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 September 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 November 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 -
September 30, 1995 and December 31, 1994 . . . . . 3
Consolidated Statement of Operations -
Three months and nine months ended
September 30, 1995 and 1994. . . . . . . . . . . . 4
Consolidated Statement of Cash Flows -
Nine months ended September 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 . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 28
- - 2 -
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheet
(in thousands, except share data)
(unaudited)
<CAPTION>
September 30 December 31
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at market
(cost: 1995, $3,559,151; 1994, $3,707,356) $3,589,771 $3,463,732
Equity securities, at market (cost: 1995,
$5,006; 1994, $14,947) 4,356 14,767
Short-term investments 332,225 204,164
Joint venture mortgage loans 342,484 351,359
Third-party mortgage loans 262,383 318,682
Other real estate-related investments 225,953 237,242
Policy loans 288,774 277,743
Other invested assets 25,167 25,760
---------- ----------
Total investments 5,071,113 4,893,449
Cash 3,238 23,189
Accrued investment income 113,796 125,543
Deferred insurance acquisition costs 296,040 310,465
Fixed assets, at cost less accumulated depreciation 1,702 3,735
Receivable for securities sold 11,579 -
Reinsurance recoverable 519,197 642,801
Other assets and receivables 40,585 29,914
Assets held in separate accounts 1,708,010 1,507,984
----------- -----------
Total assets $7,765,260 $7,537,080
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $4,607,610 $4,843,690
Ceded future policy benefits 519,197 642,801
Payable for securities purchased 106,995 574
Other accounts payable and liabilities 57,402 66,687
Deferred income taxes 57,766 41,364
Liabilities related to separate accounts 1,708,010 1,507,984
----------- -----------
Total liabilities 7,056,980 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 12,912 (236,443)
Retained earnings 200,874 175,929
----------- -----------
Total stockholder's equity 708,280 433,980
----------- -----------
Total liabilities and stockholder's equity $7,765,260 $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>
Nine months ended Three months ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REVENUE
Net investment income $266,686 $260,485 $ 87,545 $ 94,733
Realized investment gains (losses) (42,319) (30,840) 4,366 (25,811)
Fees and other income 25,435 23,619 7,975 7,821
-------- -------- -------- --------
Total revenue 249,802 253,264 99,886 76,743
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to
policyholders 183,598 186,232 60,396 61,719
Commissions, taxes, licenses and fees 20,959 20,000 6,946 6,365
Operating expenses 15,404 19,370 5,703 6,500
Deferral of insurance
acquisition costs (30,494) (33,538) (10,284) (10,770)
Amortization of insurance
acquisition costs 23,489 22,765 1,482 8,107
-------- -------- -------- -------
Total benefits and expenses 212,956 214,829 64,243 71,921
-------- -------- -------- --------
Income before income tax expense 36,846 38,435 35,643 4,822
-------- -------- -------- --------
Income tax expense (benefit)
Current (1,515) 3,107 8,478 (9,545)
Deferred 13,416 10,931 3,453 11,352
-------- -------- -------- --------
Total income tax expense 11,901 14,038 11,931 1,807
-------- -------- -------- --------
Net income $ 24,945 $ 24,397 $ 23,712 $ 3,015
======== ======== ======== ========
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>
Nine months
ended September 30
--------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 24,945 $ 24,397
Reconcilement of net income to net cash provided:
Realized investment losses 42,319 30,840
Interest credited and other charges 177,290 181,547
Deferred insurance acquisition costs (7,005) (10,773)
Amortization of discount and premium
on investments 3,281 (2,684)
Deferred income taxes 13,414 (10,911)
Other, net (18,403) (23,688)
-------- --------
Net cash provided from operating activities 235,841 210,550
-------- --------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 194,719 77,385
Fixed maturities sold prior to maturity 261,190 774,510
Mortgage loans, policy loans and other
invested assets 155,176 437,893
Net change in fixed assets 1,989 2,052
Cost of investments purchased or loans originated:
Fixed maturities (299,843) (1,421,655)
Mortgage loans, policy loans and
other invested assets (109,340) (184,157)
Short-term investments, net (128,061) 186,313
Net change in receivable and payable
for securities transactions 94,842 171,874
-------- ---------
Net cash provided by investing activities 170,672 44,215
-------- --------
Cash flows from financing activities
Policyholder account balances:
Deposits 185,626 169,209
Withdrawals (598,996) (456,815)
Capital contributions - 65,000
Other (13,094) (8,003)
-------- --------
Net cash used in financing activities (426,464) (230,609)
-------- --------
Net change in cash (19,951) 24,156
Cash at the beginning of the period 23,189 7,487
-------- --------
Cash at the end of the period $ 3,238 $ 31,643
======== ========
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 change in net unrealized gains (losses), net of applicable
taxes, on fixed maturities and equity securities is not reflected
as a component of KILICO's net income.
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 the consolidated federal income tax return of Kemper
Corporation ("Kemper") or a change in circumstances which causes
the recognition of the benefits to become more likely than not.
During the first nine 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:
(in thousands)
<CAPTION>
September 30 December 31
1995 1994
------------ -----------
<S> <C> <C>
Deferred federal tax assets:
Life policy reserves $ 45,077 $ 51,519
Real estate-related 35,707 39,360
Other investment-related 5,641 7,435
Unrealized losses on investments - 85,331
Other 7,994 6,415
------- --------
Total deferred federal tax assets 94,419 190,060
Valuation allowance (15,201) (100,532)
------- --------
Total deferred federal tax assets
after valuation allowance 79,218 89,528
------- --------
Deferred federal tax liabilities:
Deferred insurance acquisition
costs 103,614 108,663
Depreciation and amortization 19,654 18,878
Unrealized gains on investments 10,489 -
Other 3,227 3,351
------- --------
Total deferred federal tax
liabilities 136,984 130,892
------- --------
Net deferred federal tax liability $(57,766) $(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 Corporation ("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
("Zurich"), Insurance Partners, L.P., Insurance Partners
Offshore (Bermuda), L.P. and ZIP Acquisition Corp. The
transaction is subject to certain conditions, including certain
approvals by state insurance regulators and the common
stockholders of Kemper. The transaction is expected to close in
early January 1996. (See Part II, ITEM 5 of this Form 10-Q.)
Currently, KILICO is wholly owned by Kemper Financial Companies,
Inc. ("KFC"), which in turn is approximately 99 percent owned by
Kemper and 1 percent owned by employees of KFC's subsidiaries. KFC is
currently seeking to redeem or repurchase all its employee-owned
securities prior to year-end 1995, and in such event, Kemper has
informed KILICO that KFC likely would be merged into Kemper in
early January 1996 prior to Kemper's acquisition by the investor
group, with Kemper as the surviving corporation.
RESULTS OF OPERATIONS
KILICO reported net income in the first nine months of 1995 of
$24.9 million, compared with net income of $24.4 million in the
first nine months of 1994.
<TABLE>
The following table reflects the components of net income:
<CAPTION>
Net income:
(in millions)
<CAPTION>
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating earnings $ 52.4 $ 44.4 $ 20.9 $ 19.7
Net realized investment
gains (losses) (27.5) (20.0) 2.8 (16.7)
------ ------ ------ ------
Net income $ 24.9 $ 24.4 $ 23.7 $ 3.0
====== ====== ====== ======
</TABLE>
- - 8 -
<PAGE>
<TABLE>
The following table reflects the major components of realized
investment gains (losses) included in net income:
Realized investment gains (losses):
(in millions)
<CAPTION>
Nine months ended Three months ended
September 30 September 30
----------------- -----------------
1995 1994 1995 1994
------ ------ ------- -------
<S> <C> <C> <C> <C>
Real estate-related losses <F1> $(53.6) $(18.1) $ (.2) $ -
Fixed maturity write-downs (1.8) (.1) (1.8) -
Other gains (losses), net 13.1 (12.6) 6.4 (25.8)
------ ------ ------ -------
Realized investment gains (losses) (42.3) (30.8) 4.4 (25.8)
Income tax expense (benefit) (14.8) (10.8) 1.6 (9.1)
------ ------ ------ -------
Net realized investment gains (losses) $(27.5) $(20.0) $ 2.8 $ (16.7)
====== ====== ====== ========
<FN>
<F1> See the discussion captioned "Real Estate Asset Sales"
in ITEM 5 below.
</FN>
</TABLE>
Operating earnings (net income excluding realized investment
results) improved to $52.4 million in the first nine months of
1995, compared with $44.4 million in the first nine months of
1994, primarily due to improvements in spread income, an increase
in fees and other income, and reductions in operating expenses,
offset by a net decrease in the deferral of 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 actions
adversely impacted spread income. The recent declines in interest
rates during the second and third quarters of 1995, however, have
mitigated at present competitive pressures to increase renewal
crediting rates further.
Investment income was positively impacted in the first nine
months of 1995, compared with the first nine months 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 nine
months of 1995 and $133.8 million in the first nine months of
1994 and resulted in no realized gain or loss to KILICO.
Investment income in 1995 also benefited from a repositioning of
- - 9 -
<PAGE>
KILICO's fixed maturity investment portfolio in September 1994.
The repositioning of KILICO's investment portfolio involved
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
other cash and short-term investments, were 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.
<TABLE>
Life insurance sales
(in millions)
<CAPTION>
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Annuities
General account $185.3 $168.5 $ 60.2 $ 53.7
Separate account 114.7 202.4 28.0 55.7
------ ------ ------ ------
Total annuities 300.0 370.9 88.2 109.4
Interest-sensitive life insurance .3 .7 .3 -
------ ------ ------ ------
Total sales $300.3 $371.6 $ 88.5 $109.4
====== ====== ====== ======
</TABLE>
Sales of annuity products consist of total deposits received. The
increase in general account (fixed annuity) sales reflects
KILICO's current strategy to increase sales of fixed annuities in
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 nine months of 1995, compared
with the first nine months 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 $16.1 million
in the first nine months of 1995, compared with $15.6 million in
the first nine months of 1994. Other income also included
surrender charge revenue of $6.3 million in the first nine months
of 1995, compared with $5.2 million in the first nine months of
1994, as total general account and separate account policyholder
surrenders and withdrawals increased in the first nine months of
1995, compared with the first nine months of 1994.
- - 10 -
<PAGE>
<TABLE>
Policyholder surrenders and withdrawals
(in millions)
<CAPTION>
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
General account $622.4 $435.4 $159.4 $159.8
Separate account 156.0 105.6 45.6 34.6
------ ------ ------ ------
Total $778.4 $541.0 $205.0 $194.4
====== ====== ====== ======
</TABLE>
Policyholder withdrawals increased during the first nine months
of 1995. (See "LIQUIDITY AND CAPITAL RESOURCES" below.) 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 and third quarters of 1995, together with the
benefits of the planned association with Zurich, policyholder
surrenders and withdrawals for the quarter ended September
30, 1995 declined substantially from the level of surrenders and
withdrawals in the first two quarters of 1995. KILICO expects that
the level of surrender and withdrawal activity experienced should
remain relatively stable for the remainder of 1995.
The deferral of insurance acquisition costs was lower in the
first nine months of 1995, compared with the first nine months of
1994, primarily reflecting lower overall annuity sales. The
amortization of insurance acquisition costs increased in the
first nine months of 1995, compared with the first nine 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.
Operating expenses decreased by $4.0 million, or 20.5 percent, in
the first nine months of 1995, compared with the first nine
months of 1994, 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
- - 11 -
<PAGE>
affiliated non-life realty companies through September 30, 1995,
third-party sales and refinancings 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 any indebtedness, and capital
contributions of $342.5 million through September 30, 1995.
KILICO's statutory surplus ratio improved to 12.3 percent at
September 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.
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>
September 30, 1995 December 31,1994
------------------ ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 335 6.6% $ 227 4.6%
Fixed maturities:
Investment-grade:
NAIC<F1> Class 1 2,895 57.1 2,569 52.2
NAIC<F1> Class 2 624 12.3 760 15.5
Performing below investment-grade <F2> 67 1.3 135 2.8
Non-performing below investment grade 4 .1 - -
Equity securities 4 .1 15 .3
Joint venture mortgage loans<F3><F4> 343 6.8 351 7.1
Third-party mortgage loans<F3><F4> 262 5.2 319 6.5
Other real estate-related investments <F4> 226 4.5 237 4.8
Policy loans 289 5.7 278 5.7
Other 25 .3 26 .5
----- ----- ----- -----
Total $5,074 100.0% $4,917 100.0%
===== ===== ====== =====
<FN>
<F1> National Association of Insurance Commissioners ("NAIC").
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F2> Excludes $27.6 million, or 0.5 percent, and $49.9 million,
or 1.0 percent, at September 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
- - 12 -
<PAGE>
any applicable income tax expense. The aggregate unrealized
appreciation, net of tax, on fixed maturities at September 30,
1995 was $19.9 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.
At September 30, 1995, investment-grade fixed maturities and cash
and short-term investments accounted for 76.0 percent of KILICO's
invested assets and cash, compared with 72.3 percent at
December 31, 1994. Approximately 67 percent of KILICO's NAIC
Class 1 bonds are rated AAA or equivalent at September 30, 1995.
Approximately 48 percent of KILICO's investment-grade fixed
maturities at September 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 were predominately made 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 securities purchased
at a discount 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 such
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 September 30,
1995, KILICO had unamortized discounts and premiums of $17.9
million and $12.1 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.
- - 13 -
<PAGE>
Below investment-grade securities holdings (NAIC classes 3
through 6) (representing securities of 8 issuers at September 30,
1995) totaled 1.4 percent of cash and invested assets at
September 30, 1995, compared with 2.8 percent at 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. 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 $831 million real estate portfolio held by KILICO constituted
16.4 percent of cash and invested assets at September 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>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Investments before reserves, write-downs
and net joint venture operating losses:
Joint venture mortgage loans $ 356 $ 358
Third-party mortgage loans 274 353
Other real estate-related investments 314 350
------ ------
Subtotal 1,061 944
Reserves (49) (43)
Write-downs (49) (97)
Cumulative net operating losses of joint
ventures owned (15) (14)
------ ------
Net real estate investments $ 831 $ 907
====== ======
</TABLE>
As reflected in the real estate portfolio table below, KILICO has
continued to fund both existing projects and legal commitments.
The future legal commitments were $258.9 million at September 30,
1995. This amount represented a net decrease of $117.2 million
since December 31, 1994, in part due to fundings in the first
nine months of 1995. As of September 30, 1995, KILICO expects to
fund approximately $58.8 million of these legal commitments,
along with providing capital to existing projects. The disparity
between total legal commitments and the amount expected to be
- - 14 -
<PAGE>
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
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 $50.6 million of real estate owned and $60.9 million of
net equity investments in joint ventures, KILICO's real estate
loans (including real estate-related bonds) totaled $719.3
million at September 30, 1995, after reserves and write-downs.
Of this amount, $473.5 million are on accrual status with a
weighted average interest rate of approximately 7.6 percent. Of
these accrual loans, 60.1 percent have terms requiring current
periodic payments of their full contractual interest, 27.3
percent require only partial payments or payments to the extent
of cash flow of the borrowers, and 12.6 percent defer all
interest to maturity.
The equity investments in real estate at September 30, 1995
consisted of $55.9 million of loans to Spanish projects
(described below) and $16.7 million in KILICO's other equity
investments in joint ventures, net of $11.7 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 $34.2 million of deeds in
lieu of foreclosure, $16.0 million of foreclosures and $0.4
million of certain purchased properties at September 30, 1995.
Real estate owned was net of $32.1 million of write-downs at
September 30, 1995.
- - 15 -
<PAGE>
<TABLE>
Real estate portfolio
(in millions)
<CAPTION>
Mortgage loans
--------------
Joint Third-
venture party
--------------
<S> <C> <C>
Balance at December 31, 1994 $351.4 $318.7
Additions (deductions):
Fundings 22.4 3.0
Interest added to principal 11.5 5.9
Sales/paydowns/distributions (30.6) (24.3)
Sales to KFC Portfolio Corp. (1.7) (1.1)
Operating loss - -
Transfers to real estate owned (3.6) (15.9)
Realized investment gains (losses) (27.9) (13.3)
Net transfers 24.8 (25.4)
Other transactions, net (3.8) 14.8
------ ------
Balance at September 30, 1995 $342.5 $262.4
====== ======
Real estate portfolio
(in 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 at December 31, 1994 $49.9 $84.6 $57.3 $45.4 $907.3<F1>
Additions (deductions): - .9 3.7 21.1 51.1
Interest added to principal - .4 - - 17.8
Sales/paydowns/distributions (.1) (6.3) (31.8) (2.0) (95.1)
Sales to KFC Portfolio Corp. - (.8) - - (3.6)
Operating loss - - - (.1) (.1)
Transfers to real estate owned - - 19.5 - -
Realized investment gains (losses) (10.8) (6.0) 6.5 (2.1) (53.6)
Net transfers (11.2) 13.1 - (1.3) -
Other transactions, net (.2) .9 (4.6) (.1) 7.0
----- ----- ----- ----- ------
Balance at September 30, 1995 $27.6 $86.8 $50.6 $60.9 $830.8<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 $97.6 million reserve and write-downs. Excludes
$22.9 million of real estate-
related accrued interest.
</FN>
</TABLE>
As reflected in the preceding table, cash received by KILICO from
sales/paydowns/distributions during the first nine months of 1995
exceeded KILICO's cash fundings during the same period by $44.0
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 Distribution by property type
as of September 30, 1995 as of September 30, 1995
<S> <C> <S> <C>
California 27.4% Land 22.6%
Illinois 23.3 Office 19.5
Texas 9.9 Industrial 15.2
Ohio 7.1 Retail 13.0
Spain 6.7 Hotel 12.2
Colorado 4.0 Apartment 2.9
Indiana 3.3 Mixed Use 2.3
Oregon 3.1 Residential 1.8
Washington 2.8 Other 10.5
Hawaii 2.5 -----
Florida 2.3 Total 100.0%
Idaho 2.0 =====
Other <F1> 5.6
-----
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 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 September 30, 1995, KILICO's real estate portfolio also
included $55.9 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 $19.3 million of net fundings during the
first nine months of 1995 and represented approximately 6.7
percent of KILICO's real estate portfolio at September 30, 1995.
These investments, which began in the late 1980s, accounted for
$7.5 million of the September 30, 1995 off-balance-sheet legal
commitments, of which KILICO expects to fund up to approximately
$3.8 million.
Undeveloped land, including the Spanish projects, represented
approximately 22.6 percent of KILICO's real estate portfolio at
September 30, 1995. To maximize the value of certain land and
other projects, additional development has been proceeding or has
been planned, but in any event further development is subject to
certain consents from the parties to the Merger Agreement. Such
development of existing projects would 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. (See
"Real Estate Asset Sales" in ITEM 5 of this Form 10-Q below.)
At September 30, 1995, KILICO's loans to and investments in
projects with the Prime Group, Inc. or its affiliates, based in
Chicago, totaled approximately $238.7 million, or 28.7 percent,
of KILICO's real estate portfolio (including the previously
mentioned Spanish projects, which are Prime Group-related). This
amount reflected $21.0 million in fundings during the first nine
months of 1995. KILICO also received cash from Prime
Group-related sales/paydowns/distributions totaling $4.7 million
in the first nine months of 1995. Prime Group-related
commitments accounted for $187.8 million of the off-balance-sheet
legal commitments at September 30, 1995, of which KILICO expects
to fund up to $23.0 million.
- - 17 -
<PAGE>
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
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
nine months of 1995, KILICO provided $21.8 million of fundings
to the MLP projects. KILICO also received cash from MLP-related
sales/paydowns/distributions of $42.9 million in the first nine
months of 1995. At September 30, 1995, projects in the MLP
accounted for $31.8 million of KILICO's off-balance-sheet legal
commitments, of which KILICO expects to fund up to $25.0 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
September 30, 1995, approximately $226.2 million, or 27.2
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 6.1 (10.1) 10.0 6.0
---- ---- ---- ----
Balance at 9/30/95 $13.2 $ .3 $35.5 $49.0
==== ==== ==== ====
</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 $48.6 million at September 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 or if Kemper's and KILICO's plans with respect to certain
projects change. (See ITEM 5 below.)
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>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Potential problem loans<F1> $ 13.1 $ 57.9
Past due loans <F2> 4.7 -
Non-accrual loans<F3> 304.7 274.6
Restructured loans (currently performing)<F4> 45.4 50.5
Real estate owned <F5> 50.6 57.3
------ ------
Total<F6><F7> $ 418.5 $ 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 $32.1
million an d $67.5 million at September 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 September 30, 1995 (excluding fair value adjustments to
real estate owned) were 15.7 percent of total troubled
real-estate related investments and 7.3 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 $266.7 million for
the first nine months of 1995, compared with $260.5 million for
the first nine months 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>
Nine months ended
September 30
------------------
1995 1994
---- ----
<S> <C> <C>
Fixed maturity investments $ .2 $ -
Real estate-related investments 14.7 23.9
----- -----
Total $14.9 $23.9
===== =====
Basis points 38 60
===== =====
</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 September 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.
- -21-
<PAGE>
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
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 $27.5 million for the first nine months of 1995, compared
with $20.0 million of losses for the first nine 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 taxes. 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
the year and once during first-quarter 1995. Interest rates have
subsequently declined through the second and third quarters of
1995.
- -22-
<PAGE>
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
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 competitors'
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 September 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
second and third quarters of 1995, KILICO's capital resources were
positively impacted by the elimination of the 1994 year-end
unrealized loss position 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 policyholder
benefits, expenses, taxes and customer 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 $185.6 million during the
first nine months of 1995 from $169.2 million for the first nine
months of 1994. Policyholder withdrawals increased to $599.0
million during the first nine months of 1995 from $456.8 million
for the first nine months of 1994, primarily due to rising
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
- - 23 -
<PAGE>
companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment
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";
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 August
31, 1995, 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 from under review with
"direction uncertain" to "possible upgrade".
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 $708.3 million at September 30,
1995, compared with $434.0 million at December 31, 1994. The
increase in the first nine months of 1995 reflected a $249.4
million benefit in the unrealized position of KILICO's fixed
maturity investment portfolio, due to declining interest rates,
as well as net income of $24.9 million during the first nine
months of 1995.
- - 24 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. Other information
On May 15, 1995, Kemper, Zurich, Insurance Partners, L.P.,
Insurance Partners Offshore (Bermuda), L.P. (collectively,
"Insurance Partners," and together with Zurich, the "Investor
Group") and ZIP Acquisition Corp. entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which Kemper
would be acquired in a merger transaction.
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 and KILICO have entered into sale agreements
without requiring the above-described condition, or Kemper and KILICO
have otherwise determined that they are willing to enter into such sales
contracts. A major consequence of Kemper's and KILICO'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 its
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 Kemper and KILICO determine 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 prior to the Merger
or the satisfaction or waiver of the Preliminary Closing
Conditions.
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 approximately $380 million, and a letter 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 convenants
relating to the conduct of its 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 the Spanish development
projects. See "Management's Discussion and Analysis - INVESTMENTS -
Real estate concentrations" above. Because the values of development
projects depend in part on Kemper's and KILICO's plans with respect
thereto, and because the Investor Group's consent is necessary at the
present time for implementing such plans, there can be no assurance
that Kemper's and KILICO'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.
- - 26 -
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX.
Exhibit No.
-----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the sixthree
months ended September 30, 1995.
- - 27 -
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended September 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: November 14, 1995 By:/s/JOHN B. SCOTT
----------------
John B. Scott
Chairman, President and
Chief Executive Officer
Date: November 14, 1995 By:/s/JOSEPH R. SITAR
------------------
Joseph R. Sitar
Chief Accounting Officer
- - 28 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE THIRD QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 3,589,771
<DEBT-CARRYING-VALUE> 3,589,771
<DEBT-MARKET-VALUE> 3,589,771
<EQUITIES> 4,356
<MORTGAGE> 604,867
<REAL-ESTATE> 225,953
<TOTAL-INVEST> 5,071,113
<CASH> 3,238
<RECOVER-REINSURE> 519,197
<DEFERRED-ACQUISITION> 296,040
<TOTAL-ASSETS> 7,765,260
<POLICY-LOSSES> 4,607,610
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,500
0
0
<OTHER-SE> 705,780
<TOTAL-LIABILITY-AND-EQUITY> 7,765,260
0
<INVESTMENT-INCOME> 266,686
<INVESTMENT-GAINS> (42,319)
<OTHER-INCOME> 25,435
<BENEFITS> 183,598
<UNDERWRITING-AMORTIZATION> 23,489
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 36,846
<INCOME-TAX> 11,901
<INCOME-CONTINUING> 24,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,945
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
