ------- Net unrealized gain (loss) on investments........................ $ 37,458 $49,269 $88,101 ======== ======= =======
Income tax expense related to the change in unrealized gains for the years ended December 31, 2002, 2001 and 2000 was $24.4 million, $12.2 million and $0, respectively. The income tax benefit related to the adjustment to deferred insurance acquisition costs for the years ended December 31, 2002, 2001 and 2000 was $3.9 million, $2.6 million and $0.1 million, respectively. The income tax benefit related to the adjustment to value of business acquired for the years ended December 31, 2002, 2001 and 2000 was $0.5 million, $1.5 million and $1.3 million, respectively. (4) 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. 61 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Approximately 16.2 percent of the investment-grade fixed maturity securities at December 31, 2002 were residential mortgage-backed securities, down from 22.0 percent at December 31, 2001. Approximately 6.3 percent of the investment-grade fixed maturity securities at December 31, 2002 were commercial mortgage-backed securities, compared with 5.7 percent at December 31, 2001. The residential mortgage-backed securities 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 7.3 percent and 9.6 percent of the investment-grade fixed maturity securities at December 31, 2002 and 2001, respectively, consisted of asset-backed securities. The majority of investments in asset-backed securities were backed by home equity loans (34.7%), manufactured housing loans (17.7%), collateralized loan and bond obligations (15.4%) and automobile loans (13.1%). 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, 2002 was as follows: California (58.0%), Washington (9.4%), Colorado (7.6%) and Illinois (6.6%). The property type distribution of a majority of the real estate portfolio as of December 31, 2002 was as follows: land (57.0%), hotels (31.4%) and office (6.6%). 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. At December 31, 2002, loans to a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company, a former affiliate, constituted approximately $102.3 million of the Company's real estate portfolio. Kemper's interest in the MLP is 75.0 percent at December 31, 2002. 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 subsequent periods and the general reserve allowance related to these loans was released. At December 31, 2002, MLP-related commitments accounted for approximately $0.2 million of the Company's off-balance-sheet legal commitments. At December 31, 2002, 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 62 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $60.0 million of the Company's real estate portfolio. The Nesbitt ventures consist of nine hotel properties and one retail property. At December 31, 2002, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 2002, the Company carried a valuation reserve of $0.6 million for one of these properties as its estimated fair value decreased below the debt supported by the property. At December 31, 2002, a loan to a joint venture amounted to $11.8 million. This affiliated mortgage loan was on an office property located in Illinois and owned by an affiliate, Zurich North America. At December 31, 2002, 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 $4.9 million at December 31, 2002 and consisted of mortgage loans on unzoned lots located in Hawaii. These properties are not currently producing income and the loans are on non-accrual. All zoned properties were sold by March of 2001. The Company is currently pursuing an out of court settlement with the City of Honolulu for the down zoning of certain unzoned properties. If a settlement is not reached, the trial will begin in 2003. The Company is holding the other unzoned properties for future zoning and sales. The Company anticipates that it could be a number of years until the Company obtains zoning to allow development or completely disposes of all its investment in Hawaii. At December 31, 2002, off-balance-sheet legal commitments related to Hawaiian properties totaled $4.0 million. At December 31, 2002, 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, 2002. (5) Income Taxes Income tax expense (benefit) was as follows for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ------- ------- -------- (in thousands) Current......... $(4,835) $11,228 $ 28,274 Deferred........ 2,458 16,926 (27,027) ------- ------- -------- Total..... $(2,377) $28,154 $ 1,247 ======= ======= ========
Additionally, the deferred income tax expense (benefit) related to items included in other comprehensive income was as follows for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ------- ------- ------- (in thousands) Unrealized gains and losses on investments $24,416 $12,246 $ -- Value of business acquired................ (509) (1,473) (1,265) Deferred insurance acquisition costs...... (3,906) (2,606) (85) ------- ------- ------- Total.............................. $20,001 $ 8,167 $(1,350) ======= ======= =======
63 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The actual income tax expense for 2002, 2001 and 2000 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 2002, 2001, and 2000 to income before income tax expense.
2002 2001 2000 -------- ------- -------- (in thousands) Computed expected tax expense........................ $(52,300) $27,913 $ 17,342 Difference between "expected" and actual tax expense: State taxes....................................... 342 (2,302) 737 Goodwill impairment and amortization of other intangibles..................................... 55,045 4,797 4,589 Dividend received deduction....................... (2,220) -- (1,191) Foreign tax credit................................ -- (15) (214) Change in valuation allowance..................... -- -- (15,201) Recapture of affiliated reinsurance............... -- -- (4,599) Prior year tax settlements........................ (3,594) (2,577) -- Other, net........................................ 350 338 (216) -------- ------- -------- Total actual tax expense...................... $ (2,377) $28,154 $ 1,247 ======== ======= ========
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 related to the recapture of affiliated reinsurance 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. 64 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, 2002 2001 ------------ ------------ (in thousands) Deferred federal tax assets: Deferred insurance acquisition costs ("DAC Tax").......... $141,338 $135,307 Unrealized losses on investments.......................... -- -- Life policy reserves...................................... 82,584 90,870 Unearned revenue.......................................... 56,986 55,574 Real estate-related....................................... -- -- Other investment-related.................................. 13,365 12,646 Other..................................................... 6,131 3,349 -------- -------- Total deferred federal tax assets..................... 300,404 297,746 Valuation allowance....................................... -- -- -------- -------- Total deferred federal tax assets after valuation allowance........................................... 300,404 297,746 -------- -------- Deferred federal tax liabilities: Value of business acquired................................ 13,439 24,608 Deferred insurance acquisition costs...................... 156,042 135,317 Depreciation and amortization............................. 13,142 21,165 Other investment-related.................................. 4,848 7,239 Unrealized gains on investments........................... 35,966 12,246 Other..................................................... 3,739 1,483 -------- -------- Total deferred federal tax liabilities................ 227,176 202,058 -------- -------- Net deferred federal tax assets.............................. $ 73,228 $ 95,688 ======== ========
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. (6) Related-Party Transactions The Company received capital contributions from Kemper totaling $37.3 million in 2002 and paid cash dividends of $13.0 million and $20.0 million to Kemper during 2001 and 2000, 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, 2002 and 2001, joint venture mortgage loans totaled $114.1 million and $104.3 million, respectively, and during 2002, 2001 and 2000, the Company earned interest income on these joint venture loans of $10.4 million, $25.4 million and $0.8 million, respectively. 65 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"), permits 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 2002, 2001 and 2000 amounted to $29.9 million, $27.4 million and $23.3 million, respectively. The Company also paid to Kemper real estate subsidiaries fees of $0.4 million, $0.5 million and $0.6 million in 2002, 2001 and 2000, respectively, related to the management of the Company's real estate portfolio. The Company has a service agreement with Deutsche Investment Management Americas, Inc. ("DIM"), formerly Zurich Scudder Investments, Inc. ("ZSI"), a subsidiary of Zurich at December 31, 2001. DIM provides investment services, including purchases or sales of securities, under the supervision of the Investment Committee of the Company. On September 24, 2001, ZFS announced that it would sell 100% of its ownership in ZSI to Deutsche Bank in a transaction valued at $2.5 billion. The sale was completed on April 5, 2002. This transaction did not include Scudder's United Kingdom operations, Threadneedle Investments. At December 31, 2002 and 2001, the Company reported the following amounts due from or (to) related parties:
December 31, December 31, 2002 2001 ------------ ------------ ZLICA................................... $ 17,979 $ 640,705 Zurich Insurance Company--Bermuda Branch -- 1,131,138 Other................................... 1,017 96,037 ------------ ----------- Receivable from related parties...... $ 18,996 $ 1,867,880 ============ =========== FKLA.................................... $ (3,536,310) $(2,064,245) Zurich Direct........................... (52,607) (83,572) Zurich Insurance Company--Bermuda Branch (16,354,306) -- Other................................... (108,000) (1,859,277) ------------ ----------- Payable to related parties........... $(20,051,223) $(4,007,094) ============ =========== Net payable to related parties....... $(20,032,227) $(2,139,214) ============ ===========
Related party receivables and payables are settled each month. 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 Life Insurance Company of New York ("ZLICONY"). ZLICONY 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 for cash to Farmers Group, Inc., which is an affiliated company. The Company held an $11.8 million real estate-related investment in an affiliated mortgage loan at December 31, 2002 and 2001. 66 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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.) (7) Reinsurance As of December 31, 2002 and 2001, the reinsurance recoverable related to fixed-rate annuity liabilities ceded to FLA amounted to $215.3 million and $230.1 million, respectively. The Company cedes 90 percent of all new direct individual life insurance premiums to outside reinsurers. Life reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $2.4 million and $2.1 million as of December 31, 2002 and 2001, respectively. The Company is party to a 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, under the original agreement, retained a portion of such funds in a funds withheld account ("FWA") which is included as a component of benefits and funds payable in the accompanying consolidated balance sheet as of December 31, 2001. During the first quarter of 2002, the Company amended the BOLI reinsurance agreement with ZICBB. Under the amended agreement, the balance in the FWA was transferred to a trust account that acts as security for the reinsurance agreement. On January 25, 2002, approximately $222.5 million in cash was transferred to the trust account. The trust account is not reflected in the Company's consolidated financial statements but is included in ZICBB's financial statements as of December 31, 2002. At December 31, 2002, reserve credits totaling $237.6 million were secured by the trust agreement, which was supported by cash and invested assets with a fair value of approximately $252.6 million. The net amount at risk of the guaranteed minimum death benefit and guaranteed retirement income benefit on certain new variable annuity contracts issued between March 1, 1997 and April 30, 2000 were ceded to outside reinsurers. As of December 31, 2002 and 2001, the reinsurance recoverable related to reinsuring the net amount at risk on these contracts amounted to $24.7 million and $8.3 million, respectively. 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 January 2003, the specific annuities that comprised the block of business ceded to ZICBB were surrendered. Approximately $5.0 million in surrender charges collected on these specific annuities was paid to ZICBB at the end of February 2003, as the final settlement payment related to this reinsurance agreement. 67 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, ---------------------------- 2002 2001 2000 -------- -------- -------- Face amount in force........... $ 85,592 $ 85,564 $ 85,358 ======== ======== ======== Net amount at risk ceded....... $(75,288) $(76,283) $(78,169) ======== ======== ======== Cost of insurance charges ceded $ 156.5 $ 168.1 $ 173.8 ======== ======== ======== Funds withheld account......... $ -- $ 236.1 $ 228.8 ======== ======== ========
The Company's FWA supported reserve credits on reinsurance ceded on the BOLI product at December 31, 2001 and 2000. At December 31, 2002, the trust supports reserve credits on the reinsurance ceded. (8) 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 as of December 31, 2002 and 2001 amounted to $1.4 million and $1.3 million, respectively. 68 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The discount rate used in determining the allocated postretirement benefit obligation was 6.5 percent and 7.0 percent for 2002 and 2001, respectively. The assumed health care trend rate used was based on projected experience for 2002, 7.3 percent for 2003, gradually declining to 6.1 percent by the year 2007 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, 2002 and 2001 by $159 thousand and $142 thousand, respectively. (9) 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 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. (10) Financial Instruments--Off-Balance-Sheet Risk At December 31, 2002, 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. (11) 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 69 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, DIM. 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. 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 and where no observable price is available, by appraised value. 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 $4.8 million and $2.8 million in 2002 and 2001, 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, 2002 and 2001. 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. 70 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The carrying values and estimated fair values of the Company's financial instruments at December 31, 2002 and 2001 were as follows:
December 31, 2002 December 31, 2001 --------------------- --------------------- Carrying Carrying Value Fair Value Value Fair Value ---------- ---------- ---------- ---------- (in thousands) Financial instruments recorded as assets: Fixed maturity securities........................... $3,420,773 $3,420,773 $3,094,560 $3,094,560 Cash and short-term investments..................... 47,436 47,436 216,479 216,479 Mortgage loans and other real estate-related assets. 177,691 177,691 176,440 176,440 Policy loans........................................ 223,888 223,888 239,787 239,787 Equity securities................................... 58,615 58,615 67,731 67,731 Other invested assets............................... 2,491 2,491 20,799 20,799 Financial instruments recorded as liabilities: Life policy benefits, excluding term life reserves.. 3,625,384 3,565,147 3,376,604 3,324,417 Funds withheld account.............................. -- -- 236,134 236,134
(12) Stockholder's Equity--Retained Earnings The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to stockholders without prior approval of regulatory authorities is restricted. In 2003, the Company cannot pay any dividends without Illinois Department of Insurance approval. In 2002, the Company did not pay dividends. The Company paid cash dividends of $13.0 million and $20.0 million to Kemper during 2001 and 2000, 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:
2002 2001 2000 -------- -------- -------- (in thousands) Net income (loss)............ $(84,871) $(71,854) $ 19,975 ======== ======== ======== Statutory capital and surplus $312,653 $332,598 $397,423 ======== ======== ========
The Company's statutory net loss reflects the market downturn and its impact on reserves for guaranteed death and living benefits consistent with statutory reserving methodology. As of January 1, 2001, the Company adopted the Codification of Statutory Accounting Principles ("Codification") guidance. The National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual is the NAIC's primary guidance on statutory accounting. Codification provides guidance for areas where statutory accounting had been silent and changed current statutory accounting in some areas. The Illinois Insurance Department adopted Codification, 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 Codification. 71 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) 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) 2002 Operating Summary Revenue.................................. $ 92,322 $105,170 $ 92,308 $ 90,962 $ 380,762 ======== ======== ========= ======== ========= Net operating income, excluding realized gains, before cumulative effect of accounting change...................... $ 8,109 $ 394 $(169,309) $ 14,261 $(146,545) ======== ======== ========= ======== ========= Net operating income (loss), excluding realized gains......................... $(13,798) $ 394 $(169,309) $ 14,261 $(168,452) Net realized investment gains (losses)... (841) 7,613 1,037 (8,315) (506) -------- -------- --------- -------- --------- Net income (loss).................... $(14,639) $ 8,007 $(168,272) $ 5,946 $(168,958) ======== ======== ========= ======== ========= 2001 Operating Summary Revenue.................................. $ 91,072 $ 98,360 $ 85,013 $123,852 $ 398,297 ======== ======== ========= ======== ========= Net operating income (loss), excluding realized gains (losses)................ $ 8,183 $ (1,364) $ (6,443) $ 37,792 $ 38,168 Net realized investment gains (losses)... 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 ======== ======== ========= ======== =========
(14) Operations by Business Segment The Company, along with FKLA, ZLICA and FLA, operate under the trade name Zurich Life, formerly Zurich Kemper Life. Prior to 2002, Zurich Life was organized by Strategic Business Unit ("SBU"). Each SBU concentrated on specific distribution channels. However, the SBUs were 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 and/or through more than one distribution channel. In 2002, the Company's management team shifted its financial focus from SBU performance to a line of business performance within each legal entity. The SBUs are now primarily responsible for market management, including distribution management, product design, sales and marketing. The Company has two primary operating segments, life insurance and annuities, that offer different types of products and services. These two operating segments reflect the way the Company manages its operations and makes business decisions. Premiums received from the sale of annuity products and the majority of our life insurance products are treated as deposit-type funds and are not recorded as revenue within the consolidated statements of operations. 72 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) However, revenues for both the life insurance and annuity segments are generated from investing these deposit-type funds. For universal life insurance products and fixed annuity products, deposits are primarily invested in fixed maturity securities and the Company earns investment income. Variable life insurance deposits and variable annuity deposits are transferred to the separate account and invested in underlying investment funds that invest in stocks and bonds. The Company receives cost of insurance charges and other separate account fees as revenues from this business. In addition, the Company receives premium tax and DAC Tax expense loads from certain contractholders. In the following table, the Company uses the caption "net operating income" as an operating measure of segment performance. Net operating income is calculated by deducting net realized investment gains or losses, net of related income taxes, and the cumulative effect of a change in accounting principle, net of tax, from net income. Net realized investment gains or losses are excluded from net operating income because they can, in part, be discretionary and are not indicative of operational trends. Prior period information has been restated to conform to the new composition of our segments.
Twelve Months Ended Twelve Months Ended December 31, 2002 December 31, 2001 ----------------------------------- --------------------------------- Life Annuity Total Life Annuity Total ---------- ---------- ----------- ---------- ---------- ----------- (in thousands) Total operating revenue............................... $ 80,573 $ 300,968 $ 381,541 $ 78,196 $ 299,441 $ 377,637 ---------- ---------- ----------- ---------- ---------- ----------- Operating income (loss) before tax expense, goodwill impairment and cumulative effect of accounting change............................................... $ 13,663 $ (5,800) $ 7,863 $ 15,721 $ 43,370 $ 59,091 Income tax expense (benefit) on operations............ 5,238 (7,342) (2,104) 7,128 13,795 20,923 Goodwill impairment................................... (32,832) (123,679) (156,511) -- -- -- ---------- ---------- ----------- ---------- ---------- ----------- Net operating income (loss) before cumulative effect of accounting change................................. (24,407) (122,137) (146,544) 8,593 29,575 38,168 Cumulative effect of accounting change, net of tax.... -- (21,907) (21,907) -- -- -- ---------- ---------- ----------- ---------- ---------- ----------- Net operating income (loss)........................... $ (24,407) $ (144,044) $ (168,451) $ 8,593 $ 29,575 $ 38,168 ========== ========== =========== ========== ========== =========== Goodwill.............................................. $ -- $ -- $ -- $ 6,601 $ 171,817 $ 178,418 ---------- ---------- ----------- ---------- ---------- ----------- Total assets.......................................... $9,840,840 $8,825,442 $18,666,282 $8,841,469 $9,248,359 $18,089,828 ========== ========== =========== ========== ========== =========== Total reserve for policyholder benefits in the general account.............................................. $ 808,389 $3,303,100 $ 4,111,489 $ 628,899 $3,005,262 $ 3,634,161 Total Separate Account liabilities.................... 8,848,140 4,699,236 13,547,376 7,696,013 5,412,740 13,108,753 ---------- ---------- ----------- ---------- ---------- ----------- Total reserve for policyholder benefits............... $9,656,529 $8,002,336 $17,658,865 $8,324,912 $8,418,002 $16,742,914 ========== ========== =========== ========== ========== ===========
73 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Twelve Months Ended December 31, 2000 ---------------------------------- Life Annuity Total ---------- ---------- ----------- (in thousands) Total operating revenue............................... $ 90,913 $ 278,274 $ 369,187 ---------- ---------- ----------- Operating income (loss) before tax expense, goodwill impairment and cumulative effect of accounting change............................................... $ 23,820 $ 34,005 $ 57,825 Income tax expense (benefit) on operations............ 4,171 (27) 4,144 ---------- ---------- ----------- Net operating income (loss) before cumulative effect of accounting change................................. 19,649 34,032 53,681 Cumulative effect of accounting change, net of tax.... -- -- -- ---------- ---------- ----------- Net operating income (loss)........................... $ 19,649 $ 34,032 $ 53,681 ========== ========== =========== Goodwill.............................................. $ 5,764 $ 185,399 $ 191,163 ---------- ---------- ----------- Total assets.......................................... $8,077,697 $7,928,946 $16,006,643 ========== ========== =========== Total reserve for policyholder benefits in the general account.............................................. $ 691,290 $2,896,850 $ 3,588,140 Total Separate Account liabilities.................... 7,009,309 4,170,330 11,179,639 ---------- ---------- ----------- Total reserve for policyholder benefits............... $7,700,599 $7,067,180 $14,767,779 ========== ========== ===========
(15) Subsequent Event In the first quarter of 2003, the specific annuities that comprised the block of business ceded to ZICBB were surrendered. Approximately $5.0 million in surrender charges collected on these specific annuities was paid to ZICBB at the end of February, 2003, as the final settlement payment related to this reinsurance agreement. (16) Effects of New Accounting Pronouncements In January, 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities. While there are a number of criteria that determine the effective date of FIN 46, the Company has concluded that it does not have any variable-interest entities. 74 APPENDIX A STATE PREMIUM TAX CHART Rate of Tax -------------------------------- Qualified Non-Qualified State Plans Plans - ----- --------- ------------- California .................................. 0.50%* 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. A-1 PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements included in Part B: KILICO Variable Annuity Separate Account Report of Independent Accountants Statement of Assets, Liabilities and Contract Owners' Equity as of December 31, 2002 Statement of Operations for the Year Ended December 31, 2002 Statements of Changes in Contract Owners' Equity for the Years Ended December 31, 2002 and 2001 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, 2002 and 2001 Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statements of Operations, years ended December 31, 2002, 2001 and 2000 Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Loss), years ended December 31, 2002, 2001 and 2000 Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity, years ended December 31, 2002, 2001 and 2000 Kemper Investors Life Insurance Company and Subsidiaries Consolidated Statements of Cash Flows, years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements (b) Exhibits: /4/1.1 A copy of resolution of the Board of Directors of Kemper Investors Life Insurance Company dated September 13, 1977. /4/1.2 A copy of Record of Action of Kemper Investors Life Insurance Company dated April 15, 1983. 2. Not Applicable. /3/3.1 Distribution Agreement between Investors Brokerage Services, Inc. and KILICO. /1/3.2 Addendum to Selling Group Agreement of Kemper Financial Services, Inc. /2/3.3 Selling Group Agreement of Investors Brokerage Services, Inc. /7/4.1 Form of Group Variable, Fixed and Market Value Adjusted Annuity Contract. /7/4.2 Form of Certificate to Group Variable, Fixed and Market Value Adjusted Annuity Contract. /7/4.3 Form of Individual Variable, Fixed and Market Value Adjusted Annuity Contract. /7/5. Form of Application. /3/6. Kemper Investors Life Insurance Company Articles of Incorporation and By-laws. 7. Not Applicable. /2/8.1(a) Fund Participation Agreement among Kemper Investors Life Insurance Company, Janus Aspen Series and Janus Capital Corporation. /5/8.1(b) Service Agreement between Kemper Investors Life Insurance Company and Janus Capital Corporation. /8/8.2(a) Participation Agreement By and Among Kemper Investors Life Insurance Company 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.). /6/8.2(b) Service Agreement between Credit Suisse Asset Management, LLC (successor to Warburg Pincus Asset Management, Inc.) and Federal Kemper Life Assurance Company and Kemper Investors Life Insurance Company. /12/8.2(c) Restatement of Participation Agreement among Counsellors Securities Inc., Warburg Pincus Asset Management, Inc. and/or the Warburg Pincus Funds and Kemper Investors Life Insurance Company. /8/8.3 Fund Participation Agreement among Kemper Investors Life Insurance Company, Kemper Investors Fund (now known as Scudder Variable Series II), Zurich Kemper Investments, Inc. and Kemper Distributors, Inc. /9/8.4(a) Participation Agreement between Kemper Investors Life Insurance Company and Scudder Variable Life Investment Fund (now known as Scudder Variable Series I). /9/8.4(b) Participating Contract and Policy Agreement between Kemper Investors Life Insurance Company and Scudder Kemper Investments, Inc. /9/8.4(c) Indemnification Agreement between Kemper Investors Life Insurance Company and Scudder Kemper Investments, Inc. /9/8.5(a) Participation Agreement Among Kemper Investors Life Insurance Company, PIMCO Variable Insurance Trust, and PIMCO Funds Distributors LLC. /9/8.5(b) Services Agreement between Pacific Investment Management Company and Kemper Investors Life Insurance Company. /14/8.6 Participation Agreement Among Franklin Templeton Variable Insurance Products Trust, Franklin Templeton Distributors, Inc. and Kemper Investors Life Insurance Company. /12/8.7(a) Fund Participation Agreement between Kemper Investors Life Insurance Company and The Dreyfus Socially Responsible Growth Fund, Inc. /13/8.7(b) November 1, 1999 Amendment to Fund Participation Agreement between Kemper Investors Life Insurance Company and The Dreyfus Socially Responsible Growth Fund, Inc. /13/8.7(c) Administrative Services Agreement by and between The Dreyfus Corporation and Kemper Investors Life Insurance Company (redacted). /13/8.7(d) November 1, 1999 Amendment to Administrative Services Agreement by and between The Dreyfus Corporation and Kemper Investors Life Insurance Company (redacted). /13/8.8(a) Fund Participation Agreement by and among The Alger American Fund, Kemper Investors Life Insurance Company and Fred Alger & Company Incorporated. /13/8.8(b) Service Agreement between Fred Alger Management, Inc. and Kemper Investors Life Insurance Company (redacted). /14/8.9(a) Form of Fund Participation Agreement by and among Kemper Investors Life Insurance Company, INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc. and INVESCO Distributors, Inc. /14/8.9(b) Form of Administrative Services Agreement by and between INVESCO Funds Group, Inc., INVESCO Variable Investment Funds, Inc. and Kemper Investors Life Insurance Company (redacted). /7/9. Opinion and Consent of Counsel. 10. Consent of PricewaterhouseCoopers LLP, independent accountants. 11. Not Applicable. 12. Not Applicable. /4/13. Schedules for Computation of Performance Calculations. /10/17.1 Schedule III: Supplementary Insurance Information (years ended December 31, 2002 and 2001). /10/17.2 Schedule IV: Reinsurance (year ended December 31, 2002). /15/17.3 Schedule IV: Reinsurance (year ended December 31, 2001). /16/17.4 Schedule IV: Reinsurance (year ended December 31, 2000). /10/17.5 Schedule V: Valuation and qualifying accounts (year ended December 31, 2002). /15/17.6 Schedule V: Valuation and qualifying accounts (year ended December 31, 2001). /16/17.7 Schedule V: Valuation and qualifying account (year ended December 31, 2000). - ------------- /1/ Incorporated by reference to Post-Effective Amendment No. 22 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 27, 1995. /2/ Incorporated 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. /3/ Incorporated 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. /4/ Incorporated by reference to the Registration Statement on Form N-4 for the Registrant (File No. 333-22375) filed on or about February 26, 1997. /5/ Incorporated 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. /6/ Incorporated by reference to Post-Effective Amendment No. 4 to the Registration Statement on Form S-6 (File No. 33-79808) filed on or about April 30, 1997. /7/ Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4 (File No. 333-22375) filed on or about November 3, 1997. /8/ Incorporated 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. /9/ Incorporated 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. /10/ Incorporated by reference to Form 10-K for Kemper Investors Life Insurance Company for fiscal year ended December 31, 2002 filed on or about March 27, 2003. /11/ Incorporated 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. /12/ Incorporated 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, 1999. /13/ Incorporated 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. /14/ Incorporated by reference to Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-22389) filed on or about April 26, 2001. /15/ Incorporated 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. /16/ Incorporated 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. Item 25. Directors and Officers of Kemper Investors Life Insurance Company The directors and principal 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 Mark A. Davis .................................. Executive Vice President and Chief Actuary Edward K. Loughridge ........................... Executive Vice President and Corporate Development Officer Debra P. Rezabek ............................... Executive Vice President, General Counsel, Corporate Secretary and Director Richard M. Sousa ............................... Executive Vice President and Director George Vlaisavljevich .......................... Executive Vice President and Director Martin D. Feinstein ............................ Chairman of the Board
Item 26. Persons Controlled by or Under Common Control with the Insurance Company or Registrant The response to this item is 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 At March 31, 2003, the Registrant had approximately 52,515 qualified and non-qualified Scudder Destinations Contract Owners. At March 31, 2003, the Registrant had approximately 233 qualified and non-qualified Farmers Variable Annuity I 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 of 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., a wholly owned subsidiary of Kemper Investors Life Insurance Company, 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. Position and Offices Name 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 and 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. 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 in the Texas Optional Retirement Program KILICO, depositor and sponsor of Registrant, KILICO Variable Annuity Separate Account, and Investors Brokerage Services, Inc., the principal underwriter of the Individual and Group Variable, Fixed and Market Value Adjusted Deferred Annuity Contracts (the "Contracts") issued by Registrant, will issue the Contracts to participants in the Texas Optional Retirement Program (the "Program") in reliance upon, and in compliance with, Rule 6c-7 of the Investment Company Act of 1940, and represent that they will: 1. Include appropriate disclosure regarding the restrictions on redemptions imposed by the Program in each registration statement, including the prospectus, used in connection with the Program; 2. Include appropriate disclosure regarding the restrictions on redemptions imposed by the Program in any sales literature used in connection with the offer of Contracts to Program participants; 3. Instruct salespeople who solicit Program participants to purchase Contracts specifically to bring the restrictions on redemption imposed by the Program to the attention of potential Program participants; and 4. Obtain from each Program participant who purchases a Contract in connection with the Program, prior to or at the time of such purchase, a signed statement acknowledging the restrictions on redemption imposed by the Program. 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 Individual and Group Variable, Fixed and Market Value Adjusted 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 Registration Statement, and has duly caused this 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 25th day of April, 2003. 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 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 25th day of April, 2003.
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, Chief Financial Officer and Director - ------------------------------------------------- (Principal Financial Officer and Principal Accounting Officer) Frederick L. Blackmon /s/ DEBRA P. REZABEK Director - ------------------------------------------------- Debra P. Rezabek /s/ RICHARD M. SOUSA Director - ------------------------------------------------- Richard M. Sousa /s/ GEORGE VLAISAVLJEVICH Director - ------------------------------------------------- George Vlaisavljevich
EXHIBIT INDEX The following exhibits are filed herewith:
Sequentially Exhibit Numbered Number Title Pages - -------- ----- ----- 10. Consent of PricewaterhouseCoopers LLP, independent accountants
EX-99.10 3 dex9910.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 10. CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Kemper Investors Life Insurance Company and Contract Owners of contracts that participate in the KILICO Variable Annuity Separate Account: We hereby consent to the use in this Post-Effective Amendment No. 11 (File Nos. 333-22375 and 811-3199) to the registration statement on Form N-4 (the "Registration Statement") of our report dated March 21, 2003, relating to the consolidated financial statements of Kemper Investors Life Insurance Company, and of our report dated February 24, 2003, relating to the financial statements of the KILICO Variable Annuity Separate Account, which are incorporated by reference into the Prospectus which constitutes part of this Registration Statement. We also consent to the references to us under the heading "Experts" in such Prospectus and the Statement of Additional Information. PricewaterhouseCoopers LLP Chicago, Illinois April 24, 2003 -----END PRIVACY-ENHANCED MESSAGE-----