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, 1997.
[ ] 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, 1997, 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, 1997 and December 31,1996...........................3
Consolidated Statement of Operations -
Six months and three months ended
June 30, 1997 and 1996.......................................4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1997 and 1996......................5
Notes to Consolidated Financial Statements.........................6
Management's Discussion and Analysis
Results of Operations........................................8
Investments.................................................11
Liquidity and Capital Resources.............................16
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders......18
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 December 31
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at
market (cost: June 30, 1997,
$3,835,802; December 31,1996, $3,929,650) $3,774,369 $3,866,431
Short-term investments 8,970 71,696
Joint venture mortgage loans 66,752 110,971
Third-party mortgage loans 115,973 106,585
Other real estate-related investments 54,213 50,157
Policy loans 284,399 288,302
Other invested assets 29,074 23,507
---------- ----------
Total investments 4,333,750 4,517,649
Cash 2,363 2,776
Accrued investment income 117,318 115,199
Reinsurance recoverable 404,082 427,165
Goodwill 239,591 244,688
Value of business acquired 165,679 189,639
Federal income tax recoverable - 3,840
Deferred insurance acquisition costs 40,258 26,811
Receivable on sales of securities 18,892 32,569
Other assets and receivables 4,403 30,277
Assets held in separate accounts 2,382,375 2,127,247
---------- ----------
Total assets $7,708,711 $7,717,860
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $4,083,355 $4,256,521
Ceded future policy benefits 404,082 427,165
Benefits and claims payable to policyholders 15,540 36,142
Other accounts payable and liabilities 30,691 59,462
Deferred income taxes 54,259 60,362
Liabilities related to separate accounts 2,382,375 2,127,247
---------- ----------
Total liabilities 6,970,302 6,966,899
---------- ----------
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 761,538 761,538
Net unrealized loss on investments (53,974) (47,498)
Retained earnings 28,345 34,421
---------- ----------
Total stockholder's equity 738,409 750,961
---------- ----------
Total liabilities and stockholder's equity $7,708,711 $7,717,860
========== ==========
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
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income $148,299 $146,949 $ 74,050 $ 74,647
Realized investment gains (losses) 9,050 (3,687) 8,161 (2,439)
Premium income 9,129 239 4,121 109
Fees and other income 21,870 17,447 12,961 9,419
------- ------- ------- -------
Total revenue 188,348 160,948 99,293 81,736
------- ------- ------- -------
BENEFITS AND EXPENSES
Benefits and interest credited to
policyholders 105,920 115,556 52,353 57,260
Claims incurred 8,582 75 4,290 75
Commissions, taxes, licenses and fees 17,498 13,354 9,475 6,486
Operating expenses 15,955 10,360 8,780 4,920
Amortization of value of business
acquired 11,812 7,021 6,991 2,787
Amortization of goodwill 5,099 5,099 2,552 2,552
Deferral of insurance acquisition
costs (15,790) (13,262) (7,688) (8,148)
Amortization of insurance acquisition
costs 1,697 928 811 846
------- ------- ------- ------
Total benefits and expenses 150,773 139,131 77,564 66,778
------- ------- ------- ------
Income before income tax expense 37,575 21,817 21,729 14,958
------- ------- ------- ------
Income tax expense (benefit)
Current 16,028 13,381 10,577 9,124
Deferred (1,627) (3,466) (1,854) (2,722)
------- ------- ------- ------
Total income tax expense 14,401 9,915 8,723 6,402
------- ------- ------- ------
Net income $ 23,174 $ 11,902 $ 13,006 $ 8,556
======= ======= ======= =======
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
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $23,174 $11,902
Reconcilement of net income to net cash provided:
Realized capital losses (gains) (9,050) 3,687
Interest credited and other charges 101,886 112,501
Amortization of value of business acquired 11,812 7,021
Amortization of goodwill 5,099 5,099
Deferred insurance acquisition costs (14,093) (12,334)
Amortization of discount and premium on investments 8,997 16,633
Deferred income taxes (1,587) (93)
Federal income taxes recoverable 3,840 112,646
Other, net 11,455 (873)
------- --------
Net cash flow provided from operating activities 141,533 256,189
------- --------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 104,154 123,660
Fixed maturities sold prior to maturity 209,569 229,455
Mortgage loans, policy loans and other invested
assets 117,093 84,107
Cost of investments purchased or loans originated:
Fixed maturities (229,921) (643,531)
Mortgage loans, policy loans and other invested
assets (76,014) (74,834)
Short-term investments, net 62,729 247,355
Net change in receivable and payable for securities
transactions 13,677 870
Net change in other assets 114 121
------- -------
Net cash provided by (used in) investing activities 201,401 (32,797)
------- -------
Cash flows from financing activities
Policyholder account balances:
Deposits 67,412 85,251
Withdrawals (343,675) (354,440)
Dividends to parent (29,250) -
Other (37,834) 22,266
------- -------
Net cash used in financing activities (343,347) (246,923)
-------- --------
Net decrease in cash (413) (23,531)
Cash at the beginning of period 2,776 25,811
------- -------
Cash at the end of the period $ 2,363 $ 2,280
======= =======
See accompanying 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 acquisition of the Company on January 4, 1996 was accounted for
using the purchase method of accounting. Under the purchase method of
accounting, KILICO's assets and liabilities were 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 was 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 business 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.
The value of the business acquired is amortized over the estimated
contract life of the business acquired in relation to the present value
of estimated gross profits using current assumptions based on an
interest rate equal to the liability or contract rate on the value of
business acquired. The estimated amortization and accretion of interest
for the value of business acquired for each of the years through December
31, 2002 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>
1997 $ 168,692 $(29,414) $ 9,865 $ 149,144
1998 149,144 (25,949) 8,728 131,922
1999 131,922 (25,260) 7,672 114,335
2000 114,335 (23,560) 6,545 97,320
2001 97,320 (20,926) 5,613 82,007
2002 82,007 (19,075) 4,757 67,689
</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, 1997, this adjustment increased the value of business
6
<PAGE>
acquired and stockholder's equity by approximately $8.8 million and $5.7
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 1996 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 the purchase method of accounting.
RESULTS OF OPERATIONS
KILICO recorded improved net income of $23.2 million in the first six
months of 1997, compared with net income of $12.1 million in the first
six months of 1996. The improvement in net income in 1997, compared with
1996, was related to both an increase in operating earnings and improved
realized investment results.
The following table reflects the components of net income:
<TABLE>
Net income:
(in millions)
<CAPTION>
Six months ended
June 30
-----------------
1997 1996
---- ----
<S> <C> <C>
Operating earnings $ 17.3 $14.5
Net realized capital gains (losses) 5.9 (2.4)
---- ----
Net income $ 23.2 $12.1
===== =====
</TABLE>
The following table reflects the major components of realized capital gains
and losses included in net income. (See "INVESTMENTS" below.)
<TABLE>
Realized capital gains (losses)
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
---------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate-related gains $ 9.3 $ .6 $ 7.7 $ .9
Fixed maturity write-downs (1.0) (1.1) - (1.1)
Other gains (losses), net .8 (3.2) .5 (2.3)
---- ---- ---- ----
Realized investment gains (losses) 9.1 (3.7) 8.2 (2.5)
Income tax expense (benefit) 3.2 (1.3) 2.9 (.9)
---- ---- ---- ----
Net realized capital gains (losses) $ 5.9 $(2.4) $5.3 $(1.6)
==== ==== ==== ====
</TABLE>
Operating earnings (net income excluding realized capital gains and losses)
increased to $17.3 million in the first six months of 1997, compared with
$14.5 million in the first six months of 1996, primarily due to an increase
in spread revenue, caused by both an increase in investment income and a
decrease in interest credited. In addition, the 1997 first half results
were positively impacted by term life insurance premiums assumed from
Federal Kemper Life Assurance Company ("FKLA"), a wholly-owned subsidiary
of Kemper, and an increase in fees and other income. These improvements
were partially offset by an increase in claims incurred related to the
assumed reinsurance business discussed above and an increase in operating
expenses.
Investment income was positively impacted in the first half of 1997, compared
with the first half of 1996, by a $440 million repositioning of the bond
8
<PAGE>
portfolio during the second half of 1996, from lower yielding U.S.
treasuries and cash, to higher yielding U.S. corporate bonds and
asset-backed securities. Investment income in 1996 was also negatively
impacted by lower yielding investments and a higher than normal level of
cash and short-term investments held during the first quarter of 1996, as
proceeds from the sale of real estate investments at December 31, 1995 were
in the process of being reinvested.
Interest credited declined in 1997, compared with 1996, due to crediting
rate reductions in early 1997, as well as from a decrease in total annuity
liabilities in force due to surrenders and withdrawals during 1996 and 1997.
<TABLE>
Sales
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
---------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuities:
General account $ 67.2 $ 84.8 $ 33.3 $ 32.7
Separate account 133.7 105.5 62.3 62.9
----- ----- ----- -----
Total annuities 200.9 190.3 95.6 95.6
Life insurance:
Separate account bank
owned life insurance 80.0 - 80.0 -
Term life 9.0 .3 3.7 .2
Interest sensitive life .2 .2 .1 .2
----- ----- ----- -----
Total life 89.2 .5 83.8 .4
----- ----- ----- -----
Total sales $290.1 $190.8 $ 179.4 $ 96.0
===== ===== ===== =====
</TABLE>
Sales of annuity products consist of total deposits received. The decrease
in the first half of 1997 general account (fixed annuity) sales, compared
with the first half of 1996, is reflective of the current interest rate
environment as well as the strong stock market which has made variable
annuities more attractive to consumers in the first half of 1997.
The increase in separate account (variable sales) in the first half of 1997,
compared with the first half of 1996, was in part due to improvements 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, the addition of new investment fund managers and a
strong underlying stock market. Sales of variable annuities not only
increase administrative fees earned but they also pose minimal investment
risk for KILICO, as policyholders invest in one or more of several
underlying investment funds which invest in stocks and bonds.
Beginning in 1995, KILICO began to sell low-cost term life insurance
products offering initial level premiums for 5, 10, 15, and 20 years in
order to balance its product mix and asset-liability structure. In
December 1996, KILICO also assumed $14.4 billion (face amount) of term
life insurance premiums from FKLA. Through June 30, 1997, KILICO has
assumed $8.7 million of premiums and $8.0 million of claims under the
terms of the reinsurance agreement. Excluding the amounts assumed from
FKLA, KILICO's total term life sales, including new and renewal premiums,
amounted to $280 thousand in the first half of 1997, compared with $333
thousand in the first half of 1996. Face amount of new business issued
during 1997 and 1996 amounted to approximately $160 million and $136 million,
respectively.
Included in fees and other income are administrative fees received from
KILICO's separate account products of $16.8 million in the first six months
of 1997, compared with $12.1 million in the first six months of 1996.
Administrative fee
9
<PAGE>
revenue increased due to growth in average separate account assets and the
receipt of $80.0 million of bank owned life insurance ("BOLI") premiums
which generated $2.4 million of expense loads and fees. Other income also
included surrender charge revenue of $2.8 million in in the first six months
of 1997, compared with $2.9 million in the first six months of 1996.
<TABLE>
Policyholder surrenders and withdrawals
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
General account $326.0 $324.1 $179.8 $172.3
Separate account 110.1 91.3 48.9 44.8
------ ------ ----- -----
Total $436.1 $415.4 $228.7 $217.1
====== ====== ====== ======
</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 expects that the level of future surrender and withdrawal activity,
compared with such activity experienced in 1996, could be adversely
affected by a future rise in interest rates and by reductions to crediting
rates during the first quarter of 1997.
Commissions, taxes, licenses and fees and the deferral of insurance
acquisition costs increased in the first half of 1997, compared with the
first half of 1996, primarily due to an increase in commissions related to
the increase in sales in the first half of 1997.
Operating expenses increased in the first half of 1997, compared with the
first half of 1996, primarily due to an increase in headcount as the life
operations restaffed subsequent to the acquisition by Zurich and an
increase in data processing expenses related to new product introductions
and system enhancements.
Operating earnings were negatively impacted by an increase in the
amortization of insurance acquisition costs in the first half of 1997,
compared with the first half of 1996, primarily due to an increase in the
amount of deferred insurance acquisition costs as of June 30, 1997,
compared with June 30, 1996 due to deferrable expenses related to new
business production after January 4, 1996. 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. Deferred insurance acquisition costs are established
on all new policies sold after January 4, 1996.
The net amortization of the value of business acquired in the first half
of 1997, compared with the first half of 1996, was adversely impacted by
net realized capital gains in 1997, compared with net realized capital
losses in 1996. Net realized capital gains generally accelerate the
amortization of both the value of business acquired and deferred insurance
acquisition costs as they tend to decrease KILICO's projected future
estimated gross profits. Net realized capital losses generally defer such
amortization into future periods as they tend to increase KILICO's projected
future estimated gross profits.
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. KILICO is amortizing goodwill on a straight-line
basis over twenty-five years.
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, its evaluation of risk and return in various markets, consistency
with KILICO's business strategy and investment guidelines approved by the
board of directors, the interest rate environment, liability durations and
changes in market and business conditions. In addition, as previously
discussed, KILICO's strategy is to continue to reduce its overall exposure
to real estate-related investments and mortgage-backed fixed maturity
investments.
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
June 30, 1997 December 31, 1996
--------------- -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 11 .3% $ 74 1.6%
Fixed maturities:
Investment grade
NAIC <F1> Class 1 3,173 73.2 3,231 71.5
NAIC <F1> Class 2 593 13.7 621 13.7
Below investment grade:
Performing 8 .2 13 .3
Nonperforming 1 - 1 -
Joint venture mortgage loans 67 1.5 111 2.4
Third-party mortgage loans 116 2.7 107 2.4
Other real estate-related investments 54 1.2 50 1.1
Policy loans 284 6.5 288 6.4
Other 29 .7 24 .6
----- ----- ----- -----
Total $4,336 100.0% $4,520 100.0%
===== ===== ===== =====
<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, 1997
was $61.4 million, compared with $63.2 million at December 31, 1996. 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, 1997, investment-grade fixed maturities and cash and short-term
investments accounted for 87.2 percent of KILICO's invested assets and
cash, compared with 86.8 percent at December 31, 1996.
Approximately 35.8 percent of KILICO's investment-grade fixed maturities
at June 30, 1997 were mortgage-backed securities, down from 36.4 percent
at December 31, 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
11
<PAGE>
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 holding of such
investments over time.
As a result of the previously discussed 1996 repositioning of KILICO's
fixed maturity investment portfolio, as well as purchases in 1997,
approximately 9.4 percent of KILICO's investment-grade fixed maturities at
June 30, 1997 consisted of corporate asset-backed securities, compared
with 8.8 percent at December 31, 1996. The majority of KILICO's investments
in asset-backed securities were backed by manufactured housing loans, auto
loans and home equity loans.
Future investment income from mortgage-backed securities and other
asset-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, 1997, KILICO had unamortized
premiums and discounts of $22.1 million and $5.4 million, respectively,
related to mortgage-backed and asset-backed securities. Reductions to
investment income related to the amortization of premiums and discounts
amounted to $9.0 million during the first half of 1997, compared with $16.6
million in the first half of 1996. 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 for the remainder of 1997.
Real estate-related investments
The $236.9 million real estate portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 5.4 percent of cash and invested assets at June
30, 1997, compared with $267.7 million, or 5.9 percent, at December 31,
1996.
As reflected in the "Real estate portfolio" table on the following page,
KILICO has continued to fund both existing projects and legal commitments.
Total future legal commitments were $128.6 million at June 30, 1997,
compared with $197.4 million at December 31, 1996. As of June 30, 1997,
KILICO expects to fund approximately $36.7 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-exemmpt 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. KILICO
anticipates that as certain mortgages mature they could be rolled over,
restructured or foreclosed if not earlier disposed of.
Excluding the $6.7 million of real estate owned and $12.0 million of net
equity investments in joint ventures, KILICO's real estate loans totaled
$218.2 million at June 30, 1997. Of this amount, $175.4 million are on
accrual status with a weighted average interest rate of approximately 8.6
percent. Of these accrual loans, 18.4 percent have terms requiring current
periodic payments of their full contractual interest, 49.6 percent require
only partial payments or payments to the extent of cash flow of the
borrowers, and 32.0 percent defer all interest to maturity.
12
<PAGE>
<TABLE>
Real estate portfolio
(in millions)
<CAPTION>
Mortgage loans
----------------
Joint Third-
venture party
------- -----
<S> <C> <C>
Balance at December 31, 1996 $111.0 $106.6
Additions (deductions):
Fundings 2.7 -
Interest added to principal 2.8 .4
Sales/paydowns/distributions (40.7) (.2)
Operating gain - -
Realized investments gains 6.0 .1
Other transactions, net (15.1) 9.1
---- ----
Balance at June 30, 1997 $ 66.7 $116.0
====== ======
Real estate portfolio
(in millions)
<CAPTION>
Other real estate-related investments
------------------------------------------
Other Real estate Equity
loans<F2> owned investments Total
--------- ----------- ----------- ----
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 30.9 $ 7.5 $11.7 $267.7 <F1>
Additions (deductions):
Fundings 5.0 - - 7.7
Interest added to principal - - - 3.2
Sales/paydowns/distributions (.3) (1.9) (1.0) (44.1)
Operating gain - - .7 .7
Realized investments gains 1.9 .7 .6 9.3
Other transactions, net (2.0) .4 - (7.6)
---- ---- ---- ----
Balance at June 30, 1997 $ 35.5 $ 6.7 $12.0 $236.9 <F3>
===== ===== ===== =====
<FN>
<F1> Net of $11.8 million reserve and writedowns. Excludes $9.7 million
of real estate-related accrued interest.
<F2> The other real estate loans were notes receivable evidencing
financing, primarily to joint ventures. These loans were issued by
KILICO generally to provide financing for Kemper's or KILICO's joint
ventures.
<F3> Net of $11.4 million reserve and writedowns. Excludes $9.3 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, 1997. June 30, 1997.
<S> <C> <S> <C>
California 40.9 % Hotel 43.9 %
Hawaii 14.4 Land 26.8
Colorado 9.1 Residential 10.3
Oregon 8.6 Retail 3.0
Washington 8.4 Industrial 1.0
Florida 6.0 Office .8
Texas 4.7 Other 14.2
Michigan 3.4 -----
Ohio 3.1 Total 100.0 %
Other 1.4 =====
----
Total 100.0 %
=====
</TABLE>
Real estate markets in which KILICO has investments are generally
improving, particularly the hotel market. However, the Hawaiian market
continues to be soft and shows little signs of improvement.
Undeveloped land represented approximately 26.8 percent of KILICO's real
estate portfolio at June 30, 1997. 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
13
<PAGE>
construction and zoning permits and market demand for the permitted use of
the property. There can be no assurance that such permits will be obtained
as planned or at all, nor that such expenditures will occur as scheduled,
nor that Kemper's and KILICO's plans with respect to such projects may not
change substantially.
Approximately half 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, 1997, 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 42.9, percent of KILICO's
real estate portfolio. The Nesbitt ventures primarily consist of eleven
hotel properties. At June 30, 1997, KILICO had $100 thousand of
Nesbitt-related off-balance-sheet legal funding commitments outstanding.
At June 30, 1997, 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
$56.2 million, or 23.7 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 June 30, 1997. At June 30,
1997, MLP-related commitments accounted for approximately $8.8 million of
KILICO's off-balance-sheet legal commitments, which KILICO expects to fund.
At June 30, 1997, KILICO loans to and investment in projects with the
Prime Group, Inc. or its affiliates totaled approximately $(5.8) million.
Negative amounts represent KILICO's share of project-related operating
losses in excess of the Company's investment. Prime Group-related
commitments, however, accounted for $77.5 million of the off-balance-sheet
legal commitments at June 30, 1997, of which KILICO expects to fund $14.2
million.
Real estate outlook
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 December 31
1997 1996
--------- -------------
<S> <C> <C>
Potential problem loans <F1> $ 2.5 $ 3.2
Past due loans <F2> - -
Nonaccrual loans <F3> 48.3 43.5
Restructured loans (currently performing) <F4> - -
Real estate owned 6.7 7.5
----- -----
Total $ 57.5 $54.2
===== =====
______________________________________________________________
<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. Loans on nonaccrual status after reserves and write-downs
amounted to $42.8 million and $38.2 million at June 30, 1997 and
December 31, 1996, respectively.
14
<PAGE>
<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 evaluates its real estate-related investments (including accrued
interest) using an estimate of each investment's observable market price,
net of estimated costs to sell. Real estate-related reserves amounted to
$9.0 million and $9.5 million at June 30, 1997 and December 31, 1996,
respectively. 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-related investments are expected to continue to
decline further through future sales. Although the real estate-related
investments have been valued using an estimate of each investment's
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.
Net investment income
KILICO's pre-tax net investment income totaled $148.3 million in the first
half of 1997, compared with $146.9 million in the first half of 1996.
Included in pre-tax net investment income is KILICO's share of operating
gains and losses from equity investments in real estate consisting of other
income less depreciation, interest and other expenses. Such operating
results exclude interest expense on loans by KILICO which are on nonaccrual
status. As previously discussed, KILICO's net investment income in the
first half of 1997 has been positively impacted by a repositioning of the
bond portfolio during the second half of 1996.
KILICO's total foregone investment income before tax, on both non-performing
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
------------------
1997 1996
---- ----
<S> <C> <C>
Fixed maturities $ .3 $ .5
Real estate-related investments 1.9 .2
---- ----
Total $ 2.2 $ .7
==== ====
Basis points 10 5
==== ====
</TABLE>
Based on the level of nonaccrual real estate-related investments at June
30, 1997, KILICO estimates foregone investment income in 1997, will
increase compared with the 1996 level. Any increase in non-performing
securities, and either worsening or stagnating 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. Other mitigating
factors include marketing
15
<PAGE>
advantages that could result from KILICO having lower levels of investment
risk and higher financial strength claims-paying ability ratings.
Realized investment results
Reflected in net income are after-tax net realized investment gains of
$5.9 million for the first half of 1997, compared with net realized
investment losses of $2.4 million for the first half of 1996.
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 has been established, and is evaluated as of each
reported period end, to reduce the deferred tax asset for investment
losses to the amount that, based upon available evidence, is in
management's judgment more likely than not to be realized.
Interest rates
Interest rates at June 30, 1997 are relatively consistent with the level
experienced at December 31, 1996. Although interest rates have fluctuated
during the first half of 1997, they have stabilized as of the end of the
second quarter of 1997. Interest rate fluctuations can cause significant
fluctuations in both future investment income and future investment gains
and losses. Also, lower renewal crediting rates on annuities, compared
with competitors' higher new money crediting rates, have also influenced
certain annuity holders to seek alternative products. KILICO mitigates this
risk somehwat by charging surrender fees which decrease over time when
annuity holders withdraw funds prior to maturity on certain annuity products.
However, approximately 51 percent of KILICO's fixed and variable annuity
liabilities as of June 30, 1997 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, claims,
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, premium 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
16
<PAGE>
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.
Stockholder's equity
Stockholder's equity totaled $738.4 million at June 30, 1997, compared
with $751.0 million at December 31, 1996. The 1997 decrease in
stockholder's equity was primarily due to $29.3 million of cash dividends
paid to Kemper during the first half of 1997 and a $6.5 million increase
in KILICO's unrealized loss position, offset by net income of $23.2 million.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders of KILICO held on May 13,
1997, the following directors were elected:
Loren J. Alter
William H. Bolinder
David A. Bowers
Daniel L. Doctoroff
Markus Rohrbasser
John B. Scott
Paul H. Warren
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, 1997.
18
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended June 30, 1997
-----------------------------------------
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 12, 1997 By:/s/JOHN B. SCOTT
----------------------------------
John B. Scott
President, Chief Executive Officer and
Director
Date: August 12, 1997 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-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] JUNE-30-1997
[DEBT-HELD-FOR-SALE] 3,774,369
[DEBT-CARRYING-VALUE] 3,774,369
[DEBT-MARKET-VALUE] 3,774,369
[EQUITIES] 0
<MORTGAGES> 182,725
[REAL-ESTATE] 54,213
[TOTAL-INVEST] 4,333,750
[CASH] 2,363
[RECOVER-REINSURE] 404,082
[DEFERRED-ACQUISITION] 40,258
[TOTAL-ASSETS] 7,708,711
[POLICY-LOSSES] 4,083,355
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 15,540
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 735,909
[TOTAL-LIABILITY-AND-EQUITY] 7,708,711
[PREMIUMS] 9,129
[INVESTMENT-INCOME] 148,299
[INVESTMENT-GAINS] 9,050
[OTHER-INCOME] 21,870
[BENEFITS] 114,502
[UNDERWRITING-AMORTIZATION] 1,697
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 37,575
[INCOME-TAX] 14,401
[INCOME-CONTINUING] 23,174
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 23,174
[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
20
