UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended June 30, 1996.
[ ] 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 333-02491*.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in charter)
ILLINOIS
(State of Incorporation)
36-3050975
(I.R.S. Employer
Identification Number)
1 KEMPER DRIVE
LONG GROVE, ILLINOIS
(Address of Principal Executive Offices)
60049-0001
(Zip Code)
Registrant's telephone number, including area code: (847) 550-5500
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 August 1, 1996, 250,000 shares of common stock (all held by an affiliate,
Kemper Corporation) were outstanding. There is no market value for any such
shares.
* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-Q
also relates to Commission file numbers 33-33547, 33-43462 and
33-46881.
1
<PAGE>
KEMPER INVESTORS LIFE INSURANCE COMPANY
FORM 10-Q
PART I. FINANCIAL STATEMENTS PAGE NO.
Consolidated Balance Sheet -
June 30, 1996 and January 4, 1996.......................3
Consolidated Statement of Operations -
Six months and three months ended
June 30, 1996 and 1995..................................4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1996 and 1995.................5
Notes to Consolidated Financial Statements...................6
Management's Discussion and Analysis
Results of Operations...................................8
Investments............................................11
Liquidity and Capital Resources........................17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................18
Signatures...................................................19
2
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheet
(in thousands, except share data)
(unaudited)
<CAPTION>
June 30 January 4
1996 1996
--------- ---------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale,
at market (cost: June 30, 1996, $4,017,595;
January 4, 1996, $3,749,323) $3,881,505 $3,749,323
Short-term investments 125,160 372,515
Joint venture mortgage loans 105,946 110,194
Third-party mortgage loans 130,782 144,450
Other real estate-related investments 50,067 34,296
Policy loans 290,029 289,390
Other invested assets 17,319 15,154
---------- ----------
Total investments 4,600,808 4,715,322
Cash 2,280 25,811
Accrued investment income 113,380 104,402
Reinsurance recoverable 472,665 502,836
Goodwill 240,260 245,165
Value of business acquired 189,223 190,222
Federal income tax recoverable - 112,646
Deferred insurance acquisition costs 12,675 -
Other assets and receivables 4,033 11,440
Assets held in separate accounts 1,906,098 1,761,110
---------- ----------
Total assets $7,541,422 $7,668,954
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $4,428,460 $4,585,148
Ceded future policy benefits 472,665 502,836
Other accounts payable and liabilities 66,235 34,565
Deferred income taxes 54,185 52,051
Liabilities related to separate accounts 1,906,098 1,761,110
---------- ----------
Total liabilities 6,927,643 6,935,710
---------- ----------
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 730,744 730,744
Net unrealized loss on investments (131,563) -
Retained earnings 12,098 -
---------- ----------
Total stockholder's equity 613,779 733,244
---------- ----------
Total liabilities and stockholder's equity $7,541,422 $7,668,954
========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Operations
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended Three Months ended
June 30 June 30
------------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income $146,949 $179,141 $74,647 $88,978
Realized investment losses (3,687) (46,685) (2,439) (45,309)
Fees and other income 17,686 17,460 9,528 8,522
------- ------- ------- -------
Total revenue 160,948 149,916 81,736 52,191
------- ------- ------- -------
BENEFITS AND EXPENSES
Benefits and interest credited to
policyholders 115,631 123,202 57,335 61,777
Commissions, taxes, licenses and fees 13,354 14,013 6,486 8,202
Operating expenses 10,360 9,701 4,920 4,839
Amortization of value of business acquired 7,021 - 2,787 -
Amortization of goodwill 4,903 - 2,451 -
Deferral of insurance acquisition costs (13,262) (20,210) (8,148) (10,726)
Amortization of insurance acquisition costs 928 22,007 846 9,208
------- ------- ------- -------
Total benefits and expenses 138,935 148,713 66,677 73,300
------- ------- ------- -------
Income (loss) before income tax expense
(benefit) 22,013 1,203 15,059 (21,109)
------- ------- ------- -------
Income tax expense (benefit)
Current 13,381 (9,993) 9,124 (13,855)
Deferred (3,466) 9,963 (2,722) 6,446
------- ------- ------- -------
Total income tax expense (benefit) 9,915 (30) 6,402 (7,409)
------- ------- ------- -------
Net income (loss) $ 12,098 $ 1,233 $ 8,657 $(13,700)
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30
-------------------
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities
Net income $12,098 $1,233
Reconcilement of net income to net cash provided:
Realized investment losses 3,687 46,685
Interest credited and other charges 112,501 119,761
Amortization of value of business acquired 7,021 -
Amortization of goodwill 4,903 -
Deferred insurance acquisition costs (12,334) 1,797
Amortization of discount and premium on investments 16,633 2,086
Deferred income taxes (93) 9,913
Federal income taxes recoverable 112,646 (19,565)
Other, net (873) (13,763)
------- -------
Net cash flow provided from operating activities 256,189 148,147
------- -------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 123,660 71,888
Fixed maturities sold prior to maturity 229,455 161,453
Mortgage loans, policy loans and other invested assets 84,107 193,475
Cost of investments purchased or loans origninated:
Fixed maturities (643,531) (99,918)
Mortgage loans, policy loans and other invested assets (74,834) (190,341)
Short-term investments, net 247,355 17,004
Net change in receivable and payable for securities
transactions 870 (548)
Net change in other assets 121 1,608
------- -------
Net cash provided by (used in) investing activities (32,797) 154,621
------- -------
Cash flows from financing activities
Policyholder account balances:
Deposits 85,251 125,131
Withdrawals (354,440) (441,630)
Other 22,266 (8,465)
------- -------
Net cash used in financing activities (246,923) (324,964)
------- -------
Net decrease in cash (23,531) (22,196)
Cash at the beginning of period 25,811 23,189
------- -------
Cash at the end of the period $2,280 $ 993
======= =======
See accompaning notes to consolidated financial statements.
</TABLE>
5
<PAGE>
Kemper Investors Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
1. Kemper Investors Life Insurance Company ("KILICO") is incorporated under the
insurance laws of the State of Illinois. KILICO is licensed in the District
of Columbia and all states except New York. KILICO is a wholly owned
subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding company.
On January 4, 1996, an investor group comprised of Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the
issued and outstanding common stock of Kemper. As a result of the change in
control, Zurich and Insurance Partners own 80 percent and 20 percent,
respectively, of Kemper and therefore KILICO.
The consolidated financial statements of KILICO prior to January 4, 1996,
were prepared on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP"). In conjunction with the
acquisition, GAAP requires that the accompanying consolidated financial
statements of KILICO as of January 4, 1996 (the acquisition date) and as of
and for the six months ended June 30, 1996, be prepared in conformity with
purchase accounting.
Under purchase accounting KILICO's assets and liabilities have been marked
to their relative fair market values as of the acquisition date. The
difference between the cost of acquiring KILICO and the net fair market
values of KILICO's assets and liabilities as of the acquisition date has
been recorded as goodwill. KILICO is amortizing goodwill on a straight-line
basis over twenty-five years.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income
taxes.
Deferred insurance acquisition costs, and the related amortization thereof,
for policies sold prior to January 4, 1996 have been replaced by the value
of business acquired.
The value of business acquired reflects the estimated fair value of
KILICO's life insurance bus iness in force and represents the portion of the
cost to acquire KILICO that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
A 15 percent discount rate was used to determine such value as the rate of
return required by Zurich and Insurance Partners to invest i n the business
being acquired. In selecting the rate of return used to value the policies
purchased , KILICO considered the magnitude of the risks associated with
each of the actuarial assumptions used in determining expected future cash
flows, the cost of capital available to fund the acquisition, the perceived
likelihood of changes in insurance regulations and tax laws, the complexity
of KILICO's business, and the prices paid (i.e., discount rates used in
determining other life insurance company valuations) on similar blocks of
business sold in recent periods.
6
<PAGE>
The value of the business acquired is amortized using current assumptions
based on an interest rate equal to the liability or contract rate on the
value of business acquired. The estimated amortization and accretion of
interest for the value of business acquired for each of the years in the
five year period ended December 31, 2000 are as follows:
<TABLE>
(in thousands)
<CAPTION>
Projected
Year ended Beginning Accretion of ending
December 31 balance Amortization interest balance
----------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
1996 $ 190,222 $ (25,551) $ 8,769 $ 173,440
1997 173,440 (28,208) 8,171 153,403
1998 153,403 (27,438) 7,163 133,128
1999 133,128 (25,390) 6,176 113,914
2000 113,914 (22,279) 5,270 96,905
</TABLE>
The projected ending balance of the value of business acquired will be
further adjusted to reflect the impact of unrealized gains or losses on
fixed maturities held as available for sale in the investment portfolio.
Such adjustments are not recorded in KILICO's net income but rather are
recorded as a credit or charge to stockholder's equity, net of income tax.
As of June 30, 1996, this adjustment increased the value of business
acquired and stockholder's equity by approximately $6.0 million and $3.9
million, respectively.
2. In the opinion of management, all necessary adjustments consisting of
normal recurring accruals have been made for a fair statement of the
results of KILICO for the periods included in these financial statements.
These financial statements should be read in conjunction with the financial
statements and related notes in the 1995 Annual Report on Form 10-K.
3. The change in net unrealized losses on fixed maturities and equity
securities is not reflected as a component of KILICO's net income.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
As previously discussed in the notes to the consolidated financial statements,
Kemper, and therefore KILICO, were acquired on January 4, 1996 by an investor
group led by Zurich. In connection with the acquisition, KILICO's assets and
liabilities were marked to their respective fair market values as of the
acquisition date in conformity with purchase accounting adjustments required
under GAAP.
KILICO's financial statement results as of January 4, 1996, and as of and for
the six months ended June 30, 1996, have been adjusted to reflect the effects of
such purchase accounting adjustments. KILICO's financial statement results for
the six months ended June 30, 1995 have been prepared on a historical cost basis
and do not reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $12.1 million in the first half of 1996, compared
with net income of $1.2 million in the first half of 1995. The increase in net
income in 1996, compared with 1995, was primarily related to a decrease in
realized investment losses offset by purchase accounting adjustments.
The following table reflects the components of net income:
<TABLE>
Net income:
(in millions)
<CAPTION>
Six months ended
June 30
------------------
1996 1995
---- ----
<S> <C> <C>
Operating earnings $14.5 $31.5
Net realized investment losses (2.4) (30.3)
----- -----
Net income $12.1 $ 1.2
===== =====
</TABLE>
The following table reflects the major components of realized investment results
included in net income. (See "INVESTMENTS" below.)
<TABLE>
Realized investment results
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate-related gains (losses) $ .6 $(53.4) $ .9 $(53.4)
Fixed maturity write-downs (1.1) - (1.1) -
Other gains (losses), net (3.2) 6.7 (2.3) 8.1
----- ----- ----- -----
Realized investment losses (3.7) (46.7) (2.5) (45.3)
Income tax benefit (1.3) (16.4) ( .9) (15.9)
----- ----- ----- -----
Net realized investment losses $(2.4) $(30.3) $(1.6) $(29.4)
===== ===== ===== =====
</TABLE>
Other realized investment gains and losses for the first half of both 1996 and
1995 relate primarily to the sale of fixed maturity investments.
8
<PAGE>
Operating earnings (net income excluding realized investment results) declined
to $14.5 million in the first half of 1996, compared with $31.5 million in the
first half of 1995, primarily due to purchase accounting adjustments in the
first half of 1996 which negatively impacted spread revenue which also increased
expenses. These reductions were partially offset by purchase accounting
adjustments which favorably impacted the net deferral of deferred insurance
acquisition costs.
Investment income was negatively impacted in the first half of 1996, compared
with the first half of 1995, primarily reflecting purchase accounting
adjustments related to the amortization of premiums on fixed maturity
investments. Under purchase accounting, the market value of KILICO's fixed
maturity investments as of January 4, 1996 became KILICO's new cost basis in
such investments. The difference between the new cost basis and original par is
then amortized against investment income over the remaining effective lives of
the fixed maturity investments. As a result of the interest rate environment
as of January 4, 1996, the market value of KILICO's fixed maturity investments
was approximately $105.3 million greater than original par. The amortization of
such premiums reduced investment income by approximately $13.9 million in the
first half of 1996, compared with the first half of 1995.
Investment income was also negatively impacted during the first half of 1996,
compared with the first half of 1995, by a higher level of cash and short-term
investments held in the first quarter of 1996. The increase in cash and short-
term investments in the first quarter of 1996 was caused in part by the cash
proceeds received from bulk sales of real estate-related investments in late
December 1995. The reduction in real estate-related investments reflects
KILICO's current strategy to continue to reduce its investments in, and overall
exposure to, real estate-related investments. Investment income in the first
half of 1996, compared with the same period in 1995, was also negatively
impacted by approximately $1.2 million related to higher investment expenses
associated with the management of KILICO's remaining real estate portfolio.
<TABLE>
Sales
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
---------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuities:
General account $ 84.8 $125.1 $ 32.7 $ 74.3
Separate account 105.5 86.7 62.9 38.3
----- ----- ----- -----
Total annuities 190.3 211.8 95.6 112.6
Life insurance and other .5 - .4 -
----- ----- ----- -----
Total sales $190.8 $211.8 $ 96.0 $112.6
===== ===== ===== =====
</TABLE>
Sales of annuity products consist of total deposits received. The decrease in
1996 general account (fixed annuity) sales is reflective of the current interest
rate environment. The increase in variable sales in 1996, compared with 1995,
was in part due to increases in KILICO's financial strength and performance
ratings in January 1996, KILICO's association with Zurich, the addition of new
separate account investment fund options and the addition of new investment fund
managers. Sales of variable annuities not only increase administrative fees
earned but they also pose a minimal investment risk for KILICO as policyholders
invest in one or more of several underlying investment funds.
Included in fees and other income are administrative fees received from KILICO's
separate account products of $12.1 million in the first half of 1996, compared
with $10.5 million in the first half 1995. Administrative fee revenue increased
due to growth in average separate account assets. Other income also included
surrender charge revenue of $2.9 million in the first half of 1996, compared
with
9
<PAGE>
$4.8 million in the first half of 1995. The decrease in surrender charge
revenue reflects a significant reduction in total general account and separate
account policyholder surrenders and withdrawals in the first half of 1996,
compared with the first half of 1995.
<TABLE>
Policyholder surrenders and withdrawals
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
General account $324.1 $463.0 $172.3 $208.8
Separate account 91.3 110.4 44.8 54.1
------ ------ ------ -----
Total $415.4 $573.4 $217.1 $262.9
====== ====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income.
KILICO increased crediting rates in early 1995 in order to reduce the level of
future withdrawals. KILICO expects that the level of future surrender and
withdrawal activity, compared with such activity experienced in the first half
of 1996, could be adversely affected by the rising interest rates experienced in
the first half of 1996. However, KILICO believes that Zurich's majority
ownership and upgrades in KILICO's ratings in January 1996 will help to mitigate
the effects of such rising interest rates on policyholder surrenders and
withdrawals.
The difference between the cost of acquiring KILICO and the net fair market
value of KILICO's assets and liabilities as of January 4, 1996 was recorded as
goodwill. The amortization of goodwill negatively impacted expenses by $4.9
million in the first half of 1996, compared with the first half of 1995. KILICO
is amortizing goodwill on a straight-line basis over twenty-five years.
Operating earnings were favorably impacted by the net deferral of insurance
acquisition costs and the amortization of the value of business acquired in the
first half of 1996, compared with the net amortization of deferred insurance
acquisition costs in the first half of 1995. Deferred insurance acquisition
costs, and the related amortization thereof, for policies sold prior to January
4, 1996 have been replaced under purchase accounting by the value of business
acquired. The value of business acquired reflects the present value of the
right to receive future cash flows from insurance contracts existing at the
date of acquisition. The amortization of the value of business acquired is
based on an interest rate equal to the liability or contract rate on the value
of the business acquired. Deferred insurance acquisition costs are established
on all new policies sold after January 4, 1996.
The net amortization of deferred insurance acquisition costs in the first half
of 1995 was adversely affected by the level of policyholder surrenders and
withdrawals and increasing renewal crediting rates in the first half of 1995 as
both were expected to decrease KILICO's projected future estimated gross
profits.
KILICO has taken many steps in the last several years 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, sales and refinancing of mortgage and other real estate loans and
capital contributions.
10
<PAGE>
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, the
interest rate environment, liability durations and changes in market and
business conditions. In addition, as previously discussed, KILICO's current
strategy is to continue to reduce its overall exposure to real estate-related
investments.
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
June 30, 1996 January 4, 1996
----------------- -------------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 127 2.8% $ 398 8.4%
Fixed maturities:
Investment Grade
NAIC <F1> Class 1 3,351 72.8 3,096 65.3
NAIC <F1> Class 2 450 9.8 570 12.0
Below investment grade:
Performing 77 1.7 78 1.6
Nonperforming 4 .1 5 .1
Joint venture mortgage loans 106 2.3 110 2.3
Third-party mortgage loans 131 2.8 145 3.1
Other real estate-related investments 50 1.1 34 .7
Policy loans 290 6.3 289 6.1
Other 17 .3 16 .4
----- ----- ----- -----
Total $4,603 100.0% $4,741 100.0%
===== ===== ===== =====
<FN>
<F1> National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
</FN>
</TABLE>
Fixed maturities
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized depreciation, on fixed maturities at June 30, 1996 was $136.1
million. KILICO does not record a net deferred tax benefit for the aggregate
unrealized depreciation on investments. Fair values are sensitive to movements
in interest rates and other economic developments and can be expected to
fluctuate, at times significantly, from period to period.
At June 30, 1996, investment-grade fixed maturities and cash and short-term
investments accounted for 85.4 percent of KILICO's invested assets and cash,
compared with 85.7 percent at January 4, 1996.
Approximately 39.9 percent of KILICO's investment-grade fixed maturities at June
30, 1996 were mortgage-backed securities, down from 45.7 percent at January 4,
1996. 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 investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. KILICO's mortgage-backed investments are generally of AAA credit
quality, and the markets for these investments have been and are expected to
remain liquid. KILICO plans to continue to reduce its percentage holding of
such investments over time.
11
<PAGE>
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. As a result of purchase accounting
adjustments to fixed maturities, most of KILICO's mortgage-backed securities are
carried at a premium over par. Prepayment activity resulting from a decline
in interest rates on such securities purchased at a premium would accelerate the
amortization of the premiums which would result in reductions of investment
income related to such securities. At June 30, 1996, KILICO had unamortized
premiums and discounts of $32.5 million and $5.3 million, respectively, related
to mortgage-backed securities. KILICO believes that as a result of the purchase
accounting adjustments and the current interest rate environment, anticipated
prepayment activity is expected to result in reductions to future investment
income similar to those reductions experienced by KILICO in the first half of
1996.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 11 issuers at June 30, 1996, totaled 1.8 percent of
cash and invested assets at June 30, 1996, compared with 1.7 percent of cash and
invested assets at January 4, 1996. 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.
Real estate-related investments
The $287 million real estate portfolio held by KILICO, consisting of joint
venture and third-party mortgage loans and other real estate-related
investments, constituted 6.2 percent of cash and invested assets at June 30,
1996, compared with $289 million, or 6.1 percent, at January 4, 1996.
As reflected in the "Real estate portfolio" table on the following page, KILICO
has continued to fund both existing projects and legal commitments. The future
legal commitments were $215.7 million at June 30, 1996. This amount represented
a net decrease of $32.5 million since January 4, 1996, primarily due to sales
and fundings in 1996. As of June 30, 1996, KILICO expects to fund approximately
$37.9 million of these legal commitments, along with providing capital to
existing projects. The disparity between total legal commitments and the amount
expected to be funded relates principally to standby financing arrangements that
provide credit enhancements to certain tax-exempt bonds, which KILICO does not
presently expect to fund. The total legal commitments, along with estimated
working capital requirements, are considered in KILICO's evaluation of reserves
and write-downs.
Generally, at the inception of a real estate loan, KILICO anticipated that it
would roll over the loan and reset the interest rate at least one time in the
future, although KILICO 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 anticipates that as
certain mortgages mature they could be rolled over, restructured or foreclosed
if not earlier disposed of.
Excluding the $11.6 million of real estate owned and $21.5 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $253.7 million
at June 30, 1996. Of this amount, $249.2 million are on accrual status with a
weighted average interest rate of approximately 8.6 percent. Of these accrual
loans, 25.3 percent have terms requiring current periodic payments of their full
contractual interest, 48.2 percent require only partial payments or payments to
the extent of cash flow of the borrowers, and 26.5 percent defer all interest to
maturity.
The equity investments in real estate at June 30, 1996 consisted of KILICO's
other equity investments in joint ventures. These 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.
12
<PAGE>
<TABLE>
Real estate portfolio
(in millions)
<CAPTION>
Mortgage loans
--------------------
Joint Third-
venture party
------- -----
<S> <C> <C>
Balance at January 4, 1996 $ 110.2 $ 144.5
Additions (deductions):
Fundings 6.1 1.1
Interest added to principal 2.2 2.2
Sales/paydowns/distributions (9.5) (17.0)
Operating gain - -
Purchases from KFC Portfolio Corp. - -
Realized investments losses (.9) .2
Other transactions, net (2.2) (.2)
----- -----
Balance at June 30, 1996 $ 105.9 $ 130.8
===== =====
<CAPTION
Other real estate-related investments
-----------------------------------------------
Other Real estate Equity
loans <F2> owned investments Total
---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Balance at January 4, 1996 $ 22.3 $ .5 $ 11.4 $ 288.9 <F1>
Additions (deductions):
Fundings - 14.9 - 22.1
Interest added to principal - - - 4.4
Sales/paydowns/distributions (9.4) (6.2) (.7) (42.8)
Operating gain - - .9 .9
Purchases from KFC Portfolio Corp. 12.2 - 6.3 18.5
Realized investments losses (4.8) 2.5 3.6 .6
Other transactions, net (3.3) (.1) - (5.8)
------- ------ ------- -------
Balance at June 30, 1996 $ 17.0 $ 11.6 $ 21.5 $ 286.8 <F3>
======= ====== ======= =======
<FN>
<F1> Excludes $5.6 million of real estate-related accrued interest.
<F2> The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures, and were issued to KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
<F3> Excludes $8.6 million of real estate-related accrued interest.
</FN>
</TABLE>
Real estate concentrations
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states
and in certain types of properties. In addition to these exposures, KILICO
also has exposures to certain real estate developers and partnerships.
<TABLE>
<CAPTION>
Geographic distribution as of Distribution by property type as of
June 30, 1996. June 30, 1996.
<S> <C> <S> <C>
California 34.7 % Hotel 36.3 %
Illinois 13.4 Land 24.6
Hawaii 10.8 Office 20.9
Texas 10.6 Residential 8.5
Oregon 7.4 Retail 4.7
Colorado 6.9 Industrial .9
Washington 6.4 Other 4.1
Florida 5.0 ----
Ohio 3.1 Total 100.0 %
Other 1.7 =====
----
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. Portions of California's and
Hawaii's real estate market conditions have continued to be worse than in many
other areas of the country. Real estate markets in northern California and
Illinois show some stabilization and improvement.
Undeveloped land represented approximately 24.6 percent of KILICO's real estate
portfolio at June 30, 1996. To maximize the value of certain land and other
projects, additional development has been proceeding or has been planned. Such
development of existing projects would continue to require funding, either from
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. The values of certain development projects
have been written down as of January 4, 1996 and December 31, 1995, reflecting
changes
13
<PAGE>
in plans in connection with the Zurich-led acquisition of Kemper. 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.
The majority of KILICO's real estate loans are on properties or projects where
KILICO, Kemper, or their affiliates have taken ownership positions in joint
ventures with a small number of partners.
At June 30, 1996, loans to and investments in joint ventures in which Patrick M.
Nesbitt or his affiliates ("Nesbitt") have an interest constituted approximately
$101.5 million, or 35.4 percent of KILICO's real estate portfolio. The Nesbitt
ventures primarily consist of eleven hotel properties. At June 30, 1996, KILICO
had $100 thousand of Nesbitt-related off-balance-sheet legal funding commitments
outstanding.
At June 30, 1996, loans to and investments in a master limited partnership (the
"MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual
Casualty Company, a former affiliate, constituted approximately $82.2 million,
or 28.7 percent, of KILICO's real estate portfolio. KILICO's interest in the
MLP is a less than one percent limited partnership interest, and Kemper's
interest is 75 percent as of December 31, 1995. At June 30, 1996, MLP-related
commitments accounted for approximately $10.7 million of KILICO's off-balance-
sheet legal commitments, which KILICO expects to fund.
At June 30, 1996, KILICO loans to and investment in projects with the Prime
Group, Inc. or its affiliates totaled approximately $5.9 million, or 2.1
percent, of KILICO's real estate portfolio. Prime Group-related commitments
accounted for $162.1 million of the off-balance-sheet legal commitments at June
30, 1996, of which KILICO expects to fund $12.8 million.
Provisions for real estate-related losses
KILICO establishes real estate reserves when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by
Creditors for Impairment of a Loan", indicate a likelihood of loss. As of
January 4, 1996 and December 31, 1995, reflecting KILICO's change in strategy
with respect to its real estate portfolio, and the disposition thereof, real
estate-related investments were valued using an estimate of the investments
observable market price, net of estimated costs to sell.
Real estate outlook
KILICO's investment in real estate-related investments is expected to decline
further through future sales. Although the real estate-related investments have
been valued using an estimate of the investments observable market price, net of
estimated costs to sell, KILICO's net income could be materially reduced in
future periods if real estate market conditions worsen in areas where KILICO's
portfolio is located or if Kemper's and KILICO's plans with respect to certain
projects change.
14
<PAGE>
The following table is a summary of KILICO's troubled real estate-related
investments:
<TABLE>
Troubled real estate-related investments
(before reserves and write-downs, except for real estate owned)
(in millions)
<CAPTION>
June 30 January 4
1996 1996
--------- -----------
<S> <C> <C>
Potential problem loans <F1> $ 5.7 $ 17.9
Past due loans <F2> 3.0 -
Nonaccrual loans <F3> 4.5 3.5
Restructured loans (currently performing) <F4> - .2
Real estate owned 11.6 .5
------ ------
Total $ 24.8 $ 22.1
====== ======
<FN>
<F1> These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
<F2> Interest more than 90 days past due but not on nonaccrual status.
<F3> KILICO does not accrue interest on real estate-related investments when
it judges that the likelihood of collection of interest is doubtful.
<F4> KILICO defines a "restructuring" of debt as an event whereby KILICO,
for economic or legal reasons related to the debtor's financial
difficulties, grants a concession to the debtor it would not otherwise
consider. Such concessions either stem from an agreement between KILICO
and the debtor or are imposed by law or a court. By this definition,
restructured loans do not include any loan that, upon the expiration of
its term, both repays its principal and pays interest then due from the
proceeds of a new loan that KILICO, at its option, may extend (roll
over).
</FN>
</TABLE>
KILICO continues to devote significant attention to its real estate portfolio,
enhancing monitoring of the portfolio and formulating specific action plans
addressing nonperforming and potential problem loans. KILICO is continuing to
analyze various potential transactions designed to further 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 and mortgage refinancings. However, there can
be no assurance that such efforts will result in continued improvements in the
performance of KILICO's real estate portfolio.
Net investment income
KILICO's pre-tax net investment income totaled $146.9 million in the first half
of 1996, compared with $179.1 million in the first half of 1995. Included in
pre-tax net investment income is KILICO's share of the operating losses from
equity investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest income on
loans by KILICO which are on nonaccrual status.
15
<PAGE>
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
<TABLE>
Foregone investment income
(dollars in millions)
<CAPTION>
Six months ended
June 30
----------------
1996 1995
---- ----
<S> <C> <C>
Fixed maturities $ .5 $ -
Real estate-related investments .2 9.9
---- ----
Total $ .7 $9.9
==== ====
Basis points 5 40
==== ====
</TABLE>
Any increase in 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. Based on the level of
nonaccrual real estate-related investments at June 30, 1996, KILICO estimates
foregone investment income in 1996 will decrease significantly compared with the
1995 level.
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,
higher financial strength and claims-paying ability ratings 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 $2.4 million
and $30.3 million for the first half of 1996 and 1995, respectively.
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income. These changes in unrealized value are included within a
separate component of stockholder's equity, net of any applicable income taxes.
If and to the extent a fixed maturity investment suffers an other-than-temporary
decline in value, however, such security is written down to net realizable
value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance is established in accordance with SFAS 109 "Accounting for
Income Taxes" 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.
16
<PAGE>
Interest rates
The rising interest rate environment in the first half of 1996 will contribute
to an increase in future net investment income as well as to both realized and
unrealized fixed maturity investment losses in 1996. Also, lower renewal
crediting rates on annuities, compared with competitors' higher new money
crediting rates influenced certain annuity holders to seek alternative products.
KILICO mitigates this risk somewhat by charging surrender fees which decrease
over time when annuity holders withdraw funds prior to maturity on certain
annuity products. Approximately one-half of KILICO's fixed annuity liabilities
as of June 30, 1996, however, were no longer subject to significant surrender
fees.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, investment income, other operating
revenue and cash provided from maturing or sold investments. (See the
"Policyholder surrenders and withdrawals" table and related discussion and
"INVESTMENTS" above.)
Ratings
Ratings are an 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 KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
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 event, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
Following the January 4, 1996, change in control, certain of KILICO's financial
strength ratings and claims-paying ability ratings were upgraded. KILICO's
ratings are as follows:
<TABLE>
<CAPTION>
Current rating Prior rating
---------------- ---------------
<S> <C> <C>
A.M. Best Company..................... A (Excellent) A- (Excellent)
Moody's Investor Service.............. Aa3 (Excellent) Baa1 (Adequate)
Duff & Phelps Credit Rating Co........ AA (Very High) A+ (High)
Standard & Poor's..................... AA- (Excellent) Aq (Good)
</TABLE>
Stockholder's equity
Stockholder's equity totaled $613.8 million at June 30, 1996, compared with
$733.2 million at January 4, 1996. The 1996 decrease in stockholder's equity
was primarily due to a $131.5 million decrease related to the change in the
unrealized loss position of KILICO's fixed maturity investment portfolio offset
by net income of $12.1 million.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX.
Exhibit No.
-----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three
months ended June 30, 1996.
18
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended June 30, 1996
-----------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Kemper Investors Life Insurance Company
(Registrant)
Date: August 8, 1996 By:/s/JOHN B. SCOTT
----------------
John B. Scott
President, Chief Executive Officer and
Director
Date: August 8, 1996 By:/s/FREDERICK L. BLACKMON
------------------------
Frederick L. Blackmon
Sr. Vice President and
Chief Financial Officer
19
<PAGE>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[MULTIPLIER] 1,000
[PERIOD-TYPE] 6-MOS.
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-05-1996
[PERIOD-END] JUN-30-1996
[DEBT-HELD-FOR-SALE] 3,881,505
[DEBT-CARRYING-VALUE] 3,881,505
[DEBT-MARKET-VALUE] 3,881,505
[EQUITIES] 0
<MORTGAGES> 236,728
[REAL-ESTATE] 50,067
[TOTAL-INVEST] 4,600,808
[CASH] 2,280
[RECOVER-REINSURE] 472,665
[DEFERRED-ACQUISITION] 12,675
[TOTAL-ASSETS] 7,541,422
[POLICY-LOSSES] 4,428,460
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
<POLICY-HOLDER-FUNDS) 0
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 611,279
[TOTAL-LIABILITY-AND-EQUITY] 7,541,422
[PREMIUMS] 0
[INVESTMENT-INCOME] 146,949
[INVESTMENT-GAINS] (3,687)
[OTHER-INCOME] 17,686
[BENEFITS] 115,631
[UNDERWRITING-AMORTIZATION] 928
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 22,013
<INCOME-TAX) 9,915
[INCOME-CONTINUING] 12,098
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 12,098
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
