UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1995.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from N/A to N/A.
Commission file number: 33-46881*
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Illinois 36-3050975
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1 Kemper Drive
Long Grove, Illinois 60049-0001
(Address of Principal Executive Offices) (Zip Code)
708-320-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 1, 1995, 250,000 shares of Common Stock (all held by
an affiliate, Kemper Financial Companies, Inc.) were
outstanding.
* Pursuant to Rule 429 under the Securities Act of 1933, this
Form 10-Q also relates to Commission file numbers 33-33547
and 33-43462.
The registrant meets the conditions set forth in General
Instruction H (1) (a) and (b) of Form 10-Q and is therefore
filing this Form 10-Q with the reduced disclosure format.
<PAGE>
KEMPER INVESTORS LIFE INSURANCE COMPANY
FORM 10-Q
PART I. FINANCIAL STATEMENTS Page No.
--------
Consolidated Balance Sheet -
June 30, 1995 and December 31, 1994 . . . . . . . . 3
Consolidated Statement of Operations -
Three months and six months ended
June 30, 1995 and 1994. . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1995 and 1994 . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . 6
Management's Discussion and Analysis
Results of Operations . . . . . . . . . . . . . . . 8
Investments . . . . . . . . . . . . . . . . . . . . 12
Liquidity and Capital Resources . . . . . . . . . . 23
PART II. OTHER INFORMATION
ITEM 5. Other Information . . . . . . . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 27
- 2 -
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheet
(in thousands, except share data)
(unaudited)
<CAPTION>
June 30 December 31
1995 1994
---------- -----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at market
(cost: 1995, $3,578,972; 1994, $3,707,356) $3,610,428 $3,463,732
Equity securities, at market (cost: 1995,
$5,006; 1994, $14,947) 4,356 14,767
Short-term investments 187,160 204,164
Joint venture mortgage loans 353,127 351,359
Third-party mortgage loans 295,915 318,682
Other real estate-related investments 226,667 237,242
Policy loans 281,691 277,743
Other invested assets 25,271 25,760
----------- -----------
Total investments 4,984,615 4,893,449
Cash 993 23,189
Accrued investment income 118,660 125,543
Deferred insurance acquisition costs 286,955 310,465
Fixed assets, at cost less accumulated depreciation 2,083 3,735
Receivable for securities sold 1,990 -
Reinsurance recoverable 550,607 642,801
Other assets and receivables 49,271 29,914
Assets held in separate accounts 1,641,106 1,507,984
----------- -----------
Total assets $7,636,280 $7,537,080
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $4,645,628 $4,843,690
Ceded future policy benefits 550,607 642,801
Payable for securities purchased 2,016 574
Other accounts payable and liabilities 57,535 66,687
Deferred income taxes 54,460 41,364
Liabilities related to separate accounts 1,641,106 1,507,984
----------- -----------
Total liabilities 6,951,352 7,103,100
----------- -----------
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 491,994 491,994
Net unrealized gain (loss) on investments 13,272 (236,443)
Retained earnings 177,162 175,929
----------- -----------
Total stockholder's equity 684,928 433,980
----------- -----------
Total liabilities and stockholder's equity $7,636,280 $7,537,080
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Operations
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30 --------
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Net investment income $179,141 $165,752 $ 88,978 $ 83,492
Realized investment losses (46,685) (5,029) (45,309) (11,054)
Fees and other income 17,460 15,798 8,522 7,804
-------- -------- -------- --------
Total revenue 149,916 176,521 52,191 80,242
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to
policyholders 123,202 124,513 61,777 61,906
Commissions, taxes, licenses and fees 14,013 13,635 8,202 5,959
Operating expenses 9,701 12,870 4,839 6,682
Deferral of insurance
acquisition costs (20,210) (22,768) (10,726) (10,914)
Amortization of insurance
acquisition costs 22,007 14,658 9,208 8,666
------- ------- ------- -------
Total benefits and expenses 148,713 142,908 73,300 72,299
------- ------- ------- -------
Income (loss) before income tax
expense (benefit) 1,203 33,613 (21,109) 7,943
------- ------- ------- -------
Income tax expense (benefit)
Current (9,993) 12,652 (13,855) (2,063)
Deferred 9,963 (421) 6,446 5,402
------- ------- ------- ------
Total income tax expense (benefit) (30) 12,231 (7,409) 3,339
------- ------- ------- ------
Net income (loss) $ 1,233 $ 21,382 $(13,700) $ 4,604
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
- 4 -
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Six Months
Ended June 30
-------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,233 $ 21,382
Reconcilement of net income to net cash provided:
Realized investment losses 46,685 5,029
Interest credited and other charges 119,761 121,337
Deferred insurance acquisition costs 1,797 (8,110)
Amortization of discount and premium
on investments 2,086 1,598
Deferred income taxes 9,913 (433)
Other, net (33,328) (18,159)
-------- --------
Net cash provided from operating activities 148,147 122,644
-------- --------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 71,888 21,752
Fixed maturities sold prior to maturity 161,453 432,677
Mortgage loans, policy loans and other
invested assets 193,475 337,704
Net change in fixed assets 1,608 1,441
Cost of investments purchased or loans originated:
Fixed maturities (99,918) (712,864)
Mortgage loans, policy loans and
other invested assets (190,341) (131,425)
Short-term investments, net 17,004 85,631
Net change in receivable and payable
for securities transactions (548) (13,489)
-------- --------
Net cash provided by investing activities 154,621 21,427
-------- --------
Cash flows from financing activities
Policyholder account balances:
Deposits 125,131 115,472
Withdrawals (441,630) (302,360)
Capital contributions - 65,000
Other (8,465) (12,331)
-------- --------
Net cash used in financing activities (324,964) (134,219)
-------- --------
Net change in cash (22,196) 9,852
Cash at the beginning of the period 23,189 7,487
-------- --------
Cash at the end of the period $ 993 $ 17,339
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
- 5 -
<PAGE>
Kemper Investors Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. In the opinion of management, all necessary adjustments
consisting of normal recurring accruals have been made for a
fair statement of the results of Kemper Investors Life
Insurance Company ("KILICO") for the periods included in these
financial statements. These financial statements should be
read in conjunction with the financial statements and related
notes in the 1994 Annual Report on Form 10-K.
2. The net change in unrealized gains (losses), net of applicable
taxes, on fixed maturities and equity securities is not
reflected as a component of KILICO's net income (loss).
3. Pursuant to Statement of Financial Accounting Standards
("SFAS")109, "Accounting for Income Taxes," deferred tax
assets are recognized if future realization of the tax benefit
is more likely than not, with a valuation allowance for the
portion that is not likely to be realized. KILICO has
established a valuation allowance to reduce the deferred
federal tax asset related to real estate and other
investments to the amount that, based upon available evidence,
is, in management's judgment, more likely than not to be
realized. Any reversals of the valuation allowance are
contingent upon the recognition of future capital gains in
Kemper Corporation's ("Kemper") consolidated federal
income tax return or a change in circumstances which causes
the recognition of the benefits to become more likely than
not. During the first six months of 1995, the valuation
allowance was decreased by $85.3 million. This decrease in
the valuation allowance solely relates to the decrease in the
deferred federal tax asset from unrealized losses on
investments.
- 6 -
<PAGE>
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of KILICO's net deferred federal tax
liability are as follows:
<CAPTION>
(in thousands) June 30 December 31
1995 1994
-------- -----------
<S> <C> <C>
Deferred federal tax assets:
Life policy reserves $ 46,246 $ 51,519
Real estate-related 35,735 39,360
Other investment-related 5,910 7,435
Unrealized losses on investments - 85,331
Other 6,672 6,415
-------- ---------
Total deferred federal tax assets 94,563 190,060
Valuation allowance (15,201) (100,532)
------- ---------
Total deferred federal tax assets
after valuation allowance 79,362 89,528
------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 100,435 108,663
Depreciation and amortization 19,390 18,878
Unrealized gains on investments 10,782 -
Other 3,215 3,351
------- -------
Total deferred federal tax
liabilities 133,822 130,892
------- -------
Net deferred federal tax liability $(54,460) $(41,364)
======= =======
</TABLE>
The tax returns through the year 1986 have been examined by
the Internal Revenue Service ("IRS"). The tax returns for
the years 1987 through 1990 are currently under examination by
the IRS. Changes proposed are not material to KILICO's
financial position.
4. On May 15, 1995, Kemper entered into a definitive agreement to
be acquired in a merger transaction. See "Management's
Discussion and Analysis" on the following page.
- 7 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
On May 15, 1995, Kemper signed a definitive merger agreement
whereby Kemper, including Kemper Investors Life Insurance Company
("KILICO"), would be acquired by an investor group comprised of
Zurich Insurance Company, Insurance Partners, L.P. and Insurance
Partners Offshore (Bermuda), L.P. and ZIP Acquisition Corp (the
"Merger Agreement"). The transaction is subject to certain
conditions, including divestiture of Kemper's securities
brokerage operations and certain approvals by state insurance
regulators, mutual fund shareholders and the stockholders of
Kemper. The transaction is expected to close in the fourth
quarter of 1995, or, at the option of the investor group, in
January 1996. (See Part II, Item 5 of this Form 10-Q.)
RESULTS OF OPERATIONS
KILICO reported net income in the first half of 1995 of
$1.2 million, compared with net income of $21.4 million in the
first half of 1994. The decline was primarily due to realized
investment losses in 1995, compared with realized investment
gains in 1994.
<TABLE>
The following table reflects the major components of realized
investment gains (losses) included in net income:
Realized investment gains (losses):
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Real estate-related losses <F1> $(53.4) $(18.1) $(53.4) $ (4.3)
Fixed maturity write-downs - (.1) - -
Other gains (losses), net 6.7 13.2 8.1 (6.7)
------ ------ ------ ------
Realized investment losses (46.7) (5.0) (45.3) (11.0)
Income tax benefit (16.4) (1.7) (15.9) (3.8)
------ ------ ------ ------
Net realized investment losses $(30.3) $ (3.3) $(29.4) $ (7.2)
====== ====== ====== ======
<FN>
<F1> See the discussion captioned "Real estate asset sales" in ITEM 5 of this
Form 10-Q below.
</FN>
</TABLE>
- 8 -
<PAGE>
Operating earnings (net income excluding realized investment
results) improved to $31.5 million in the first half of 1995,
compared with $24.7 million in the first half of 1994, primarily
due to increased spread income, lower operating expenses and an
increase in fees and other income. These improvements were
partially offset by an increase in the amortization of deferred
insurance acquisition costs.
KILICO improved spread income by increasing investment income and
by also reducing crediting rates on certain existing blocks of
fixed annuity and interest-sensitive life insurance products
through most of 1994. Such reductions in crediting rates occurred
as overall interest rates also declined. Operating earnings then
began to improve as crediting rates declined at a faster rate
than KILICO's investment income. Beginning in late 1994,
however, as a result of rising interest rates and other
competitive market factors, KILICO began to increase crediting
rates on such interest-sensitive products, which adversely
impacts spread income. The recent decline in interest rates
during the second quarter of 1995, however, has created an
interest rate environment mitigating at present competitive
pressures to increase renewal crediting rates further.
Investment income was positively impacted in the first half of
1995, compared with the first half of 1994, from reductions in
the level of non-performing real estate-related investments,
primarily from sales of certain real estate-related investments
to affiliated non-life realty companies in recent periods.
These sales totaled $3.5 million in the first half of 1995 and
$107.3 million in the first half of 1994 and resulted in no
realized gain or loss to KILICO.
Investment income in 1995 also benefited from a repositioning of
KILICO's fixed maturity investment portfolio in September 1994.
The repositioning of KILICO's investment portfolio resulted in
the sale of $330.7 million of fixed maturity investments, which
consisted of lower yielding investment-grade corporate securities
and collateralized mortgage obligations. The $306.9 million of
proceeds from the repositioning, together with $275.0 million of
cash and short-term investments, was reinvested into higher yielding
U.S. government and agency guaranteed mortgage pass-through
securities issued by the Government National Mortgage Association
and the Federal National Mortgage Association. See "INVESTMENTS"
below.
- 9 -
<PAGE>
<TABLE>
Life insurance sales
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
------------------ --------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Annuities ------ ------ ------ ------
General account $125.1 $114.8 $ 74.3 $ 53.7
Separate account 86.7 146.7 38.3 69.3
------ ------ ------ ------
Total annuities 211.8 261.5 112.6 123.0
Interest-sensitive life insurance - .7 - .2
------ ------ ------ ------
Total sales $211.8 $262.2 $112.6 $123.2
====== ====== ====== ======
</TABLE>
Sales of annuity products consist of total deposits received. The
increase in general account (fixed annuity) sales reflected
KILICO's current strategy to increase sales of fixed annuities as
a result of the current interest rate environment. KILICO's
longer term strategy is to direct its sales efforts toward
separate account (variable annuity) products, which increase
administrative fees earned and pose minimal investment risk for
KILICO as policyholders invest in one or more of several
underlying investment funds. Despite this strategy, separate
account sales declined in the first half of 1995, compared with
the first half of 1994. This decline was due to competitive
conditions in certain distribution channels, in part reflecting
KILICO's financial strength and performance ratings and
uncertainty concerning KILICO's ownership.
Included in fees and other income are administrative fees
received from KILICO's separate account products of $10.5 million
in the first half of 1995, compared with $10.3 million in the
first half of 1994. Other income also included surrender charge
revenue of $4.8 million in the first half of 1995, compared with
$3.5 million in the first half of 1994, as total general account
and separate account policyholder surrenders and withdrawals
increased to $573.4 million in the first half of 1995, compared
with $346.5 million in the first half of 1994. Policyholder
withdrawals increased during the first half of 1995 reflecting
uncertainty regarding KILICO's ownership and rising interest
rates late in 1994 and early in 1995. KILICO's crediting rate
increases in late 1994 and in early 1995 were designed to reduce
the level of future withdrawals. As a result of increases in
renewal crediting rates and declining interest rates in the second
quarter of 1995, together with the benefits of KILICO's planned
association with the Zurich Insurance Company, KILICO expects
that the level of surrender and withdrawal activity experienced
in the first half of 1995 should decrease for the remainder
of 1995.
-10-
<PAGE>
The deferral of insurance acquisition costs was lower in the
first half of 1995, compared with the first half of 1994,
primarily reflecting lower overall annuity sales. The
amortization of insurance acquisition costs increased in the
first six months of 1995, compared with the first six months of
1994, primarily as a result of an increase in policyholder
withdrawals and increasing renewal crediting rates. Policyholder
withdrawals and increasing renewal crediting rates adversely
impact the amortization of insurance acquisition costs as both
would be expected to decrease KILICO's projected future estimated
gross profits.
Commissions, taxes, licenses and fees increased $0.4 million during
the first half of 1995, compared with the first half of 1994,
primarily due to an increase in guaranty fund assessments for
insolvent life insurance companies.
Operating expenses decreased by $3.2 million, or 24.6 percent, in
the first half of 1995, compared with the first half of 1994,
primarily as a result of expense control efforts.
Since year-end 1990, KILICO has taken many steps to improve its
earnings, financial strength and competitive marketing position.
These steps included adjustments in crediting rates, reductions
of operating expenses, reductions of below investment-grade
securities, a strategy not to embark on new real estate projects,
additional provisions for real estate-related losses, sales of
$646.0 million of certain real estate-related investments to
affiliated non-life realty companies through June 30, 1995,
third-party sales and refinancing of certain mortgage and other
real estate loans, approximately $900 million in annuity
reinsurance transactions with an affiliated mutual life insurance
company, a parental guarantee of indebtedness, and capital
contributions of $342.5 million through June 30, 1995. KILICO's
statutory surplus ratio improved to 11.9 percent at June 30, 1995
from 10.2 percent at December 31, 1994, 8.2 percent at December
31, 1993, 6.6 percent at December 31, 1992, 6.5 percent at
December 31, 1991, and 4.0 percent at year-end 1990.
- 11 -
<PAGE>
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts
written. KILICO makes shifts in its investment portfolio
depending on, among other factors, the interest rate environment,
liability durations and changes in market and business
conditions.
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 188 3.8% $ 227 4.6%
Fixed maturities:
Investment-grade:
NAIC<F1> Class 1 2,732 54.8 2,569 52.2
NAIC<F1> Class 2 736 14.8 760 15.5
Performing below investment-grade <F2> 142 2.8 135 2.8
Equity securities 4 .1 15 .3
Joint venture mortgage loans<F3> 353 7.1 351 7.1
Third-party mortgage loans<F3> 296 5.9 319 6.5
Other real estate-related investments 227 4.5 237 4.8
Policy loans 282 5.7 278 5.7
Other 25 .5 26 .5
----- ----- ------ -----
Total<F4> $4,985 100.0% $4,917 100.0
===== ===== ====== =====
<FN>
<F1> National Association of Insurance Commissioners ("NAIC").
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F2> Excludes $26.5 million, or 0.5 percent, and $49.9 million,
or 1.0 percent, at June 30, 1995 and December 31, 1994,
respectively, of bonds carried in other real estate-related
investments.
<F3> A joint venture mortgage loan is recharacterized in the
current period as a third-party mortgage loan when KILICO and its
affiliates have disposed of their related equity
interest in that venture.
<F4> See table captioned "Summary of gross and net real estate
investments" below.
</FN>
</TABLE>
Fixed maturities
KILICO is carrying its fixed maturity investment portfolio, which
it considers available for sale, at estimated market value, with
the aggregate unrealized appreciation or depreciation being
recorded as a separate component of stockholder's equity, net of
any applicable income tax expense. The aggregate unrealized
appreciation, net of tax, on fixed maturities at June 30, 1995 was
$20.4 million, compared with unrealized depreciation of $243.6
million at December 31, 1994. KILICO does not record a net deferred
tax benefit for the aggregate unrealized depreciation on investments.
Market values are sensitive to movements in interest rates and
other economic developments and can be expected to fluctuate, at
times significantly, from period to period.
- 12 -
<PAGE>
At June 30, 1995, investment-grade fixed maturities and cash and
short-term investments accounted for 73.4 percent of KILICO's
invested assets and cash, compared with 72.3 percent at
December 31, 1994. Approximately 70 percent of KILICO's NAIC
Class 1 bonds are rated AAA or equivalent at June 30, 1995.
Approximately 50 percent of KILICO's investment-grade fixed
maturities at June 30, 1995 were mortgage-backed securities.
These investments consist primarily of marketable mortgage
pass-through securities issued by the Government National
Mortgage Association, the Federal National Mortgage Association
or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage
pass-through securities issued by these entities. KILICO has not
made any material investments in interest-only or other similarly
volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality,
and the markets for these investments have been and are expected
to remain liquid.
Future investment income from mortgage-backed securities may be
affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments.
Due to the fact that KILICO's investments in mortgage-backed
securities predominately date since 1992, the current interest
rate environment is not expected to cause any material extension
of the average maturities of these investments. With the
exception of many of KILICO's September 1994 purchases of such
investments, most of these investments were purchased by KILICO
at discounts. Prepayment activity on such securities is not
expected to result in any material losses to KILICO because
prepayments would generally accelerate the reporting of the
discounts as investment income. Prepayment activity resulting
from a decline in interest rates on securities purchased at
a premium would accelerate the amortization of the premiums which
would result in reductions of investment income related to such
securities. At June 30, 1995, KILICO has unamortized discounts
and premiums of $18.8 million and $13.2 million, respectively,
related to mortgage-backed securities. Given the credit quality,
liquidity and anticipated payment characteristics of KILICO's
investments in mortgage-backed securities, KILICO believes that
the associated risk can be managed without material adverse
consequences on its consolidated financial statements.
Below investment-grade securities holdings (NAIC classes 3
through 6) (representing securities of 11 issuers at June 30,
1995) totaled less than three percent of cash and invested assets
at June 30, 1995 and December 31, 1994. Below investment-grade
securities are generally unsecured and often subordinated to
other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to
adverse economic conditions than investment-grade issuers.
- 13 -
<PAGE>
Over the last four years, KILICO significantly reduced its
exposure to below investment-grade securities. This strategy
takes into account the more conservative nature of today's consumer
and the resulting demand for higher-quality investments in the life
insurance and annuity marketplace.
Real estate-related investments
The $876 million real estate portfolio held by KILICO constituted
17.5 percent of cash and invested assets at June 30, 1995,
compared with $907 million, or 18.4 percent, at December 31,
1994. The real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related
investments. The majority of KILICO's real estate loans are on
properties or projects where KILICO, Kemper, or their respective
affiliates have taken ownership positions in joint ventures with
a small number of partners.
<TABLE>
Summary of gross and net real estate investments
(in millions)
<CAPTION>
June 30, 1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
Investments before reserves, write-downs
and net joint venture operating losses:
Joint venture mortgage loans $ 361 $ 358
Third-party mortgage loans 315 353
Other real estate-related investments 320 350
------ ------
Subtotal 996 1,061
Reserves (45) (43)
Write-downs (60) (97)
Cumulative net operating losses of joint
ventures owned (15) (14)
------ ------
Net real estate investments $ 876 $ 907
====== ======
</TABLE>
As reflected in the real estate portfolio table on the following
page, KILICO has continued to fund both existing projects and
legal commitments. The future legal commitments were $331.8
million at June 30, 1995. This amount represented a net decrease
of $44.3 million since December 31, 1994, largely due to fundings
in the first six months of 1995. As of June 30, 1995, KILICO
expects to fund approximately $61.1 million of these legal
commitments, along with providing capital to existing projects.
The disparity between total legal commitments and the amount
expected to be funded relates principally to standby financing
arrangements that provide credit enhancements to certain tax-
exempt bonds, which KILICO does not presently expect to fund.
The total legal commitments, along with estimated working capital
requirements, are considered in KILICO's evaluation of reserves
and write-downs.
Generally, at the inception of a real estate loan, KILICO
anticipated that it would roll over the loan and reset the
interest rate at least one time in the future, although KILICO
- 14 -
<PAGE>
is not legally committed to do so. As a result of the continued
weakness in the real estate markets and fairly restrictive
lending practices by other lenders in this environment, KILICO
expects that all or most loans maturing in 1995 will be rolled
over, restructured or foreclosed.
Excluding $49.8 million of real estate owned and $60.3
million in KILICO's net equity investments in joint ventures,
KILICO's real estate loans (including real estate-related bonds)
totaled $765.6 million at June 30, 1995, after reserves and
write-downs. Of this amount, $555.1 million are on accrual
status with a weighted average interest rate of approximately 8.0
percent. Of these accrual loans, 57.1 percent have terms
requiring current periodic payments of their full contractual
interest, 27.7 percent require only partial payments or payments
to the extent of cash flow of the borrowers, and 15.2 percent
defer all interest to maturity.
The equity investments in real estate, at June 30, 1995,
consisted of $54.4 million of loans to Spanish projects
(described below), $0.9 million of unsecured loans to joint
ventures treated as equity investments, $16.4 million in KILICO's
other equity investments in joint ventures and $11.4 million of
reserves. The equity investments include KILICO's share of
periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has
elected to fund, operating requirements of certain joint
ventures.
KILICO's real estate owned included $43.3 million of deeds in
lieu of foreclosure, $3.8 million of foreclosures and $2.7
million of certain purchased properties at June 30, 1995. Real
estate owned was net of $36.3 million of write-downs at
June 30, 1995.
- 15 -
<PAGE>
<TABLE>
Real estate portfolio
(in millions)
<CAPTION>
Mortgage loans
--------------
Joint Third-
venture party
------- -----
<S> <C> <C>
Balance, December 31, 1994 $351.4 $318.7
Additions (deductions):
Fundings 20.8 2.4
Interest added to principal 9.4 5.9
Sales/paydowns/distributions (22.0) (6.1)
Sales to KFC Portfolio Corporation (1.7) (1.1)
Operating loss - -
Transfers to real estate owned (3.6) -
Realized investment gains (losses) (21.5) (13.3)
Net transfers 24.8 (25.4)
Other transactions, net (4.5) 14.8
----- -----
Balance at June 30, 1995 $353.1 $295.9
====== ======
Real estate portfolio
(millions)
<CAPTION>
Other real estate-related investments
-------------------------------------
Other Real Equity
Bonds loans estate invest-
<F2> <F3> owned ments Total
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 49.9 $ 84.6 $ 57.3 $ 45.4 $907.3 <F1>
Additions (deductions):
Fundings - .9 3.0 19.6 46.7
Interest added to principal - .4 - - 15.7
Sales/paydowns/distributions (.1) (1.8) (10.6) (1.0) (41.6)
Sales to KFC Portfolio Corporation - (.8) - - (3.6)
Operating loss - - - (.4) (.4)
Transfers to real estate owned - - 3.6 - -
Realized investment gains (losses) (12.0) (6.7) 2.1 (2.0) (53.4)
Net transfers (11.2) 13.1 - (1.3) -
Other transactions, net (.1) .4 (5.6) - 5.0
------ ------ ------ ------ ------
Balance at June 30, 1995 $ 26.5 $ 90.1 $ 49.8 $ 60.3 $875.7 <F4>
====== ====== ====== ====== ======
<FN>
<F1> Net of $139.6 million reserve and write-downs. Excludes
$29.8 million of real estate-related accrued interest.
<F2> KILICO's real estate-related bonds, all of which are
presently rated below investment-grade, are generally
unsecured and were issued to KILICO by real estate finance
or development companies generally to provide financing for
Kemper's or KILICO's joint ventures for such purposes as
land acquisitions, construction/development, refinancing
debt, interest and other operating expenses.
<F3> The other real estate loans are notes receivable evidencing
financing, primarily to joint ventures, for purposes similar
to those funded by real estate-related bonds.
<F4> Net of $104.5 million reserve and write-downs. Excludes
$21.4 million of real estate-
related accrued interest.
</FN>
</TABLE>
As reflected in the preceding table, cash fundings during the
first half of 1995 exceeded cash received from
sales/paydowns/distributions during the same period by $5.1
million.
Real estate concentrations
<TABLE>
KILICO's real estate portfolio is distributed by geographic
location and property type, as shown in the following two tables:
<CAPTION>
Geographic distribution as of Distribution by property type as of
June 30, 1995 June 30, 1995
<S> <C> <S> <C>
California 27.9% Land 21.4%
Illinois 24.6 Office 19.3
Texas 9.7 Retail 15.2
Ohio 6.7 Industrial 14.6
Spain 6.2 Hotel 11.6
Colorado 3.8 Apartment 4.1
Indiana 3.1 Residential 2.2
Oregon 2.9 Mixed use 2.2
Washington 2.7 Other 9.4
Hawaii 2.7 -----
Florida 2.2 Total 100.0%
Other <F1> 7.5 =====
-----
Total 100.0%
=====
______________
<FN>
<F1> No other single location exceeded 2.0 percent.
</FN>
</TABLE>
- 16 -
<PAGE>
Real estate markets have been depressed in recent periods in
areas where most of KILICO's real estate portfolio is located.
Approximately one-half of KILICO's real estate holdings are in
California and Illinois. California's real estate market
conditions have continued to be worse than in many other areas of
the country. Real estate markets in northern California and
Illinois show some stabilization and improvement.
At June 30, 1995, KILICO's real estate portfolio also included
$54.4 million of loans carried as equity investments in real
estate related to land for office and retail development and
residential projects located in Barcelona, Spain. The Spanish
projects accounted for $17.8 million of net fundings during the
first six months of 1995 and represented approximately 6.2
percent of KILICO's real estate portfolio at June 30, 1995.
These investments, which began in the late 1980s, accounted for
$7.7 million of the June 30, 1995 off-balance-sheet legal
commitments, of which KILICO expects to fund approximately $3.8
million.
Undeveloped land, including the Spanish projects, represented
approximately 21.4 percent of KILICO's real estate portfolio at
June 30, 1995. To maximize the value of certain land and other
projects, additional development is proceeding or is planned.
Such development of existing projects may continue to require
substantial funding, either from KILICO 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 KILICO. The values of
development projects are dependent on a number of factors,
including Kemper's and KILICO's plans with respect thereto,
obtaining necessary 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 and KILICO's plans
with respect to such projects may not change substantially.
At June 30, 1995, KILICO's loans to and investments in projects
with the Prime Group, Inc. or its affiliates, based in Chicago,
represented approximately $236.6 million, or 27.0 percent, of
KILICO's real estate portfolio (including the previously
mentioned Spanish projects, which are Prime Group-related). This
amount reflected $19.0 million in fundings during the first half
of 1995. KILICO also received cash, from Prime Group-related
sales/paydowns/distributions, totaling $22.6 million in the first
six months of 1995. Prime Group-related commitments accounted
for $188.1 million of the off-balance-sheet legal commitments at
June 30, 1995, of which KILICO expects to fund $21.3 million.
Effective January 1, 1993, Kemper and its subsidiaries, including
KILICO, formed a master limited partnership (the "MLP") with
Lumbermens Mutual Casualty Company ("Lumbermens") and its
- 17 -
<PAGE>
subsidiaries. The assets of the MLP consist of the equity
interests each partner or its subsidiaries previously owned in
projects with Peter B. Bedford or his affiliates ("Bedford"), a
California-based real estate developer. Pursuant to agreements
entered into in January 1994, Bedford transferred to the MLP and
Fidelity Life Association ("FLA"), an affiliated mutual life
insurance company, all of Bedford's ownership interests in ventures
in which Bedford, Kemper, KILICO, Lumbermens and their respective
subsidiaries previously shared ownership interests. As MLP
partners, Kemper and Lumbermens have participated in funding
certain cash needs of the MLP projects. During the first six
months of 1995, KILICO provided $21.3 million of fundings to the
MLP projects. KILICO also received cash from MLP-related
sales/paydowns/distributions of $22.7 million in the first half of
1995. At June 30, 1995, projects in the MLP accounted for $34.2
million of KILICO's off-balance-sheet legal commitments, of which
KILICO expects to fund $27.4 million. Kemper's equity interests
in real estate that were affected by formation of the MLP are held
almost entirely by the real estate subsidiaries of Kemper. Of
KILICO's real estate portfolio at June 30, 1995, approximately
$239.5 million, or 27.3 percent, represented loans to and
investments in MLP-owned joint ventures. (See ITEM 5 below).
Provisions for real-estate related losses
KILICO monitors its real estate portfolio and identifies changes
in the relevant real estate marketplaces, the economy and each
borrower's circumstances. KILICO establishes its provisions for
real estate-related losses (both reserves and write-downs) on the
basis of its valuations of the related real estate, estimated in
light of current economic conditions taking into consideration
the effects of recourse to, and subordination of loans held by,
affiliated non-life realty companies and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114,
"Accounting by Creditors for Impairment of a Loan". KILICO
evaluates its real estate-related assets (including accrued
interest) by estimating the probabilities of loss utilizing
various projections that include several factors relating to the
borrower, property, term of the loan, tenant composition, rental
rates, other supply and demand factors and overall economic
conditions. Because KILICO's real estate review process includes
estimates, there can be no assurance that current estimates will
prove accurate over time due to changing economic conditions and
other factors.
- 18 -
<PAGE>
KILICO's real estate reserve was allocated as follows:
<TABLE>
Real estate reserve
(in millions)
<CAPTION>
Joint venture Third-party Other real
mortgage mortgage estate-related
loans loans investments Total
------------- ----------- -------------- -----
<S> <C> <C> <C> <C>
Balance at 12/31/94 $ 7.1 $10.4 $25.5 $43.0
Change in reserve 1.0 (10.1) 11.0 1.9
---- ---- ---- ----
Balance at 6/30/95 $ 8.1 $ .3 $36.5 $44.9
==== ==== ==== ====
</TABLE>
In addition to the reserve, KILICO's provisions for real
estate-related losses (on assets held at the respective period
end) included cumulative write-downs (both by KILICO and
including KILICO's share of write-downs by joint ventures)
totaling $59.7 million at June 30, 1995, and $96.6 million at
December 31, 1994.
Real estate outlook
KILICO's real estate experience could continue to be adversely
affected by overbuilding and weak economic conditions in certain
real estate markets and by fairly restrictive lending practices
by banks and other lenders. Stagnant or worsening economic
conditions in the areas in which KILICO has made loans, or
additional adverse information becoming known to KILICO through
its regular reviews or otherwise, could result in higher levels
of problem loans or potential problem loans, reductions in the
value of real estate collateral and adjustments to the real
estate reserve. KILICO's net income could be materially reduced
in future periods if real estate and equity market conditions
remain stagnant or worsen in areas where KILICO's portfolio is
located.
Current conditions in the real estate markets have been adversely
affecting the financial resources of certain of KILICO's joint
venture partners. Each partner, however, remains active in the
control of its respective joint ventures. In evaluating a
partner's ability to meet its financial commitments, KILICO
considers the amount of all applicable debt and the value of all
properties within that portion of KILICO's portfolio consisting
of loans to and investments in joint ventures with such partner.
- 19 -
<PAGE>
The following table is a summary of KILICO's troubled real
estate-related investments:
<TABLE>
Troubled real estate-related investments
(before reserves and write-downs, except for real estate owned)
(in millions)
<CAPTION>
June 30, 1995 December 31, 1994
-------------- ------------------
<S> <C> <C>
Potential problem loans <F1> $ 59.4 $ 57.9
Past due loans <F2> 4.7 -
Non-accrual loans <F3> 264.2 274.6
Restructured loans (currently performing) <F4> 45.4 50.5
Real estate owned <F5> 49.8 57.3
------ -----
Total <F6><F7> $ 423.5 $ 440.3
====== =====
<FN>
<F1> These are real estate-related investments where KILICO,
based on known information, has serious doubts about the
borrowers' abilities to comply with present repayment terms
and which KILICO anticipates may go into nonaccrual, past
due or restructured status.
<F2> Interest more than 90 days past due but not on
nonaccrual status.
<F3> KILICO does not accrue interest on real estate-related
investments when it judges that the likelihood of collection
of interest is doubtful.
<F4> KILICO defines a "restructuring" of debt as an event
whereby KILICO, for economic or legal reasons related to the
debtor's financial difficulties, grants a concession to the
debtor it would not otherwise consider. Such concessions
either stem from an agreement between KILICO and the debtor
or are imposed by law or a court. By this definition,
restructured loans do not include any loan that, upon the
expiration of its term, both repays its principal and pays
interest then due from the proceeds of a new loan that
KILICO, at its option, may extend (roll over).
<F5> Real estate owned is carried at fair value and includes
foreclosures, deeds in lieu of foreclosure and certain
purchased property. Cumulative write-downs to fair value
were $36.3 million and $67.5 million at June 30, 1995 and
December 31, 1994, respectively, on real estate owned at
those dates.
<F6> Total reserves and cumulative write-downs on properties
owned at June 30, 1995 (excluding fair value adjustments to
real estate owned) were 16.1 percent of total troubled
real-estate related investments and 7.2 percent of KILICO's
total real estate portfolio before reserves and write-downs.
<F7> Equity investments in real estate are not defined as
part of, and therefore are not taken into account in
calculating, total troubled real estate. KILICO's equity
investments also involve real estate risks. See "Real
estate concentrations" above.
</FN>
</TABLE>
Based on the level of troubled real estate-related investments
KILICO has experienced, KILICO anticipates additional
foreclosures and deeds in lieu of foreclosure in 1995 and beyond.
Any consolidation accounting resulting from foreclosures would
add the related ventures' assets and senior third-party
liabilities to KILICO's balance sheet and eliminate KILICO's
loans to such ventures.
Due to the adverse real estate environment affecting KILICO's
portfolio in recent years, KILICO has continued to devote
significant attention to its real estate portfolio, enhancing
- 20 -
<PAGE>
monitoring of the portfolio and formulating specific action plans
addressing non-performing and potential problem credits. Since
1991, KILICO has intensified its attention to evaluating the
asset quality, cash flow and prospects associated with each of
its projects. KILICO continues to analyze various potential
transactions designed to reduce both its joint venture operating
losses and the amount of its real estate-related investments.
Specific types of transactions under consideration (and
previously utilized) include loan sales, property sales, mortgage
refinancings and real estate investment trusts. However, there
can be no assurance that such efforts will result in continued
improvements in the performance of KILICO's real estate
portfolio.
Net investment income
KILICO's pre-tax net investment income totaled $179.1 million for
the first half of 1995, compared with $165.8 million for the
first half of 1994. Included in pre-tax net investment income is
KILICO's share of the operating income from equity investments in
real estate and other income less depreciation, interest and
other expenses. Such operating results exclude interest expense
on loans by KILICO which are on nonaccrual status.
KILICO's total foregone investment income before tax was as
follows:
<TABLE>
Foregone investment income
(dollars in millions)
<CAPTION>
Six months ended
June 30
------------------
1995 1994
---- ----
<S> <C> <C>
Real estate-related investments $ 9.9 $18.0
===== =====
Basis points 40 71
===== =====
</TABLE>
Foregone investment income from the nonaccrual of real
estate-related investments is net of KILICO's share of interest
expense on those loans excluded from KILICO's share of joint
venture operating results. Based on the level of nonaccrual
real-estate related investments at June 30, 1995, KILICO
estimates foregone investment income in 1995 will decrease
slightly compared with the 1994 level. Any nonperforming
securities, and either worsening or stagnant real estate
conditions, would increase the expected adverse effect on
KILICO's future investment income and realized investment
results.
Future net investment income, results of operations and cash flow
will reflect KILICO's current level of investments in
investment-grade securities, real estate fundings treated as
- 21 -
<PAGE>
equity investments, nonaccrual real estate loans and joint
venture operating losses. KILICO expects, however, that any
adverse effects should be offset to some extent by certain
advantages that it expects to realize over time from its other
investment strategies, its product mix and its continuing cost-
control measures. Other mitigating factors include marketing
advantages that could result from KILICO having lower levels of
investment risk and earnings improvements from KILICO's ability
to adjust crediting rates on annuities and interest-sensitive
life products over time.
Realized investment results
Reflected in net income are after-tax realized investment losses
of $30.3 million for the first six months of 1995, compared with
$3.3 million of losses for the first six months of 1994.
Unrealized gains and losses on fixed maturity investments are not
reflected in KILICO's net income. These changes in unrealized
value are included within a separate component of stockholder's
equity, net of any applicable income tax expense. If and to the
extent a fixed maturity investment suffers an
other-than-temporary decline in value, however, such security is
written down to net realizable value, and the write-down
adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of
this process reviews its assets for possible impairments of
carrying value. Because the review process includes estimates,
there can be no assurance that current estimates will prove
accurate over time due to changing economic conditions and other
factors.
A valuation allowance was established upon adoption of SFAS 109
(and is evaluated as of each reported period end) to reduce the
deferred tax asset for investment losses to the amount that,
based upon available evidence, is in management's judgment more
likely than not to be realized.
Interest rates
Interest rate fluctuations affect KILICO. In 1994, rapidly
rising short-term interest rates resulted in a much flatter yield
curve as the Federal Reserve Board raised rates five times during
1994 and once during the first half of 1995. Interest rates have
subsequently declined through the remainder of the first six
months of 1995.
When maturing or sold investments are reinvested at lower yields
in a low interest rate environment, KILICO can adjust its
crediting rates on fixed annuities and other interest-bearing
- 22 -
<PAGE>
liabilities. However, competitive conditions and contractual
commitments do not always permit the reduction in crediting rates
to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.
The rising interest rate environment in 1994 contributed to an
increase in net investment income as well as to both realized and
unrealized fixed maturity investment losses in 1994. Also, lower
renewal crediting rates on annuities, compared with higher new
money crediting rates, have influenced certain clients to seek
alternative products. KILICO mitigates this risk somewhat by
charging decreasing surrender fees when annuity holders withdraw
funds prior to maturity on certain annuity products.
Approximately one-half of KILICO's fixed annuity liabilities as
of June 30, 1995, however, were no longer subject to significant
surrender fees.
As interest rates rose during 1994, KILICO's capital resources
were adversely impacted by unrealized loss positions from its
fixed maturity investments. As interest rates declined in the
first six months of 1995, KILICO's capital resources were
positively impacted by the eliminations of these unrealized
loss positions on its fixed maturity investments.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to
maintain adequate balances for timely payment of claims,
expenses, taxes and customer's account balances. In addition,
regulatory authorities establish minimum liquidity and capital
standards. The major ongoing sources of KILICO's liquidity are
deposits for fixed annuities, investment income, other operating
revenue and cash provided from maturing or sold investments.
(See "INVESTMENTS" above.)
Policyholder deposits increased to $125.1 million during the
first six months of 1995 from $115.5 million for the first six
months of 1994. Policyholder withdrawals increased to $441.6
million during the first six months of 1995 from $302.4 million
for the first six months of 1994, primarily due to higher
interest rates which caused KILICO's renewal crediting rates to
be lower than competitors' new money crediting rates, increased
competition and uncertainty regarding KILICO's ownership.
KILICO's late 1994 and early 1995 increases in crediting rates
were designed to produce new policyholder deposits and to reduce
future withdrawals.
Ratings
Ratings have become an increasingly important factor in
establishing the competitive position of life insurance
companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment
- 23 -
<PAGE>
portfolios, including those of KILICO. Any reductions in
KILICO's claims-paying ability or financial strength ratings
could result in its products being less attractive to consumers.
Any reductions in Kemper's senior debt ratings could adversely
impact Kemper's financial flexibility by limiting Kemper's access
to capital or increasing its cost of borrowings.
Ratings reductions for Kemper or its subsidiaries and other
financial events can also trigger obligations to fund certain
real estate-related commitments to take out other lenders. In
such events, those lenders can be expected to renegotiate their
loan terms, although they are not contractually obligated to do
so. Subject to certain limitations under the Merger Agreement,
such circumstances could accelerate or increase Kemper's
purchases of real estate-related assets from KILICO and Kemper's
other life insurance subsidiary, Federal Kemper Life Assurance
Company ("FKLA"), to further support their respective statutory
capital positions.
Each rating is subject to revision or withdrawal at any time by
the assigning organization and should be evaluated independently
of any other rating. On April 11, 1995, following the
announcement of an agreement in principle to sell Kemper,
Standard & Poor's Corporation ("S&P") announced that it revised
its BBB senior debt and BB+ preferred stock ratings of Kemper,
which S&P had placed under "Credit Watch with 'negative'
implications" in 1994, to BB+ and BB-, respectively, and placed
these ratings on "Credit Watch with 'developing' implications";
Moody's Investors Service announced that it changed the direction
of its review of its Baa2 senior debt and Baa3 preferred stock
ratings of Kemper and Baa1 insurance financial strength rating of
KILICO and FKLA to under review "with direction uncertain" from
"for possible downgrade"; Duff & Phelps Credit Rating Co. advised
Kemper that it did not revise its A- senior debt rating of
Kemper, its AA- claims-paying ability rating of FKLA and its A+
claims-paying ability rating of KILICO from "Rating Watch-
Uncertain"; and A.M. Best Company announced that its A- ratings
of FKLA and KILICO remain "under review with developing
implications."
On July 26, 1995, KILICO and FKLA were notified by S&P that they
have been assigned a claims-paying ability rating of Aq "Good".
Stockholder's equity
Stockholder's equity totaled $684.9 million at June 30, 1995,
compared with $434.0 million at December 31, 1994. The first-
half 1995 increase reflected a $249.7 million benefit in the
unrealized position of KILICO's fixed maturity investment
portfolio, due to declining interest rates, as well as net income
of $1.2 million in the first half of 1995.
- 24 -
<PAGE>
PART II OTHER INFORMATION
ITEM 5. Other Information
On May 15, 1995, Kemper, Zurich Insurance Company ("Zurich") and
Insurance Partners, L.P. and Insurance Partners Offshore
(Bermuda), L.P. (collectively, "Insurance Partners," and together
with Zurich, the "Investor Group") entered into the Merger Agreement.
A copy of the Merger Agreement and copies of two related agreements
were filed as Exhibits Nos. 2.1, 2.2 and 2.3, respectively, to
Kemper's Current Report on Form 8-K dated May 15, 1995, filed May
22, 1995 (the "May 15 Form 8-K"), and are incorporated herein by
reference.
Real estate asset sales
In compliance with the Merger Agreement, Kemper has been using
diligent efforts to enter into agreements to sell, and to cause
its subsidiaries to enter into agreements to sell, various real
estate assets, including certain mortgage and other loans, real
estate owned and equity interests in real estate. Pursuant to
Section 4.6 (a) of the Merger Agreement, Kemper has the right to
require that any binding sale agreement with a third party
include a condition that Kemper shall not be obligated to
consummate such real estate asset sale unless either the Merger
(as defined in the Merger Agreement) is consummated or the
Preliminary Closing Conditions (as defined in the Merger
Agreement) are satisfied or waived.
Since May 15, 1995, however, with respect to certain selected
real estate assets, Kemper has entered into sale agreements
without requiring the above-described condition, or Kemper has
otherwise determined that it is willing to enter into such sales
contracts. A major consequence of Kemper's unconditional intent
to sell such assets under current real estate market conditions
is KILICO's recording of additions to its provisions for real
estate-related losses (reserves and write-downs) to mark the
subject assets down to the estimated or actual sales contract
prices (less estimated sales expenses). Such prices in several
instances differed significantly from KILICO's carrying values as
determined pursuant to Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan." Primarily due to these differences, KILICO's additions to
reserves and write-downs in the second quarter of 1995 resulted
in after-tax, real estate-related, realized investment losses of
approximately $34.7 million.
- 25 -
<PAGE>
Although Kemper and KILICO would not have intended to sell all of
such real estate assets at such prices in the absence of the
Merger Agreement, Kemper and KILICO determined to proceed with
the sales with respect to selected assets without the above-
described condition in order to facilitate their sales and the
merger. If KILICO determines to enter into other real estate
sales contracts without including therein the above-described
condition, then further additions to KILICO's provisions for
real estate-related losses may be necessary.
Kemper has entered into certain real estate sales and other
contracts that include the above-described condition. These
contracts include a Purchase and Sale Agreement dated July 28,
1995, pursuant to which real estate assets held by KILICO would
be sold at a price substantially less than their June 30, 1995
carrying value of $379.5 million, and a letter of agreement between
Kemper and Lumbermens dated May 15, 1995 (the "Lumbermens
Agreement"), pursuant to which, among other things, the MLP would
be substantially restructured.
Also in the Merger Agreement Kemper agreed to various covenants
relating to conduct of business prior to the Merger. Such
covenants include real estate-related restrictions with respect
to operating, funding or entering into contracts with respect to
real estate projects, including in particular Kemper's and
KILICO's Spanish developments. See "Management's Discussion and
Analysis - INVESTMENTS - Real estate concentrations" above.
Because the values of development projects depend in part on
Kemper's plans with respect thereto, and because the Investors
Group's consent is necessary at the present time for implementing
such plans, there can be no assurance that Kemper's plans, and
therefore estimated values, may not change substantially before
either the Merger or the satisfaction or waiver of the
Preliminary Closing Conditions. In such event, KILICO would
record further additions to its provisions for real estate-
related losses.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS. Not applicable.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three
months ended June 30, 1995.
- 26 -
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended June 30, 1995
-----------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Kemper Investors Life Insurance Company
(Registrant)
Date: August 14, 1995 By: /s/JOHN B. SCOTT
-----------------------
John B. Scott
Chairman, President and
Chief Executive Officer
Date: August 14, 1995 By: /s/JOSEPH R. SITAR
------------------------
Joseph R. Sitar
Chief Accounting Officer
- 27 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCEE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 3,610,428
<DEBT-CARRYING-VALUE> 3,610,428
<DEBT-MARKET-VALUE> 3,610,428
<EQUITIES> 4,356
<MORTGAGE> 649,042
<REAL-ESTATE> 226,667
<TOTAL-INVEST> 4,984,615
<CASH> 993
<RECOVER-REINSURE> 550,607
<DEFERRED-ACQUISITION> 286,955
<TOTAL-ASSETS> 7,636,280
<POLICY-LOSSES> 4,645,628
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,500
0
0
<OTHER-SE> 682,428
<TOTAL-LIABILITY-AND-EQUITY> 7,636,280
0
<INVESTMENT-INCOME> 179,141
<INVESTMENT-GAINS> (46,685)
<OTHER-INCOME> 17,460
<BENEFITS> 123,202
<UNDERWRITING-AMORTIZATION> 22,007
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,203
<INCOME-TAX> (30)
<INCOME-CONTINUING> 1,233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,233
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
