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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1994.
/ / 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 charter)
ILLINOIS
(State of Incorporation)
ONE KEMPER DRIVE
LONG GROVE, ILLINOIS
(Address of Principal Executive Offices)
36-3050975
(I.R.S. Employer
Identification Number)
60049
(Zip Code)
Registrant's telephone number, including area code: (708) 320-4500
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
As of March 1, 1995, 250,000 shares of Common Stock (all held by an affiliate,
Kemper Financial Companies, Inc.) were outstanding. There is no market value for
any such shares. See ITEM 5 of this Form 10-K.
* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-K also
relates to Commission file numbers 33-33547 and 33-43462.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A) AND
(B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE
Kemper Investors Life Insurance Company ("KILICO"), founded in 1947, is
incorporated under the insurance laws of Illinois. KILICO is licensed in the
District of Columbia and all states except New York. KILICO is wholly owned by
Kemper Financial Companies, Inc. ("KFC"), a nonoperating holding company which
is a reporting company under the Securities Exchange Act of 1934. On a fully
converted basis, at December 31, 1994, KFC was 96.85 percent owned by another
public financial services holding company, Kemper Corporation ("Kemper").
CORPORATE CONTROL EVENTS OF 1994
In the first quarter of 1994, Kemper received and rejected an unsolicited offer
by General Electric Capital Corporation ("GECC") to acquire all outstanding
shares of Kemper common stock for $55 per share. In May 1994, GECC increased its
offer to $60 per share, subject to certain conditions including a full due
diligence review, and the board of directors of Kemper directed that all
appropriate steps be taken to maximize stockholder value. Kemper put itself up
for sale, and a due diligence process began that resulted in Conseco, Inc.'s
cash and stock bid of $67 per share on June 23, 1994. Within hours of Conseco's
announcement, GECC withdrew completely from the process. Kemper and Conseco
signed a merger agreement on June 26, 1994. On November 20, Kemper and Conseco
announced that the merger agreement was terminated by mutual consent since it
became clear that the proposed merger could not be completed. The Kemper board
then again directed that all appropriate steps be taken to maximize stockholder
value. Distractions caused by uncertainties with respect to Kemper's and
KILICO's ownership have had an impact on 1994 performance. See ITEM 7.
STRATEGIC INITIATIVES OF THE EARLY 1990'S
During 1992 and 1993, in order to streamline management, control costs and
improve profitability, the management, operations and strategic directions of
KILICO were integrated with those of another Kemper subsidiary, Federal Kemper
Life Assurance Company ("FKLA"). A common chairman and chief executive officer
for both companies was named in early 1992. Headquartered in Long Grove,
Illinois, FKLA markets term and interest-sensitive life insurance as well as
certain annuity products through brokerage general agents and other independent
distributors. The integration encompassed virtually all aspects of operations,
distribution channels and product development and was designed to promote
increased efficiencies and productivity and to expand both companies'
distribution capabilities. As described below, KILICO has emphasized different
products and distribution methods.
Since late 1991, KILICO intensified its management of real estate-related
investments due to adverse markets and recorded real estate-related reserves,
write-downs and operating losses totaling in excess of $333 million. KILICO
successfully implemented strategies to reduce both its joint venture operating
losses and the level of its real estate-related investments. These strategies
included sales, refinancings and restructurings. Also, effective January 1,
1993, subsidiaries of Kemper and Lumbermens Mutual Casualty Company
("Lumbermens") formed a master limited partnership to hold the equity real
estate interests each of the two organizations separately held previously in
joint ventures with Kemper's largest (now former) joint venture partner, which
master limited partnership in early 1994 acquired the former partner's equity
interests.
During 1992, 1993 and 1994, KILICO also sold for cash $642.5 million of certain
real estate-related investments to affiliated non-life real estate subsidiaries
of KFC. In addition, during 1991, 1992, 1993 and 1994, KILICO received $342.5
million in capital contributions from KFC (which, in turn, borrowed most of the
funds from Kemper). Focusing on its variable annuity products, KILICO also ceded
approximately $900 million of fixed-rate annuity liabilities in reinsurance
transactions effected in 1991 and 1992. Further addressing the quality of its
investment portfolio, KILICO reduced its holdings of below investment-grade
securities (excluding real estate-related investments) from 20.0 percent of its
total invested assets and cash at year-end 1990 to 2.8 percent at year-end 1994.
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NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual
universal life and variable life insurance products through various distribution
channels. KILICO's broad product selection is designed for diverse economic
environments. KILICO structures its products to offer investment-oriented
products, guaranteed returns or a combination of both to help policyholders meet
multiple insurance and financial objectives. Financial institutions,
nonaffiliated and affiliated securities brokerage firms, insurance agents and
financial planners are important distribution channels for KILICO's products. In
1994, INVEST Financial Corporation ("INVEST") and Kemper Securities, Inc.
("KSI"), two KFC subsidiaries, accounted for approximately 36 percent and 20
percent, respectively, of KILICO's first-year sales, compared with 41 percent
and 12 percent, respectively, in 1993. KILICO's sales mainly consist of deposits
received on certain long duration annuity contracts. See the table captioned
"Sales" on page 7.
Annuities accounted for approximately 99 percent of KILICO's sales in recent
years. KILICO's annuities generally have disappearing surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
In the last four years, in part reflecting the low interest rate environment
through early 1994, and to reduce its exposure to investment risk, KILICO has
placed more emphasis on marketing its separate account products. Unlike the
fixed-rate annuity business where KILICO manages spread revenue, variable
annuities pose minimal investment risk for KILICO and increase administrative
fee revenue. KILICO's separate account assets totaled $1.50 billion at December
31, 1994 and 1993, and $1.14 billion at December 31, 1992. KILICO's sales of its
separate account annuities were $250.7 million in 1994, $263.7 million in 1993,
$275.9 million in 1992 and $113.9 million in 1991. In 1992, KILICO introduced
Kemper PASSPORT, a variable and market value adjusted annuity featuring a choice
of investment portfolios, an increasing estate benefit, tax-free transfers and a
selection of guaranteed rates for a variety of terms. In 1994, KILICO changed
Kemper PASSPORT from a single premium annuity to one with a flexible premium
structure and also added a small capitalization equity subaccount as another
investment portfolio choice for purchasers of Kemper PASSPORT and certain other
variable annuity products. Separate account annuities represented 53.8 percent
of KILICO's total sales in 1994, compared with 51.7 percent in 1993, 38.5
percent in 1992 and 16.8 percent in 1991.
Declines in interest rates in recent years and strategic reductions in crediting
rates lowered general account annuity sales for KILICO in each of the last four
years. KILICO sales also were hurt by fixed-rate annuity buyers' focus on
investment risk. In the second half of 1994, KILICO began raising crediting
rates on certain general account products, reflecting both competitive
conditions and a rising interest rate environment. General account annuities
represented 46.0 percent of KILICO's total sales in 1994, compared with 47.9
percent in 1993, 60.8 percent in 1992 and 82.0 percent in 1991.
KILICO's sales of interest-sensitive life products decreased again in 1994, to
$0.8 million, from $2.0 million in 1993, $5.0 million in 1992 and $8.0 million
in 1991, for the same reasons its sales of general account annuities declined.
Overall, sales of interest-sensitive life products represented less than 1
percent of KILICO's total sales in each of the last four years.
NAIC RATIOS
The National Association of Insurance Commissioners ("NAIC") annually calculates
certain statutory financial ratios for most insurance companies in the United
States. These calculations are known as the Insurance Regulatory Information
System ("IRIS") ratios. There presently are twelve IRIS ratios. The primary
purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
Based on statutory financial data as of December 31, 1994, KILICO had only one
ratio outside the usual ranges. KILICO's change in reserving ratio on
interest-sensitive life products reflected its strategic reductions of general
account business. Other than certain states requesting quarterly financial
reporting and/or explanations of the underlying causes for certain ratios, no
state regulators have taken any action due to KILICO's IRIS ratios for 1994 or
earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed to cover losses
to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.
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In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1993 and 1992 amounted to $5.8 million and $10.0 million,
respectively. Such amounts relate to accrued guaranty fund assessments of $4.0
million and $8.9 million at December 31, 1994 and 1993, respectively. No
additional assessments were charged to expense during 1994 as KILICO believes it
has established adequate accruals for all known insolvencies where an estimate
of the cost to cover losses to policyholders was available at December 31, 1994.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law, are
being considered for future implementation by the NAIC, it is not presently
possible to predict the future impact of potential regulatory changes on KILICO.
Under asset adequacy and risk-based capital rules adopted in 1993 in Illinois
(the domiciliary state of KILICO), state regulators may mandate remedial action
for inadequately reserved or inadequately capitalized companies. The new asset
adequacy rules are designed to assure that reserves and assets are adequate to
cover liabilities under a variety of economic scenarios. The focus of the new
capital rules is a risk-based formula that applies prescribed factors to various
risk elements in an insurer's business and investments to develop a minimum
capital requirement designed to be proportional to the amount of risk assumed by
the insurer. KILICO has capital levels substantially exceeding any which would
mandate action under the risk-based capital rules and is in compliance with
applicable asset adequacy rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type at December 31, 1994, 1993 and 1992 (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
General account annuities..................................................... $ 4,010 $ 4,180 $ 4,172
Interest-sensitive life insurance............................................. 833 860 869
Ceded future policy benefits.................................................. 643 746 --
------- ------- -------
Total............................................................... $ 5,486 $ 5,786 $ 5,041
====== ====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO reinsured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares management,
operations and employees with FKLA and KILICO pursuant to an administrative and
management services agreement. FLA produces whole life policies not produced by
FKLA or KILICO as well as other policies similar to certain FKLA policies. At
December 31, 1994, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled approximately $642.8 million. KILICO remains
primarily liable to its policyholders for this amount. Utilizing FKLA's
employees, KILICO is the servicing company for this coinsured business and is
reimbursed by FLA for the related servicing expenses. Excluding this
coinsurance, KILICO, because it is primarily an annuity company, reinsures only
a very limited portion of its business. KILICO has immaterial exposure to
mortality losses. See the note captioned "Reinsurance" on page 33.
COMPETITION
KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with asset
manager, securities brokerage and investment advisory firms as well as financial
institutions that manage assets, produce financial products or market other
types of investment products.
KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/ performance ratings,
however, were lower in 1993 and 1994 than in earlier years and were under review
in 1994 and to date in 1995 due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets.
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To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of
KILICO's capital position; continued focus on existing and new variable annuity
products; distribution through diversified channels, with an emphasis on
INVEST's financial institution clients and KSI's retail base; and ongoing
efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.
RANKINGS AND RATINGS
According to Best's Agents Guide to Life Insurance Companies, 1994, as of
December 31, 1993, KILICO ranked 58th of 1,326 life insurers by admitted assets;
452nd of 1,186 by insurance in force; and 128th of 1,265 by net premiums
written.
A.M. Best Company, an industry analyst, has assigned an A- (excellent) rating to
KILICO; Moody's Investors Service has assigned an insurance financial strength
rating of Baa1 (adequate) to KILICO; and Duff & Phelps Credit Rating Co. has
assigned a claims-paying ability rating of A+ (high) to KILICO. Each of these
ratings is currently under review, primarily reflecting uncertainty with respect
to Kemper's and KILICO's ownership.
EMPLOYEES
At December 31, 1994, KILICO utilized the services of approximately 340
employees of FKLA which are also shared with FLA.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, variable life insurance and annuities offered by KILICO, and the
related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations. For information on regulatory and other dividend restrictions, see
ITEM 5(c).
INVESTMENTS
Changing marketplace dynamics affected the life insurance industry in recent
years. To accommodate customers' increased preference for safety over higher
yields, KILICO has systematically reduced its investment risk and strengthened
its capital position. In 1994, KILICO's total net investment income increased
for the first time since 1990. Investments are an integral part of KILICO's
business.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to maximize investment return. Portfolio management is handled by an
affiliated company, Kemper Financial Services, Inc. ("KFS"), and its
subsidiaries, with investment policy directed by KILICO's board of directors.
KILICO's investment strategies take into account the nature of each annuity and
life insurance product, the respective crediting rates and the estimated future
policy benefit maturities. See "INVESTMENTS" in ITEM 7.
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ITEM 2. PROPERTIES
KILICO primarily shares the office space leased by FKLA from Lumbermens, 78,000
sq. ft. in Long Grove, Illinois. KILICO also has utilized 43,000 sq. ft. of
office space presently leased by KFS in Chicago, although virtually all of this
space is expected to be eliminated in 1997 in connection with a new lease
executed by KFS.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, in 1992 the Staff of the SEC commenced an investigation
into certain of Kemper's real estate-related accounting practices and related
disclosures. KILICO's accounting and disclosure practices are consistent with
those of Kemper. Kemper fully cooperated throughout the Staff's investigation
which has now concluded. Kemper and the Staff have had settlement discussions
respecting this matter, and KILICO anticipates that this matter will be resolved
with respect to Kemper in the second quarter of 1995 with the filing of an
administrative proceeding.
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. KILICO's management, based on the advice of legal counsel,
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
OMITTED PURSUANT TO GENERAL INSTRUCTION J(2)(C) OF FORM 10-K.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) There is no established public trading market for KILICO's common stock.
(b) KFC owns all of the common stock of KILICO.
(c) KILICO has declared no cash dividends on its common stock in 1993, 1994 or
1995 through the date of filing of this Form 10-K.
RESTRICTIONS ON DIVIDENDS
Dividend distributions from KILICO to its stockholder are restricted by state
insurance laws. In Illinois, where KILICO is domiciled, if such dividend,
together with other distributions during the 12 preceding months would exceed
the greater of (a) ten percent of the insurer's statutory surplus as regards
policyholders as of the preceding December 31, or (b) the statutorily adjusted
net income for the preceding calendar year, then such proposed dividend must be
reported to the director of insurance at least 30 days prior to the proposed
payment date and may be paid only if not disapproved. The Illinois insurance
laws also permit payment of dividends only out of earned surplus, exclusive of
most unrealized capital gains.
ITEM 6. SELECTED FINANCIAL DATA
OMITTED PURSUANT TO GENERAL INSTRUCTION J(2)(A) OF FORM 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 1994, Kemper faced both an unsolicited suitor and an unsuccessful merger
agreement. The resulting distractions and uncertainties negatively impacted
KILICO's operations. The Kemper board of directors has directed its management
to take all appropriate actions to maximize value for stockholders.
RESULTS OF OPERATIONS
KILICO recorded net income of $26.4 million for 1994, compared with net income
of $14.0 million in 1993 and a net loss of $51.9 million in 1992. The
improvement in 1994 was primarily the result of increases in spread income, an
increase in fees and other income and a decrease in commissions, taxes, licenses
and fees. These improvements were partially offset by higher realized investment
losses in 1994, compared with 1993. The improvement in 1993 net income, compared
with 1992, was primarily the result of lower realized investment losses,
increases in spread income and reductions in operating expenses. The net loss in
1992 also reflected an increased level of amortization of insurance acquisition
costs.
The following table reflects the major components of realized investment results
included in net income (loss). (See "INVESTMENTS" on page 9, and the note
captioned "Invested Assets and Related Income" on page 26.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Real estate-related losses.................. $(27.1) $(51.7) $(66.0)
Fixed maturity write-downs.................. -- (12.3) (19.8)
Other gains (losses), net................... (8.4) 44.3 23.6
------ ------ ------
Total............................. $(35.5) $(19.7) $(62.2)
====== ====== ======
</TABLE>
Real estate-related losses decreased, reflecting a lower level of reserves and
write-downs on real estate-related investments. Fixed maturity write-downs
decreased due to the increased quality of KILICO's fixed maturity portfolio.
Other realized investment losses for 1994, and other realized investment gains
for 1993 and 1992 relate primarily to the sale of fixed maturity investments.
The fixed maturity losses generated in 1994 arose primarily from the sale of
$330.7 million of fixed maturity investments, consisting of lower yielding
investment-grade corporate securities and collateralized mortgage obligations,
related to a repositioning of KILICO's fixed maturity investment portfolio in
September 1994. The $306.9 million of proceeds from the repositioning, together
with $275.0 million of cash and short-term investments, were reinvested into
higher yielding U.S. government and agency guaranteed mortgage pass-through
securities issued by
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the Government National Mortgage Association and the Federal National Mortgage
Association. (See "INVESTMENTS" on page 9.)
Operating earnings (net income excluding realized investment results) totaled
$61.9 million in 1994, compared with $33.7 million and $10.3 million in 1993 and
1992, respectively. Operating earnings improved in 1994 and 1993, compared with
1992, primarily due to increased spread income. Continuing a strategy
implemented during 1992, KILICO improved spread income by reducing crediting
rates on certain existing blocks of its fixed annuity and interest-sensitive
life insurance products in 1993 and through most of 1994. Such reductions in
crediting rates occurred as overall interest rates declined. Operating earnings
improved as crediting rates declined at a faster rate than KILICO's investment
income. Beginning in late 1994, as a result of rising interest rates and other
competitive market factors, KILICO increased crediting rates on these products.
Although KILICO continues to manage spread revenue, further increases in
crediting rates could adversely impact future operating earnings but could also
help to improve sales and the overall persistency of such products.
Investment income was positively impacted in 1994 and 1993, compared with 1992,
from the benefits of capital contributions to KILICO and reductions in the level
of nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty companies.
These sales totaled $154.0 million in 1994, $343.7 million in 1993 and $144.8
million in 1992 and resulted in no realized gain or loss to KILICO. Investment
income in 1994 also benefitted from rising investment yields on new money, the
above-mentioned repositioning of KILICO's investment portfolio and a $5.0
million pre-tax adjustment related to the amortization of the discount or
premium on mortgage-backed securities. Investment income for 1994, 1993 and 1992
has been impacted by a shift over the last few years to higher-quality, lower
yielding investments and foregone income on nonperforming investments.
Investment income in 1993, compared with 1992, was also reduced by a 1992
reinsurance transaction which transferred $515.7 million of policyholder
liabilities and the related invested assets. (See the note captioned
"Reinsurance" on page 33.)
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Annuities:
General account................................. $ 214.2 $ 244.2 $ 435.6
Separate account................................ 250.8 263.7 275.9
------- ------- -------
Total annuities....................... 465.0 507.9 711.5
Interest-sensitive life insurance................. .8 2.0 5.0
------- ------- -------
Total sales........................ $ 465.8 $ 509.9 $ 716.5
====== ====== ======
</TABLE>
The decreases over the last three years in general account (fixed annuity) sales
and interest-sensitive life insurance sales reflected KILICO's continuing
strategy 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 1994
and 1993, compared with 1992, due to competitive conditions in certain
distribution channels, in part reflecting KILICO's financial strength and
performance ratings as well as the underlying investment fund performance
reflecting the economic environment of rising interest rates and overall poor
stock and bond market conditions.
Included in fees and other income are administrative fees received from KILICO's
separate account products of $20.8 million in 1994, compared with $18.1 million
and $14.3 million in 1993 and 1992, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Other income also included surrender charge revenue of $7.4
million in 1994, compared with $6.3 million and $6.2 million in 1993 and 1992,
respectively. The higher level of surrender charge revenue reflected an increase
in policyholder withdrawals, primarily as a result of the planned reductions in
crediting rates on fixed annuities and rising interest rates. KILICO's crediting
rate increases in 1994 were designed to reduce the level of future withdrawals.
Other income in 1992 also included a $12.0 million ceding commission resulting
from the earlier described reinsurance transaction.
Commissions, taxes, licenses and fees were lower in 1994, compared with 1993 and
1992, primarily reflecting lower annuity sales and reduced guaranty fund
assessments. Expenses for such assessments totaled $0.0, $5.8 million and $10.0
million in 1994, 1993 and 1992, respectively. (See "Guaranty association
assessments" in ITEM 1 on page 2.)
The higher level of deferral of policy acquisition costs in 1994, compared with
1993, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
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decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted during 1994 due
to the repositioning of KILICO's investment portfolio. The repositioning
favorably impacted the amortization of policy acquisition costs because it
resulted in current realized investment losses as well as an increase in
projected future net investment income, which together are expected to increase
KILICO's projected future estimated gross profits in later years. Excluding the
effects of the repositioning, the amortization of policy acquisition costs
increased in 1994, compared with 1993 and 1992, primarily as a result of
improved net income during 1994. The amortization in 1992 included approximately
$22.5 million of additional amortization as a result of the previously mentioned
reinsurance transaction.
Operating expenses in 1994, compared with 1993, increased only slightly, as a
result of expense control and the integration of the two life insurance
subsidiaries' operations and management beginning in 1992. Primarily as a result
of the integration of the two life companies, operating expenses in 1993
declined by approximately 37 percent, compared with the 1992 level.
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 $642.5
million of certain real estate-related investments to affiliated non-life realty
companies through December 31, 1994, 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 indebtedness, and capital contributions of
$342.5 million through December 31, 1994. KILICO's statutory surplus ratio
improved to 10.2 percent at December 31, 1994, from 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.
8
<PAGE> 10
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.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments......................................... $ 227 4.6% $ 410 7.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1.................................................... 2,569 52.2 2,307 42.9
NAIC(1) Class 2.................................................... 760 15.5 983 18.3
Performing below investment-grade(2).................................. 135 2.8 151 2.8
Equity securities....................................................... 15 .3 68 1.3
Joint venture mortgage loans(3)......................................... 351 7.1 731 13.6
Third-party mortgage loans(3)........................................... 319 6.5 132 2.4
Other real estate-related investments................................... 237 4.8 291 5.4
Policy loans............................................................ 278 5.7 264 4.9
Other................................................................... 26 .5 44 .8
------ ----- ------ -----
Total(4)...................................................... $4,917 100.0% $5,381 100.0%
====== ===== ====== =====
</TABLE>
---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) Excludes $49.9 million, or 1.0 percent, and $106.0 million, or 2.0 percent,
at December 31, 1994 and 1993, respectively, of bonds carried in other real
estate-related investments.
(3) 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.
(4) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" on
page 34.
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 effect. The aggregate
unrealized depreciation was $243.6 million at December 31, 1994, compared with
unrealized appreciation of $70.2 million, net of tax, at December 31, 1993.
KILICO has not recorded a 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.
During each of the last three years, KILICO repositioned its fixed maturity
investments and increased the relative and absolute levels of investment-grade
fixed maturities and cash and short-term investments held. At December 31, 1994,
investment-grade fixed maturities and cash and short-term investments accounted
for 72.3 percent of KILICO's invested assets and cash, compared with 68.8
percent at December 31, 1993. Approximately 70 percent of KILICO's NAIC Class 1
bonds were rated AAA or equivalent at year-end 1994, up from 61 percent at
year-end 1993.
Approximately 49.2 percent of KILICO's investment-grade fixed maturities at
December 31, 1994 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 KILICO's investments in mortgage-backed securities
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 from recent years,
the current rise in interest rates is not expected to cause any material
unanticipated extension of the average maturities of these investments. With the
exception of KILICO's September 1994 purchases of such investments, most of
these investments were purchased by KILICO at
9
<PAGE> 11
discounts. Prepayment activity on such securities is not expected to result in
any material losses to KILICO because such prepayment would generally accelerate
the reporting of the discounts as investment income. Many of KILICO's September
1994 purchases were at a premium. Prepayments resulting from a decline in
interest rates would accelerate the amortization of premiums on such purchases
which would result in reductions of investment income related to such
securities. At December 31, 1994, KILICO had unamortized discounts and premiums
of $20.4 million and $14.8 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 12 issuers at December 31, 1994 totaled less than
three percent of cash and invested assets at year-end 1994 and 1993. See the
note captioned "Invested Assets and Related Income" on page 26. 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. KILICO's below investment-grade holdings decreased through sales,
maturities, restructurings, market value adjustments and write-downs.
REAL ESTATE-RELATED INVESTMENTS
The $907 million real estate portfolio held by KILICO constituted 18.4 percent
of cash and invested assets at December 31, 1994, compared with $1.15 billion,
or 21.4 percent, at December 31, 1993. 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, Lumbermens or their respective affiliates have
taken ownership positions in joint ventures with a small number of partners.
(See the notes captioned "Unconsolidated Investees" and "Concentration of Credit
Risk" on pages 28 and 30, respectively.)
SUMMARY OF GROSS AND NET REAL ESTATE INVESTMENTS
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1993
------ ------
<S> <C> <C>
Investments before reserves, write-downs and net joint venture
operating losses:
Joint venture mortgage loans................................... $ 358 $ 766
Third-party mortgage loans..................................... 353 200
Other real estate-related investments.......................... 350 354
------ ------
Subtotal.................................................. 1,061 1,320
Reserves....................................................... (43) (61)
Write-downs.................................................... (97) (88)
Cumulative net operating losses of joint ventures owned........ (14) (17)
------ ------
Net real estate investments...................................... $ 907 $1,154
====== ======
</TABLE>
As reflected in the "Real estate portfolio" table on page 11, KILICO has
continued to fund both existing projects and legal commitments. The future legal
commitments were $376.1 million at December 31, 1994. This amount represented a
net decrease of $118.8 million since year-end 1993, largely due to fundings in
1994. As of December 31, 1994, KILICO expects to fund approximately $96.5
million of these 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.
(See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" on page
34.)
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 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.
10
<PAGE> 12
Excluding the $57.3 million of real estate owned and $45.4 million in KILICO's
net equity investments in joint ventures, KILICO's real estate loans (including
real estate-related bonds) totaled $804.6 million at December 31, 1994, after
reserves and write-downs. Of this amount, $595.9 million are on accrual status
with a weighted average interest rate of approximately 7.9 percent. Of these
accrual loans, 53.6 percent have terms requiring current periodic payments of
their full contractual interest, 32.5 percent require only partial payments or
payments to the extent of cash flow of the borrowers, and 13.9 percent defer all
interest to maturity.
At December 31, 1994, the equity investments in real estate consisted of $36.6
million of loans to Spanish projects (described on page 12), $0.3 million of
unsecured loans to joint ventures treated as equity investments, $17.7 million
in KILICO's net equity investments in joint ventures and $9.2 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 $54.2 million of deeds in lieu of
foreclosure and $3.1 million of certain purchased properties at December 31,
1994. Real estate owned was net of $67.5 million of write-downs at December 31,
1994.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
----------------- -------------------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY BONDS(4) LOANS(5) OWNED INVESTMENTS TOTAL
------- ------ -------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993............. $ 730.8 $132.2 $ 106.0 $ 58.7 $ 55.1 $ 71.7 $1,154.5(1)
Additions (deductions):
Fundings............................... 27.3 29.3 23.5 59.5 17.3 58.7 215.6
Interest added to principal............ 1.5 .8 -- -- -- -- 2.3
Sales/paydowns/distributions........... (88.8) (15.9) (26.5) (19.0) (25.2) (18.7) (194.1)
REIT(2)................................ (59.2) -- (15.8) (5.0) -- (2.4) (82.4)
Maturities............................. (10.6) -- (2.1) (44.0) -- -- (56.7)
Rollovers at maturity:
Principal............................ 10.6 -- 2.1 44.0 -- -- 56.7
Interest............................. 1.7 -- -- 1.4 -- -- 3.1
Sold to KFC Portfolio Corporation...... (21.0) (17.9) (35.1) (19.6) -- (52.3) (145.9)
Operating loss......................... -- -- -- -- -- (1.4) (1.4)
Transfers to real estate owned......... (16.1) (16.8) -- (1.9) 34.8 -- --
Realized investments gain (loss)(3).... 2.6 (16.9) (3.4) (8.3) (6.7) (9.0) (41.7)
Net transfers from joint venture to
third-party mortgages................ (198.3) 198.3 -- -- -- -- --
Other transactions, net................ (29.1) 25.6 1.2 18.8 (18.0) (1.2) (2.7)
------- ------ ------- ------- ------- ------- --------
Balance, December 31, 1994............. $ 351.4 $318.7 $ 49.9 $ 84.6 $ 57.3 $ 45.4 $ 907.3(6)
======= ====== ======= ======= ======= ======= ========
</TABLE>
---------------
(1) Net of $149.4 million reserve and write-downs. Excludes $47.3 million of
real estate-related accrued interest.
(2) Reflects the 1994 formation of Prime Retail, Inc., a retail properties real
estate investment trust ("REIT") affiliated with the Prime Group, Inc. See
"Real estate concentrations" below.
(3) See the note captioned "Invested Assets and Related Income" on page 26.
(4) 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 acquisition,
construction/development, refinancing debt, interest and other operating
expenses.
(5) 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.
(6) Net of $139.6 million reserve and write-downs. Excludes $29.8 million of
real estate-related accrued interest.
As reflected in the preceding table, cash received from
sales/paydowns/distributions and REIT transactions in 1994 exceeded KILICO's
cash fundings in 1994 by $60.9 million. Cash received from
sales/paydowns/distributions and refinancings in 1993 exceeded KILICO's cash
fundings in 1993 by $136.0 million.
11
<PAGE> 13
REAL ESTATE CONCENTRATIONS
KILICO's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1994
<TABLE>
<S> <C>
California........................... 26.9%
Illinois............................. 26.2
Texas................................ 11.2
Ohio................................. 6.3
Spain................................ 4.0
Colorado............................. 3.8
Oregon............................... 3.0
Indiana.............................. 2.7
Washington........................... 2.7
Hawaii............................... 2.5
Virginia............................. 2.5
Florida.............................. 2.1
Other(1)............................. 6.1
-----
Total...................... 100.0%
=====
</TABLE>
---------------
(1) No other single location exceeded 2.0 percent.
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1994
<TABLE>
<S> <C>
Office............................... 21.5%
Land................................. 20.4
Industrial........................... 14.7
Retail............................... 13.9
Hotel................................ 11.7
Apartment............................ 5.0
Residential.......................... 4.7
Mixed use............................ 2.1
Other................................ 6.0
-----
Total...................... 100.0%
=====
</TABLE>
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. Southern California shows
signs of improvement, although real estate market conditions there have
continued to be worse than in many other areas of the country. Northern
California and Illinois currently reflect some stabilization and improvement.
At December 31, 1994, KILICO's real estate portfolio also included $36.6 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.
Such equity investments in Spain totaled $31.9 million at December 31, 1993,
after accounting for fundings of $151.3 million during 1993. The Spanish
projects accounted for $29.4 million of net fundings during 1994 and represented
approximately 4.0 percent of KILICO's real estate portfolio at December 31,
1994. These investments, which began in the late 1980s, accounted for $14.1
million of the December 31, 1994 off-balance-sheet commitments, of which KILICO
expects to fund $7.1 million. Also during 1994, loans to the Spanish projects
totaling $24.7 million were sold at book value to an affiliated real estate
subsidiary of KFC.
Undeveloped land, including the Spanish projects, represented approximately 20.4
percent of KILICO's real estate portfolio at December 31, 1994. 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 December 31, 1994, KILICO's loans to and investments in projects with the
Prime Group, Inc. or its affiliates, based in Chicago, represented approximately
$238.0 million, or 26.2 percent, of KILICO's real estate portfolio (including
the previously mentioned Spanish projects, which are Prime Group-related). (See
the note captioned "Unconsolidated Investees" on page 28.) This amount reflected
$125.2 million in fundings during 1994 and $208.4 million during 1993. KILICO
also received cash, from Prime Group-related sales/paydowns/distributions and
REIT transactions, totaling $135.3 million in 1994 and $39.7 million in 1993.
Prime Group-related commitments accounted for $203.2 million of the
off-balance-sheet legal commitments at December 31, 1994, of which KILICO
expects to fund $33.0 million.
Effective January 1, 1993, Kemper and its subsidiaries, including KILICO, formed
a master limited partnership (the "MLP") with 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. As MLP
partners, Kemper and Lumbermens have participated in funding certain cash needs
of the MLP projects. During 1994, KILICO provided $57.3 million of fundings to
the MLP projects, compared with fundings of
12
<PAGE> 14
$54.1 million in 1993. KILICO also received cash from MLP-related
sales/paydowns/distributions and refinancings of $102.2 million in 1994 and
$130.3 million in 1993. At December 31, 1994, these projects in the MLP
accounted for $56.6 million of KILICO's off-balance-sheet legal commitments, of
which KILICO expects to fund $48.7 million. Kemper's affected equity interests
in real estate are held almost entirely by the real estate subsidiaries of
Kemper and KFC. Of KILICO's real estate portfolio at December 31, 1994,
approximately $254.3 million, or 28.0 percent, represented loans to and
investments in MLP-owned joint ventures.
Pursuant to agreements entered into in January 1994, Bedford transferred to the
MLP and FLA all of Bedford's ownership interests in ventures in which Bedford,
Kemper, Lumbermens and their respective subsidiaries previously shared ownership
interests. Bedford was released from certain recourse liabilities owed to the
MLP, the ventures, Lumbermens, Kemper and certain of their respective
subsidiaries. Because Kemper's reserve methodology does not take any credit for
such recourse and because Kemper in 1993 had already been recording an aggregate
50 percent of the operating results of the related ventures, this transaction,
which simplified the management of Kemper's portfolio, did not have any material
adverse impact on Kemper's or KILICO's results of operations or financial
condition.
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 SFAS 114. (See the discussion
of SFAS 114 on page 24 in the note captioned "Summary of Significant Accounting
Policies".) 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.
KILICO's real estate reserve was allocated as follows:
REAL ESTATE RESERVE
(in millions)
<TABLE>
<CAPTION>
JOINT VENTURE THIRD-PARTY OTHER REAL
MORTGAGE MORTGAGE ESTATE-RELATED
LOANS LOANS INVESTMENTS TOTAL
------------- ----------- -------------- ------
<S> <C> <C> <C> <C>
Balance at 12/31/92.............. $ 64.4 $ 5.0 $ 23.4 $ 92.8
1993 change in reserve........... (29.3) (5.0) 2.6 (31.7)
------- ----- ------ ------
Balance at 12/31/93.............. 35.1 -- 26.0 61.1
1994 change in reserve........... (28.0) 10.4 (.5) (18.1)
------- ----- ------ ------
Balance at 12/31/94.............. $ 7.1 $10.4 $ 25.5 $ 43.0
======= ===== ====== ======
</TABLE>
In addition to the reserve, KILICO's provision 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 $96.6 million at December 31, 1994 and $88.3 million at December 31,
1993. The 1994 decrease in reserves was primarily due to write-downs which
increased in 1994 as reserves for general real estate risks were allocated to
certain specific loans and equity investments in real estate, particularly with
respect to investments in land (including the Spanish projects). In 1993,
KILICO's real estate reserve and write-downs reflected declining valuations in
KILICO's real estate portfolio, offset in part by the positive effects of
recourse to, and subordination of loans held by, affiliated non-life realty
companies. The declining valuations in 1993 reflected KILICO's view, based on
economic data then available, that there will be slower than previously
anticipated economic growth in the future and therefore slower absorption of
real estate, particularly undeveloped land. Due to KILICO's assessment for
slower economic growth, its plans with respect to certain projects were changed
to reflect deferrals of their commencement or completion.
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 and
13
<PAGE> 15
stockholder's equity could be materially reduced in future periods if real
estate 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. Every
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.
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
------ ------
<S> <C> <C>
Potential problem loans(1).................................. $ 57.9 $ 20.2
Past due loans(2)........................................... -- 2.8
Nonaccrual loans(3)......................................... 274.6 563.6
Restructured loans (currently performing)(4)................ 50.5 56.7
Real estate owned(5)........................................ 57.3 55.1
------ ------
Total(6)(7)....................................... $440.3 $698.4
====== ======
</TABLE>
---------------
(1) 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.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. The 1994
decrease in nonaccrual loans primarily reflected sales and foreclosures as
well as write-offs of certain fully reserved loans.
(4) 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).
(5) Real estate owned is carried at fair value and includes deeds in lieu of
foreclosure and certain purchased property. Cumulative write-downs to fair
value were $67.5 million and $20.6 million at December 31, 1994 and 1993,
respectively.
(6) Total reserves and cumulative write-downs on properties owned at December
31, 1994 (excluding fair value adjustments to real estate owned) were 16.4
percent of total troubled real estate-related investments and 7.4 percent of
KILICO's total real estate portfolio before reserves and write-downs.
(7) 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.
Based on the level of troubled real estate-related investments KILICO
experienced in 1994 and 1993, 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 monitoring of the portfolio and formulating specific
action plans addressing nonperforming 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.
14
<PAGE> 16
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $353.1 million in 1994, compared
with $339.3 million in 1993 and $404.8 million in 1992. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate. KILICO's share of real estate operating losses
(excluding write-downs) totaled $1.4 million, $8.6 million and $10.0 million in
1994, 1993 and 1992, respectively. The pre-tax operating results consist of
rental 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 on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Fixed maturities....................................... $ -- $ 8.6 $23.3
Real estate-related investments........................ 28.4 32.2 17.0
----- ----- -----
Total........................................... $28.4 $40.8 $40.3
===== ===== =====
Basis points........................................... 55 78 78
===== ===== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1994, 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 levels 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 $35.5
million, $19.7 million and $62.2 million for 1994, 1993 and 1992, respectively.
(See the note captioned "Invested Assets and Related Income" on page 26.) Real
estate-related losses declined in 1994 because certain real estate markets began
to stabilize and because of the subordinated nature of loans purchased from
KILICO and held by affiliated realty companies. The 1994 realized investment
losses on bonds were primarily generated by KILICO's third-quarter repositioning
of its fixed maturity portfolio, which resulted in an after-tax loss of
approximately $16.5 million. The $306.9 million of proceeds from the
repositioning, along with $275.0 million of cash and short-term investments,
were reinvested primarily in higher yielding U.S. government guaranteed mortgage
pass-through securities. Fixed maturity write-downs were insignificant in 1994
due to the increased quality of KILICO's fixed maturity portfolio.
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.
15
<PAGE> 17
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. (See the note
captioned "Income Taxes" on page 30.)
INTEREST RATES
Interest rate fluctuations affect KILICO. The 1993 interest rate environment was
characterized by very low short-term rates and a steeply sloped yield curve
while 1994 saw rapidly rising short-term interest rates which resulted in a much
flatter yield curve as the Federal Reserve Board raised rates five times during
the year.
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 lower interest rate environment contributed both to a reduction in KILICO's
net investment income in 1993 and 1992, and as interest rates rose during 1994,
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 December 31,
1994, 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 in its fixed maturity investments. KILICO
believes, however, that this decline in value should be offset by a decrease in
the present value of KILICO's policy liabilities and that its sales of
fixed-rate annuity products could increase in a rising interest rate
environment.
16
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of claims, expenses, taxes and customers' 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 and interest-sensitive life contracts, investment income,
other operating revenue and cash provided from maturing or sold investments.
(See "INVESTMENTS" on page 9.)
Policyholder deposits decreased to $215.0 million during 1994 from $246.2
million during 1993, and policyholder withdrawals increased to $652.5 million
during 1994 from $516.3 million during 1993, primarily due to planned reductions
in crediting rates on general account annuities as well as increased
competition. KILICO's late 1994 increases in crediting rates are 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 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. Such
circumstances could accelerate or increase Kemper's purchases of real
estate-related assets from KILICO and 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. In
November 1994, after the termination of a merger agreement between Kemper and
Conseco, Inc. (see Part I of this Annual Report on Form 10-K), Standard & Poor's
Corporation revised its BBB (adequate) senior debt and BB+ (below average)
preferred stock ratings of Kemper from "CreditWatch with 'negative'
implications" to "CreditWatch with 'developing' implications"; Duff & Phelps
Credit Rating Co. revised its A- (high) senior debt rating of Kemper, its AA-
(very high) claims-paying ability rating of FKLA and its A+ (high) claims-paying
ability rating of KILICO from "Rating Watch-Down" to "Rating Watch-Uncertain";
Moody's Investors Service indicated that it continues to review for possible
downgrade its Baa2 (adequate) senior debt rating and Baa3 (adequate) preferred
stock rating of Kemper and its Baa1 (adequate) financial strength ratings of
FKLA and KILICO; and A.M. Best did not change its A- (excellent) "under review"
ratings of FKLA and KILICO. The review status of each of these ratings reflects
the fact that Kemper is pursuing strategies to maximize stockholder value, which
strategies may result in a change of control of Kemper, KILICO and/or certain of
Kemper's subsidiaries.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $434.0 million at December 31, 1994, compared with
$654.6 million and $488.7 million at December 31, 1993 and 1992, respectively.
The 1994 and 1993 changes in stockholder's equity were due primarily to capital
contributions of $82.5 million and $90.0 million in 1994 and 1993, respectively,
an increase in unrealized depreciation of investments of $329.5 million in 1994
and unrealized appreciation of $53.2 million in 1993, and net income of $26.4
million and $14.0 million in 1994 and 1993, respectively.
17
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE(S)
------
<S> <C>
Report of Independent Public Accountants............................................................. 18
Consolidated Balance Sheet, December 31, 1994 and 1993............................................... 19
Consolidated Statement of Operations, three years ended December 31, 1994............................ 20
Consolidated Statement of Stockholder's Equity, three years ended December 31, 1994.................. 21
Consolidated Statement of Cash Flows, three years ended December 31, 1994............................ 22
Notes to Consolidated Financial Statements........................................................... 23-36
Supplementary Schedule--Valuation of Qualifying Accounts............................................. 39
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Kemper Investors Life Insurance Company:
We have audited the consolidated balance sheet of Kemper Investors Life
Insurance Company and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 1994. In
connection with our audits of the consolidated financial statements, we also
have audited the supplementary schedule as listed in the accompanying index.
These consolidated financial statements and the supplementary schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the supplementary
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kemper Investors
Life Insurance Company and subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles. Also in our opinion, the related supplementary schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, Accounting for Certain
Investments in Debt and Equity Securities. Also, as discussed in the notes,
effective January 1, 1993, the Company changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, Accounting
by Creditors for Impairment of a Loan, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, Accounting for Income Taxes.
Further, as discussed in the notes, the Company adopted the provisions of SFAS
106, Employers' Accounting for Postretirement Benefits Other than Pensions in
1992.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 3, 1995
18
<PAGE> 20
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at market (cost: 1994, $3,707,356;
1993, $3,333,202)............................................................ $ 3,463,732 $ 3,441,224
Equity securities, at market (cost: 1994, $14,947; 1993, $35,170).............. 14,767 67,700
Short-term investments......................................................... 204,164 402,463
Joint venture mortgage loans................................................... 351,359 730,753
Third-party mortgage loans..................................................... 318,682 132,162
Other real estate-related investments.......................................... 237,242 291,489
Policy loans................................................................... 277,743 264,112
Other invested assets.......................................................... 25,760 43,267
----------- -----------
Total investments.................................................... 4,893,449 5,373,170
Cash........................................................................... 23,189 7,487
Accrued investment income...................................................... 125,543 132,834
Deferred insurance acquisition costs........................................... 310,465 288,097
Fixed assets, at cost less accumulated depreciation............................ 3,735 6,413
Receivable for securities sold................................................. -- 26,631
Reinsurance recoverable........................................................ 642,801 745,554
Other assets and receivables................................................... 29,914 34,058
Assets held in separate accounts............................................... 1,507,984 1,499,471
----------- -----------
Total assets......................................................... $ 7,537,080 $ 8,113,715
========== ==========
LIABILITIES
Future policy benefits......................................................... $ 4,843,690 $ 5,040,002
Ceded future policy benefits................................................... 642,801 745,554
Payable for securities purchased............................................... 574 43,758
Other accounts payable and liabilities......................................... 66,687 66,298
Deferred income taxes.......................................................... 41,364 64,045
Liabilities related to separate accounts....................................... 1,507,984 1,499,471
----------- -----------
Total liabilities.................................................... 7,103,100 7,459,128
----------- -----------
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..................................................... 491,994 409,423
Unrealized gain (loss) on investments.......................................... (236,443) 93,096
Retained earnings.............................................................. 175,929 149,568
----------- -----------
Total stockholder's equity........................................... 433,980 654,587
----------- -----------
Total liabilities and stockholder's equity........................... $ 7,537,080 $ 8,113,715
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 21
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Net investment income................................................. $ 353,084 $ 339,274 $ 404,758
Realized investment losses............................................ (54,557) (27,584) (83,502)
Fees and other income................................................. 31,950 25,687 32,360
--------- --------- ---------
Total revenue............................................... 330,477 337,377 353,616
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders....................... 248,494 275,689 348,555
Commissions, taxes, licenses and fees................................. 26,910 33,875 49,309
Operating expenses.................................................... 25,324 24,383 38,617
Deferral of insurance acquisition costs............................... (31,852) (31,781) (46,649)
Amortization of insurance acquisition costs........................... 20,809 12,376 29,119
--------- --------- ---------
Total benefits and expenses................................. 289,685 314,542 418,951
--------- --------- ---------
Income (loss) before income tax expense (benefit) and cumulative
effect of changes in accounting principles.......................... 40,792 22,835 (65,335)
Income tax expense (benefit).......................................... 14,431 11,142 (13,730)
--------- --------- ---------
Income (loss) before cumulative effect of changes in
accounting principles..................................... 26,361 11,693 (51,605)
Cumulative effect of changes in accounting principles, net of tax..... -- 2,350 (281)
--------- --------- ---------
Net income (loss)........................................... $ 26,361 $ 14,043 $ (51,886)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of year............................ $ 2,500 $ 2,500 $ 2,500
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of year....................... 409,423 310,237 280,237
Capital contributions from Parent................................... 82,500 90,000 30,000
Transfer of limited partnership interest to Parent.................. 71 9,186 --
--------- --------- ---------
End of year............................................... 491,994 409,423 310,237
--------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of year............ 93,096 39,872 (830)
Unrealized gain (loss) on revaluation of investments, net........... (329,539) 53,224 40,702
--------- --------- ---------
End of year............................................... (236,443) 93,096 39,872
--------- --------- ---------
RETAINED EARNINGS, beginning of year................................ 149,568 136,055 187,941
Net income (loss)................................................... 26,361 14,043 (51,886)
Dividend of limited partnership interest to Parent.................. -- (530) --
--------- --------- ---------
End of year............................................... 175,929 149,568 136,055
--------- --------- ---------
Total stockholder's equity................................ $ 433,980 $ 654,587 $ 488,664
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 26,361 $ 14,043 $ (51,886)
Reconcilement of net income (loss) to net cash provided:
Realized investment losses............................... 54,557 27,584 83,502
Interest credited and other charges...................... 242,591 269,766 343,788
Deferred insurance acquisition costs..................... (11,043) (19,405) (17,529)
Amortization of discount and premium on investments...... (1,383) (203) (4,699)
Deferred income taxes.................................... 20,809 14,596 16,599
Other, net............................................... (13,352) 30,148 (33,740)
------------ ------------ ------------
Net cash provided from operating activities......... 318,540 336,529 336,035
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity........................ 144,717 187,949 96,588
Fixed maturities sold prior to maturity.................. 910,913 1,652,119 2,939,784
Mortgage loans, policy loans and other invested assets... 536,668 881,505 557,237
Cost of investments purchased or loans originated:
Fixed maturities......................................... (1,447,393) (2,322,085) (3,456,016)
Mortgage loans, policy loans and other invested assets... (281,059) (443,445) (326,899)
Short-term investments, net................................. 198,299 (214,999) 474,280
Net change in receivable and payable for securities
transactions............................................. (16,553) 39,078 (70,088)
Net reductions in fixed assets.............................. 2,678 8,062 2,667
------------ ------------ ------------
Net cash provided by (used in) investing
activities........................................ 48,270 (211,816) 217,553
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................. 215,034 246,219 440,576
Withdrawals.............................................. (652,513) (516,340) (498,287)
Capital contributions from Parent........................... 82,500 90,000 30,000
Reinsured life reserves..................................... -- -- (515,684)
Other....................................................... 3,871 16,776 7,934
------------ ------------ ------------
Net cash used in financing activities............... (351,108) (163,345) (535,461)
------------ ------------ ------------
Net increase (decrease) in cash................ 15,702 (38,632) 18,127
CASH, beginning of period..................................... 7,487 46,119 27,992
------------ ------------ ------------
CASH, end of period........................................... $ 23,189 $ 7,487 $ 46,119
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products and interest-sensitive life insurance
products marketed primarily through a network of financial institutions,
nonaffiliated and affiliated securities brokerage firms, insurance agents and
financial planners. The Company is a wholly-owned subsidiary of Kemper Financial
Companies, Inc. ("KFC"), which in turn is a holding company formed by Kemper
Corporation ("Kemper"), the Company's ultimate parent.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The statements include the accounts of
the Company on a consolidated basis. All significant intercompany balances and
transactions have been eliminated.
Life insurance revenue and expenses
Revenue for annuities and interest-sensitive life products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income are ceding commissions received as a result
of certain reinsurance transactions entered into by the Company during 1992.
(See the note captioned "Reinsurance" on page 33.)
Deferred insurance acquisition costs
The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life products are being amortized over
the estimated contract life in relation to the present value of estimated gross
profits. Beginning in 1994, deferred insurance acquisition costs reflect the
estimated impact of unrealized gains or losses on fixed maturities held as
available for sale in the investment portfolio, through a credit or charge to
stockholder's equity, net of income tax.
Future policy benefits
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4 percent to 8.75 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.75 percent for
periods ranging from a portion of 1995 up to a portion of 1999 and are generally
3 percent to 4.5 percent thereafter. For contracts that have annuitized,
interest rates that are used in determining the present value of future payments
range principally from 3 percent to 11.25 percent.
Invested assets and related income
Investments in fixed maturities (bonds and redeemable preferred stocks) are
carried at market value at December 31, 1994 and 1993, as they are currently
considered available for sale. Short-term investments are carried at cost, which
approximates market value. Equity securities of nonrelated companies are
generally carried at market value using the closing prices as of the balance
sheet date derived from either a major securities exchange or the National
Association of Securities Dealers Automated Quotations system.
Mortgage loans are carried at their unpaid balance net of unamortized discount
and any applicable reserve. Other real estate-related investments net of any
applicable reserve and write-downs include certain bonds issued by real estate
finance or development companies; notes receivable from real estate ventures;
investments in real estate ventures carried at cost, adjusted for the equity in
the operating income or loss of such ventures; and real estate owned carried
primarily at fair value.
The Company 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. Real estate reserves are
23
<PAGE> 25
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
established when declines in collateral values, estimated in light of current
economic conditions and calculated in conformity with Statement of Financial
Accounting Standards ("SFAS") 114, indicate a likelihood of loss. Generally, the
reserve is based upon the excess of the loan amount over the estimated future
cash flows from the loan discounted at the loan's contractual rate of interest
taking into consideration the effects of recourse to, and subordination of loans
held by, affiliated non-life realty companies. Changes in the Company's real
estate reserves and write-downs are included in revenue as realized investment
gain or loss. (See "Real estate-related investments" on page 10.)
The Company adopted SFAS 114, Accounting by Creditors for Impairment of a Loan,
in the fourth quarter of 1993. SFAS 114 defines "impaired loans" as loans in
which it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In the fourth quarter
of 1994, the Company adopted SFAS 118, Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures. SFAS 118 amends SFAS 114, providing
clarification of income recognition issues and requiring additional disclosures
relating to impaired loans. The adoption of SFAS 118 had no effect on the
Company's financial position or results of operations at or for the year ended
December 31, 1994.
At December 31, 1994 and 1993, total impaired loans amounted to $75.9 million
and $179.4 million, respectively. Impaired loans with reserves were $67.6
million and $91.9 million with corresponding reserves of $18.8 million and $38.5
million at December 31, 1994 and 1993, respectively. In determining reserves
relative to impaired loans, the Company also considered the deficit in equity
investments in real estate of $2.0 million and $35.0 million at December 31,
1994 and 1993, respectively. (See the real estate reserve table on page 13.)
The Company had an average balance of $93.9 million and $158.0 million in
impaired loans for 1994 and 1993, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance. At
December 31, 1994 and 1993, loans on nonaccrual status amounted to $274.6
million and $563.6 million, respectively. Impaired loans are generally included
in the Company's nonaccrual loans. The additional amount of nonaccrual loans in
excess of impaired loans represents the Company's consideration of market risks
associated with the real estate loan portfolio.
Upon adoption of SFAS 114, the Company determined that its previous disclosures
relating to impaired loans and recorded real estate reserves were adequate. As
such, restating prior quarters' operating results for the impact of SFAS 114 was
not considered necessary.
Policy loans are carried at their unpaid balance. Other invested assets consist
primarily of venture capital and a leveraged lease and are carried at cost.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Unrealized gains or losses on
revaluation of investments are credited or charged to stockholder's equity net
of deferred income tax.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is
included in net interest income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage loans and is adjusted to reflect differences which arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of mortgage-backed
securities change as a result of changes in prepayment rates, the adjustment is
also included in net investment income. The Company does not accrue interest
income on fixed maturities deemed to be impaired on an other-than-temporary
basis, or on mortgage loans, real estate-related bonds and other real estate
loans where the likelihood of collection of interest is doubtful.
Separate account business
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and
24
<PAGE> 26
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
retains varying amounts of withdrawal charges to cover expenses in the event of
early withdrawals by contract holders. The assets and liabilities of the
separate accounts are carried at market value.
Income tax
The operations of the Company are included in the consolidated federal income
tax return of Kemper. Income taxes receivable or payable are determined on a
separate return basis, and payments are received from or remitted to Kemper
pursuant to a tax allocation arrangement between Kemper and its subsidiaries,
including the Company. The Company generally receives a tax benefit for losses
to the extent such losses can be utilized in Kemper's consolidated tax return.
Upon adoption of SFAS 109, Accounting for Income Taxes, effective January 1,
1993, deferred taxes are provided on the temporary differences between the tax
and financial statement basis of assets and liabilities. Deferred income tax
previously was provided on the tax effects of timing differences between
financial statement and taxable income.
Fixed assets
Fixed assets, consisting primarily of electronic data processing equipment, are
recorded at cost and are depreciated over the useful lives of the assets on a
straight-line method. At December 31, 1994 and 1993, the accumulated
depreciation on fixed assets was $20.8 million and $21.6 million, respectively.
Other
Certain reclassifications have been made in the consolidated financial
statements for the years 1993 and 1992 to conform to 1994 reporting.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. Federal
income tax paid to (refunded by) Kemper under the tax allocation arrangement for
the years ended December 31, 1994, 1993 and 1992 amounted to $(10.7) million,
$4.2 million and $7.8 million, respectively.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling $57 million, $146 million and $229 million
in 1994, 1993 and 1992, respectively.
Reflected in the statement of cash flows is the 1992 sale of $515.7 million of
reinsured life reserves for which the Company delivered an investment portfolio
that included $151.4 million of mortgage loans, $294.8 million of fixed
maturities and $69.5 million of other investments.
The Company also transferred its equity ownership interests in two limited
partnerships during 1994 and 1993. (See the note captioned "Related-Party
Transactions" on page 32.)
25
<PAGE> 27
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME
Fixed maturities are considered available for sale, depending upon certain
economic and business conditions. The Company is carrying its fixed maturity
investment portfolio 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 effect. The carrying value
(estimated market value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, at December 31, 1994 and
1993, was as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1994
U.S. treasury securities and obligations of U.S. government
agencies and authorities................................... $ 10,682 $ 10,998 $ 24 $ (340)
Obligations of states and political subdivisions, special
revenue and nonguaranteed.................................. 25,021 25,691 -- (670)
Debt securities issued by foreign governments................ 109,624 120,950 50 (11,376)
Corporate securities......................................... 1,679,428 1,805,933 7,027 (133,532)
Mortgage-backed securities................................... 1,638,977 1,743,784 -- (104,807)
---------- ---------- -------- ---------
Total fixed maturities................................ $3,463,732 $3,707,356 $ 7,101 $(250,725)
========== ========== ======== =========
1993
U.S. treasury securities and obligations of U.S. government
agencies and authorities................................... $ 11,686 $ 11,464 $ 240 $ (18)
Obligations of states and political subdivisions, special
revenue and nonguaranteed.................................. 16,434 15,232 1,202 --
Debt securities issued by foreign governments................ 114,275 112,825 2,782 (1,332)
Corporate securities......................................... 2,025,888 1,948,268 89,445 (11,825)
Mortgage-backed securities................................... 1,272,941 1,245,413 34,268 (6,740)
---------- ---------- -------- ---------
Total fixed maturities................................ $3,441,224 $3,333,202 $127,937 $ (19,915)
========== ========== ======== =========
</TABLE>
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in market value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value,
determined in the manner described in the following paragraph, during the fiscal
quarter in which the impairment was determined to have become other than
temporary, unless such net realizable value exceeded the Company's carrying
value for such issue. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $907 million real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments. (See "Real
estate-related investments" on page 10.) At December 31, 1994, the Company had
$216.2 million of mortgage loans and other real estate-related investments (net
of reserves and write-downs) that were non-income producing for the preceding 12
months.
At December 31, 1994, securities carried at approximately $5.3 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$910.9 million, $1.7 billion and $2.9 billion during 1994, 1993 and 1992,
respectively. Gross gains of $6.0 million, $80.4 million and $69.5 million and
gross losses of $55.9 million, $37.8 million and $101.7 million were realized on
sales of fixed maturities in 1994, 1993 and 1992, respectively. Gross unrealized
gains and losses on equity securities at December 31, 1994 amounted to $469
thousand and $649 thousand, respectively.
26
<PAGE> 28
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1994:
<TABLE>
<CAPTION>
CARRYING AMORTIZED
(in thousands) VALUE COST VALUE
---------- ----------
<S> <C> <C>
One year or less.................................................................... $ 1,135 $ 1,135
Over one year through five.......................................................... 346,841 357,697
Over five years through ten......................................................... 1,011,526 1,088,547
Over ten years...................................................................... 465,253 516,193
Securities not due at a single maturity date(1)..................................... 1,638,977 1,743,784
---------- ----------
Total fixed maturities....................................................... $3,463,732 $3,707,356
========== ==========
</TABLE>
---------------
(1) Weighted average maturity of 7 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities............................. $274,231 $221,144 $210,047
Dividends on equity securities......................................... 1,751 3,084 2,061
Income from short-term investments..................................... 10,668 12,155 18,249
Income from mortgage loans............................................. 41,713 82,028 149,816
Income from policy loans............................................... 18,517 16,826 17,052
Income from other real estate-related investments...................... 21,239 11,755 17,915
Income from other loans and investments................................ 3,533 8,008 2,580
-------- -------- --------
Total investment income......................................... 371,652 355,000 417,720
Investment expense..................................................... (18,568) (15,726) (12,962)
-------- -------- --------
Net investment income........................................... $353,084 $339,274 $404,758
========= ========= =========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between market and amortized cost, adjusted for other-than-temporary
declines in value; equity securities and other--the difference between market
value and cost. The realized and change in unrealized investment gains (losses)
by class of investment for the years ended December 31, 1994, 1993 and 1992 were
as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Real estate-related.............................................. $(41,720) $(79,652) $(94,995)
Fixed maturities................................................. (49,857) 36,234 11,150
Equity securities................................................ 28,243 17,086 109
Other............................................................ 8,777 (1,252) 234
-------- -------- --------
Realized investment losses before income tax benefit........... (54,557) (27,584) (83,502)
Income tax benefit............................................... (19,095) (7,917) (21,256)
-------- -------- --------
Net realized investment losses................................. $(35,462) $(19,667) $(62,246)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Fixed maturities................................................ $(351,646) $60,258 $ 88,820
Equity securities............................................... (32,710) 19,882 14,882
Adjustment to deferred insurance acquisition costs.............. 11,325 -- --
--------- ------- --------
Unrealized gain (loss) before income tax...................... (373,031) 80,140 103,702
Income tax expense (benefit).................................... (43,492) 26,916 20,968
--------- ------- --------
Net unrealized gain (loss) on investments................ $(329,539) $53,224 $ 82,734
========== ======== =========
</TABLE>
27
<PAGE> 29
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES
At December 31, 1994, KILICO, along with other Kemper subsidiaries, directly
held partnership interests in a number of real estate joint ventures. Also,
KILICO and Lumbermens Mutual Casualty Company ("Lumbermens") and certain
subsidiaries of Kemper and Lumbermens are partners in a master limited
partnership (the "MLP") formed, effective January 1, 1993, to hold the equity
interests each partner's organization separately held previously in joint
ventures with Peter B. Bedford or his affiliates ("Bedford"), and in January
1994, the MLP acquired substantially all of Bedford's interests in such joint
ventures. Kemper and Lumbermens each own 50 percent of the MLP.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
Selected financial information, as of December 31, 1994 and 1993, is presented
below separately for the MLP, ventures with the Prime Group, Inc. or its
affiliates ("Prime"), and other real estate-related partnerships. (See the note
captioned "Concentration of Credit Risk" on page 30.) Such real estate-related
information for 1994 and 1993 was based on unaudited financial information
received by the Company from the respective entities.
SELECTED FINANCIAL INFORMATION
(in thousands)
<TABLE>
<CAPTION>
REAL ESTATE-RELATED
-------------------------------------------------------
PRIME-RELATED
-------------------------
MLP DOMESTIC SPANISH OTHER
VENTURES PARTNERSHIPS PROJECTS PARTNERSHIPS
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
1994
Revenue...................................................... $ 104,827 $ 14,966 $ 22,095 $ 52,295
Expenses..................................................... 192,492 18,881 45,256 49,011
---------- ------------ --------- --------
Operating income (loss)...................................... (87,665) (3,915) (23,161) 3,284
Asset writedowns(1).......................................... (23,536) (621) (102,031) (17,037)
---------- ------------ --------- --------
Net loss..................................................... $ (111,201) $ (4,536) $(125,192) $(13,753)
========== ========= ========= ========
The Company's share of operating loss(1)..................... $ (121) $ (1,140) $ -- $ (145)
========== ========= ========= ========
The Company's share of net loss(1)........................... $ (156) $ (1,244) $ -- $ (4,915)
========== ========= ========= ========
Properties at cost, net of depreciation...................... $ 879,352 $ 55,804 $ 338,923 $ 38,075
========== ========= ========= ========
Total assets................................................. $1,049,019 $ 77,751 $ 373,637 $153,785
========== ========= ========= ========
Mortgages, notes payable and related accrued interest payable
to:
The Company................................................ $ 207,909 $ 31,767 $ 36,606 $ 7,436
Kemper subsidiaries other than the Company................. 417,967 2,713 394,764 2,411
Lumbermens................................................. 181,325 -- 92,592 26,734
Fidelity Life Association.................................. 46,036 -- -- --
Other third parties........................................ 411,795 42,048 98,076 51,303
Total liabilities............................................ $1,354,624 $ 82,770 $ 660,557 $110,334
========== ========= ========= ========
The Company's net equity investment(1)....................... $ 1,953 $ (585) $ 36,624 $ 7,415
========== ========= ========= ========
</TABLE>
---------------
(1) Excluded from the Company's share of operating and net losses and related
net equity investment in real estate-related entities is interest expense
related to loans by the Company which are on nonaccrual status and
write-downs taken directly by the Company. Included in the Company's share
of current year results are immaterial prior year audit adjustments by the
respective entities.
28
<PAGE> 30
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES (CONTINUED)
Included in the immediately preceding and immediately following tables are real
estate loans to partnerships or corporations in which the Company and other
Kemper subsidiaries hold equity interests. At December 31, 1994, the Company had
other joint venture-related loans totaling $16.0 million before reserves, not
included in the table above, to partnerships in which the Company has options to
acquire equity interests or has made loans with additional interest features.
These joint venture-related loans totaled $38.5 million at December 31, 1993.
Also at December 31, 1994, the Company had joint venture-related loans totaling
$37.5 million before reserves, not included in the table above, to partnerships
in which Lumbermens and Fidelity Life Association, an affiliated mutual
insurance company ("FLA"), had equity interests. These joint venture-related
loans totaled $68.1 million before reserves at December 31, 1993. (See the note
captioned "Financial Instruments--Off-Balance-Sheet Risk" on page 34.)
SELECTED FINANCIAL INFORMATION
(in thousands)
<TABLE>
<CAPTION>
REAL ESTATE-RELATED
------------------------------------------------------
PRIME-RELATED
------------------------
MLP DOMESTIC SPANISH OTHER
VENTURES PARTNERSHIPS PROJECTS PARTNERSHIPS
---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
1993
Revenue....................................................... $ 101,694 $ 50,636 $ 36,607 $ 60,701
Expenses...................................................... 226,282 65,824 76,449 66,978
---------- ------------ -------- ------------
Operating loss................................................ (124,588) (15,188) (39,842) (6,277)
Asset writedowns(1)........................................... (107,135) -- (39,274) --
---------- ------------ -------- ------------
Net loss...................................................... $ (231,723) $(15,188) $(79,116) $ (6,277)
========== ========= ========= =========
The Company's share of operating loss(1)...................... $ (172) $ (7,548) $ -- $ (852)
========== ========= ========= =========
The Company's share of net loss(1)............................ $ (409) $ (7,548) $ -- $ (852)
========== ========= ========= =========
Properties at cost, net of depreciation....................... $1,161,025 $278,635 $253,321 $ 46,184
========== ========= ========= =========
Total assets.................................................. $1,426,638 $375,738 $292,825 $225,019
========== ========= ========= =========
Mortgages, notes payable and related accrued interest payable
to:
The Company................................................. $ 298,447 $ 48,303 $ 31,871 $ 5,287
Kemper subsidiaries other than the Company.................. 490,031 56,602 305,335 5,430
Lumbermens.................................................. 245,890 17,262 51,423 30,226
Fidelity Life Association................................... 65,691 -- -- --
Other third parties......................................... 752,239 199,765 88,558 56,622
Total liabilities............................................. $1,895,260 $390,888 $539,728 $153,334
========== ========= ========= =========
The Company's net equity investment(1)........................ $ 18,548 $ 7,626 $ 31,871 $ 15,524
========== ========= ========= =========
</TABLE>
---------------
(1) Excluded from the Company's share of operating and net losses and related
net equity investment in real estate-related entities is interest expense
related to loans by the Company which are on nonaccrual status and
write-downs taken directly by the Company. Included in the Company's share
of current year results are immaterial prior year audit adjustments by the
respective entities.
29
<PAGE> 31
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist, including
mortgage-backed securities and real estate. These concentrations are discussed
in "INVESTMENTS" on page 9.
The Company had $246.3 million (5.0 percent of invested assets and cash), $240.5
million (4.9 percent of invested assets and cash) and $102.8 million (2.1
percent of invested assets and cash) of mortgage loans and other real estate
investments in California, Illinois and Texas, respectively, at December 31,
1994. The majority of the Illinois and Texas loans and other investments are
Prime-related. The majority of the California loans and other investments are
MLP-related. (See the note captioned "Unconsolidated Investees.")
The Company had $184.9 million (3.8 percent of invested assets and cash) of
below investment-grade securities (including real estate-related bonds) totaling
$49.9 million, or 1.0 percent of invested assets and cash) at December 31, 1994.
At December 31, 1994, the Company held only one investment which exceeded 10
percent of stockholder's equity. This investment, amounting to $47.6 million, is
a joint venture mortgage loan to Lisle Park Plaza.
The following table shows the amounts of the Company's real estate portfolio at
December 31, 1994 which consisted of loans to or investments in joint ventures
with the MLP and Prime:
<TABLE>
<CAPTION>
(in millions) MLP PRIME
------ ------
<S> <C> <C>
Mortgage loans............................................................................ $161.6 $150.3
Real estate-related bonds................................................................. 2.9 36.2
Other real estate loans................................................................... 54.5 29.7
Real estate owned......................................................................... 98.3 --
Equity investments........................................................................ 7.4 42.9
Reserves.................................................................................. (8.9) (21.0)
Write-downs............................................................................... (61.5) (.1)
------ ------
Total................................................................................... $254.3 $238.0
====== ======
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1994, 1993 and 1992:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- ---------
<S> <C> <C> <C>
Current................................................................ $ (6,898) $ (5,773) $ (9,457)
Deferred............................................................... 21,329 16,915 (4,273)
-------- -------- ---------
Total........................................................ $ 14,431 $ 11,142 $ (13,730)
======== ======== =========
</TABLE>
The actual income tax expense (benefit) for 1994, 1993 and 1992 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. federal
corporate tax rate of 35 percent in 1994 and 1993 and 34 percent for 1992 to
income (loss) before income tax expense (benefit) and cumulative effect of
changes in accounting principles.
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- ---------
<S> <C> <C> <C>
Computed expected tax expense (benefit)................................ $ 14,277 $ 7,992 $ (22,214)
Difference between "expected" and actual tax expense (benefit):
State taxes.......................................................... 645 332 777
Foreign tax credit................................................... (155) 358 (611)
Change in tax rate................................................... -- 1,441 --
Change in valuation allowance........................................ -- 701 --
Unutilized capital losses............................................ -- -- 8,286
Other, net........................................................... (336) 318 32
-------- -------- ---------
Total actual tax expense (benefit)........................... $ 14,431 $ 11,142 $ (13,730)
======== ======== =========
</TABLE>
30
<PAGE> 32
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The Company adopted SFAS 109, Accounting for Income Taxes, as of January 1,
1993. SFAS 109 established new principles for calculating and reporting the
effects of income taxes in financial statements. SFAS 109 replaced the income
statement orientation inherent in APB Opinion 11 with a balance sheet approach.
Under the new approach, deferred tax assets and liabilities are generally
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. SFAS 109 allows
recognition of deferred tax assets 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.
The implementation of SFAS 109 resulted in a one-time increase to earnings of
$2.4 million in the first quarter of 1993. Prior years' financial statements
have not been restated to apply the provisions of SFAS 109.
Upon adoption of SFAS 109, a valuation allowance was established 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's federal
income tax return or a change in circumstances which causes the recognition of
the benefits to become more likely than not. During 1994, the valuation
allowance was increased by $85.3 million. This increase in the valuation
allowance is solely attributable to the decrease in the net deferred federal tax
liability from unrealized losses on investments.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(in thousands) 1994 1993
--------- --------
<S> <C> <C>
Deferred federal tax assets:
Unrealized losses on investments................................................. $ 85,331 $ --
Life policy reserves............................................................. 51,519 60,446
Real estate-related.............................................................. 39,360 45,851
Other investment-related......................................................... 7,435 12,498
Other............................................................................ 6,415 5,804
--------- --------
Total deferred federal tax assets............................................. 190,060 124,599
Valuation allowance.............................................................. (100,532) (15,201)
--------- --------
Total deferred federal tax assets after valuation allowance................... 89,528 109,398
--------- --------
Deferred federal tax liabilities:
Deferred insurance acquisition costs............................................. 108,663 100,834
Unrealized gains on investments.................................................. -- 49,193
Depreciation and amortization.................................................... 18,878 21,367
Other............................................................................ 3,351 2,049
--------- --------
Total deferred federal tax liabilities........................................ 130,892 173,443
--------- --------
Net deferred federal tax liabilities............................................... $ (41,364) $(64,045)
========= ========
</TABLE>
The valuation allowance of $100.5 million is subject to future adjustments based
on, among other items, Kemper's estimates of future operating earnings and
capital gains.
Pursuant to the deferred method under APB Opinion 11, deferred income taxes were
recognized for income and expense items that were reported in different years
for financial reporting purposes and income tax purposes using the tax rate
applicable for the year of the calculation. Under the deferred method, deferred
taxes were not adjusted for subsequent changes in tax rates.
31
<PAGE> 33
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The sources of deferred tax expense (benefit) and their tax effect were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1992
--------
<S> <C>
Deferred insurance acquisition costs.............................................................. $ 6,172
Future policy benefit reserves tax adjustment..................................................... 5,692
Timing differences in recognition of accrued liabilities for GAAP and tax purposes................ (397)
Tax versus GAAP separate account gain............................................................. (3,277)
Tax versus GAAP capital losses.................................................................... 4,350
GAAP versus tax investment income on bonds........................................................ (4,380)
Joint venture partnership income adjustments...................................................... 1,491
Leasing transactions.............................................................................. 2,567
Change in real estate reserve..................................................................... (21,305)
Tax capitalization of policy acquisition costs.................................................... 555
Tax versus GAAP depreciation...................................................................... 490
Unutilized capital losses......................................................................... 8,286
Other, net........................................................................................ (4,517)
--------
Total................................................................................... $ (4,273)
========
</TABLE>
The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1990 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions from KFC of $82.5 million, $90.0
million and $30.0 million during 1994, 1993 and 1992, respectively.
In 1994 and 1993, the Company transferred the majority of its deficit equity
ownership interest in two limited partnerships to KFC resulting in an increase
of the Company's additional paid-in capital of $71 thousand and $9.2 million,
respectively. The Company also paid a non-cash dividend of $530 thousand to KFC
in December 1993, which represented the positive equity ownership interests of
the majority of one of its limited partnerships. Net losses associated with the
Company's ownership interests in these limited partnerships amounted to $1.4
million, $5.4 million and $3.9 million in 1994, 1993 and 1992, respectively, and
are included in the Company's consolidated statement of operations.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1994 and 1993, joint venture mortgage loans
totaled $351 million and $731 million, respectively, and during 1994, 1993 and
1992, the Company earned interest income on these joint venture loans of $22.0
million, $63.1 million and $116.3 million, respectively.
As of January 1, 1993, all of the Company's personnel are employees of Federal
Kemper Life Assurance Company ("FKLA"), an affiliated company. Prior to January
1, 1993, the majority of the Company's personnel were employees of another
affiliated company, Kemper Financial Services, Inc. ("KFS"). The Company is
allocated expenses for the utilization of KFS and FKLA employees and facilities
and the information systems of Kemper Service Company ("KSvC") based on the
Company's share of administrative, legal, marketing, investment management,
information systems and operation and support services. During 1994, 1993 and
1992, expenses allocated to the Company from KFS and KSvC amounted to $6.5
million, $3.1 million and $28.2 million, respectively. The Company also paid to
KFS investment management fees of $6.0 million, $6.7 million and $5.9 million
during 1994, 1993 and 1992, respectively. The Company paid Kemper Sales Company
$7.1 million in 1992 for services relating to the distribution of the Company's
products. In addition, expenses allocated to the Company from FKLA during 1994,
1993 and 1992 amounted to $11.1 million, $13.1 million and $1.1 million,
respectively.
During 1994, 1993 and 1992, the Company sold certain mortgages and real
estate-related investments, net of reserves, amounting to approximately $154.0
million, $343.7 million and $144.8 million respectively, to KFC Portfolio Corp.,
an affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on the sales.
32
<PAGE> 34
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities. The Company generally cedes 100 percent of the
related annuity liabilities under the terms of the reinsurance agreements.
Although these reinsurance agreements contractually obligate the reinsurers to
reimburse the Company, they do not discharge the Company from its primary
liabilities and obligations to policyholders. As such, these amounts paid or
deemed to have been paid are recorded on the Company's consolidated balance
sheet as reinsurance recoverables and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management with the Company and FKLA and certain common board
members with the Company and Kemper. The 1992 reinsurance agreement resulted in
the sale to FLA of approximately $500 million of certain assets, including $151
million of mortgage loans, while the 1992 agreement was all cash. As of December
31, 1994, the reinsurance recoverable related to the fixed-rate annuity
liabilities ceded to FLA amounted to approximately $643 million.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and FKLA sponsor a welfare plan that provides medical and life
insurance benefits to their retired and active employees and the Company is
allocated a portion of the costs of providing such benefits. The Company is self
insured with respect to medical benefits, and the plan is not funded except with
respect to certain disability-related medical claims. The medical plan provides
for medical insurance benefits at retirement, with eligibility based upon age
and the participant's number of years of participation attained at retirement.
The plan is contributory for pre-Medicare retirees, and will be contributory for
all retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The discount rate used in determining the allocated postretirement benefit
obligation was 8 percent and 7 percent for 1994 and 1993, respectively. The
assumed health care trend rate used was based on projected experience for 1994
and 1995, 10 percent in 1996, gradually declining to 6 percent by the year 1999
and remaining at that level thereafter.
The status of the plan as of December 31, 1994 and 1993, was as follows:
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Retirees...................................................................................... $206 $171
Fully eligible active plan participants....................................................... 58 90
Other active plan participants................................................................ 101 159
Unrecognized gain from actuarial experience................................................... 314 223
---- ----
Accrued liability................................................................... $679 $643
==== ====
Components of the net periodic postretirement benefit cost:
</TABLE>
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Service cost-benefits attributed to service during the period................................. $ 31 $ 84
Interest cost on accumulated postretirement benefit obligations............................... 43 41
Amortization of unrecognized actuarial gain................................................... (35) --
---- ----
Total............................................................................... $ 39 $125
==== ====
</TABLE>
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1994 and 1993 by $48 thousand and $69 thousand, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1994 and 1993 by $14 thousand and $19 thousand, respectively.
During 1994, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
33
<PAGE> 35
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1994 and prior. The Company's financial statements include provisions for all
known assessments that will be levied against the Company as well as an estimate
of amounts (net of estimated future premium tax recoveries) that the Company
believes it will be assessed in the future for which the life insurance industry
has estimated the cost to cover losses to policyholders. (See "Guaranty
association assessments" on page 2.) The Company is also contingently liable for
any future guaranty fund assessments related to insolvencies of unaffiliated
insurance companies, for which the life insurance industry has been unable to
estimate the cost to cover losses to policyholders. No specific amount can be
reasonably estimated for such insolvencies as of December 31, 1994.
(11) FINANCIAL INSTRUMENTS--OFF BALANCE-SHEET RISK
At December 31, 1994, the Company had loan commitments and stand-by financing
agreements totaling $376.1 million to support the financing needs of various
real estate investments. To the extent these arrangements are called upon,
amounts loaned would be secured by assets of the joint ventures, including first
mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $96.5 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of
business for other than trading purposes to hedge exposures in foreign currency
fluctuations related to certain foreign fixed maturity securities held by the
Company. The following table summarizes various information regarding these
derivative financial instruments as of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REPRICING
(in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
1994 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
----------------------------------------------------------------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options..................... $ 34,541 $ 18 $ 18 .25 30
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options..................... 69,241 2,194 2,194 .22 30
</TABLE>
34
<PAGE> 36
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company's hedges relating to foreign currency exposure are implemented using
forward contracts on foreign currencies. These are generally short duration
contracts with U.S. money-center banks. The Company records realized and
unrealized gains and losses on such investments in net income on a current
basis. The amounts of gain (loss) included in net income during 1994, 1993 and
1992 totaled $6.4 million, $(2.8) million and $(2.4) million, respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures are required under SFAS 107. Such fair value estimates
are made at specific points in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. A significant
portion of the Company's financial instruments are carried at fair value. (See
the note captioned "Invested Assets and Related Income" on page 26.) Fair value
estimates for financial instruments not carried at fair value are generally
determined using discounted cash flow models and assumptions that are based on
judgments regarding current and future economic conditions and the risk
characteristics of the investments. Although fair value estimates are calculated
using assumptions that management believes are appropriate, changes in
assumptions could significantly affect the estimates and such estimates should
be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Fixed maturities: Fair values for fixed maturity securities carried at market
value were determined by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics, or fair value as determined in good faith by the Company's
portfolio manager, Kemper Financial Services, Inc.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated on a
project-by-project basis. Generally, the projected cash flows of the collateral
are discounted using a discount rate of 10 to 12 percent. The resulting
collateral estimates were then used to determine the value of the Company's real
estate-related investments. The estimate of fair value should be used with care
given the inherent difficulty of estimating the fair value of real estate due to
the lack of a liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1994 and 1993 to be 5.5 percent and 5.0 percent,
respectively, while the assumed average market crediting rate was 6.5 percent in
1994 and 5.25 percent in 1993.
35
<PAGE> 37
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1994 1993
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1).................................... $3,463,732 $3,463,732 $3,441,224 $3,441,224
Equity securities...................................... 14,767 14,767 67,700 67,700
Cash and short-term investments........................ 227,353 227,353 409,950 409,950
Mortgage loans and other real estate-related assets.... 907,283 804,867 1,154,404 1,010,038
Policy loans........................................... 277,743 277,743 264,112 264,112
Other invested assets.................................. 25,760 25,760 43,267 43,267
Financial instruments recorded as liabilities:
Life policy benefits................................... 4,843,690 4,709,561 5,040,002 5,120,000
</TABLE>
---------------
(1) Includes $18 and $2,200 carrying value and fair value for 1994 and 1993,
respectively, of derivative securities used to hedge the foreign currency
exposure on certain specific foreign fixed maturity investments.
(14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. (See "Restrictions on dividends" on page
6.) The maximum amount of dividends which can be paid by the Company in 1995 is
currently $0. The Company paid no cash dividends in 1994, 1993 or 1992.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss)........................................................ $ 44,491 $(36,178) $(141,975)
========= ========= ==========
Statutory surplus........................................................ $416,243 $329,430 $ 251,283
========= ========= ==========
</TABLE>
36
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OMITTED PURSUANT TO GENERAL INSTRUCTION J(2)(C) OF FORM 10-K.
ITEM 11. EXECUTIVE COMPENSATION
OMITTED PURSUANT TO GENERAL INSTRUCTION J(2)(C) OF FORM 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEMS (A) AND (B) OMITTED PURSUANT TO GENERAL INSTRUCTION J(2)(C) OF FORM 10-K.
(C) CHANGES IN CONTROL.
There are no arrangements, known to Kemper Investors Life Insurance Company, the
operation of which may at a subsequent date result in a change in control of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OMITTED PURSUANT TO GENERAL INSTRUCTION J(2)(C) OF FORM 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
A listing of all financial statements filed as part of this Annual Report on
Form 10-K is included on page 18 in ITEM 8.
(A)(2) SCHEDULES.
The following schedule is supplemental to the financial statements of Kemper
Investors Life Insurance Company and subsidiaries for 1994 and is included in
this Form 10-K at the page indicated below. All other schedules are omitted
because the information required to be stated therein is included in the
financial statements or notes thereto or because they are inapplicable.
<TABLE>
<CAPTION>
SCHEDULE TITLE PAGE
--------- ----------------------------------------------------------------------------------------- -----
<S> <C> <C>
V Valuation and qualifying accounts, for the year ended December 31, 1994*................. 39
</TABLE>
---------------
* This schedule for the years ended December 31, 1993 and 1992 is incorporated
by reference to Kemper Investors Life Insurance Company's Form 10-K filed on
March 29, 1994 and Form S-1 filed on April 13, 1993, respectively.
(A)(3) EXHIBITS.
The exhibits listed on the accompanying Index to Exhibits on page 40 are filed
as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1994.
37
<PAGE> 39
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints John H. Fitzpatrick,
Senior Vice President and Chief Financial Officer, and Joseph R. Sitar,
Principal Accounting Officer, his true and lawful attorney-in-fact with
authority together or individually to execute in the name of each such
signatory, and with authority to file with the Securities and Exchange
Commission, any and all amendments to this Annual Report on Form 10-K, together
with any exhibits thereto and other documents therewith, necessary or advisable
to enable Kemper Investors Life Insurance Company to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, which amendments may
make such other changes in the Annual Report on Form 10-K as the aforesaid
attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Kemper Investors Life Insurance Company has duly caused this Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Long Grove,
State of Illinois, on the 28th day of March, 1995.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ JOHN B. SCOTT
John B. Scott
Chairman, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KEMPER INVESTORS LIFE
INSURANCE COMPANY IN THE CAPACITIES INDICATED ON THE 28TH DAY OF MARCH, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
------------------------------------------------- --------------------------------------------------------
<S> <C>
/s/ JOHN B. SCOTT Chairman, President, Chief Executive Officer
------------------------------------------------- and Director
John B. Scott
/s/ JOHN H. FITZPATRICK Senior Vice President, Chief Financial Officer and
------------------------------------------------- Director
John H. Fitzpatrick
/s/ JOSEPH R. SITAR Principal Accounting Officer
-------------------------------------------------
Joseph R. Sitar
/s/ JAMES R. BORIS Director
-------------------------------------------------
James R. Boris
/s/ DAVID B. MATHIS Director
-------------------------------------------------
David B. Mathis
/s/ STEPHEN B. TIMBERS Director
-------------------------------------------------
Stephen B. Timbers
</TABLE>
38
<PAGE> 40
SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
-------------------------------- ---------- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Asset valuation reserves:
Joint venture mortgage
loans...................... $ 35,085 $ -- $ -- $28,008 $ 7,077
Third-party mortgage loans.... -- -- 10,373 -- 10,373
Other real estate-related
investments................ 26,058 -- -- 553 25,505
---------- ---------- --------------- ----------- ----------
Total $ 61,143 $ -- $10,373(1) $28,561(2) $ 42,955
======== ========= ============== ========= ========
</TABLE>
---------------
(1) Charged to realized investment losses in the consolidated statement of
operations.
(2) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.
39
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C> <C> <C>
3(a) Articles of Incorporation are incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-33547) filed February 20, 1990.
3(b) Bylaws are incorporated herein by reference to Exhibits filed with Pre-Effective Amendment
No. 1 to the Registration Statement on Form S-1 (File No. 33-33547) filed October 11,
1990.
4(a) Form of Variable and Market Value Adjusted Deferred Annuity Contract is incorporated
herein by reference to Exhibits filed with Registration Statement on Form S-1 (File No.
33-43462) filed October 23, 1991.
4(b) Form of Certificate to Variable and Market Value Adjusted Deferred Annuity Contract and
Enrollment Application is incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-43462) filed October 23, 1991.
4(c) Form of Individual Variable and Market Value Adjusted Annuity Contract and Enrollment
Application is incorporated herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4 for KILICO Variable Annuity
Separate Account (File No. 33-43501) filed November 19, 1993.
4(d) Form of Endorsement to Variable and Market Value Adjusted Deferred Annuity Contract is
incorporated herein by reference to Exhibits filed with Post-Effective Amendment No. 4 to
the Registration Statement on Form N-4 for KILICO Variable Annuity Separate Account (File
No. 33-43501) filed November 19, 1993.
4(e) Form of Endorsement to Certificate to Variable and Market Value Adjusted Deferred Annuity
Contract is incorporated herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4 for KILICO Variable Annuity
Separate Account (File No. 33-43501) filed November 19, 1993.
4(f) Form of Revised Variable and Market Value Adjusted Deferred Annuity Contract is
incorporated herein by reference to Exhibits filed with Post-Effective Amendment No. 4 to
the Registration Statement on Form N-4 for KILICO Variable Annuity Separate Account (File
No. 33-43501) filed November 19, 1993.
4(g) Form of Revised Certificate to Variable and Market Value Adjusted Deferred Annuity
Contract is incorporated herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4 for KILICO Variable Annuity
Separate Account (File No. 33-43501) filed November 19, 1993.
10(a) Distribution Agreement between Kemper Investors Life Insurance Company and Kemper
Financial Services, Inc. is incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-43462) filed October 23, 1991.
</TABLE>
40
