UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 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 November 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 -
September 30, 1997 and December 31, 1996....................3
Consolidated Statement of Operations -
Nine months and three months ended
September 30, 1997 and 1996............................4
Consolidated Statement of Cash Flows -
Nine months ended September 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 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>
September 30 December 31
1997 1996
------------- -----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at
market (cost: September 30, 1997,
$3,762,070; December 31,1996, $3,929,650) $3,759,897 $3,866,431
Short-term investments 22,452 71,696
Joint venture mortgage loans 74,766 110,971
Third-party mortgage loans 102,547 106,585
Other real estate-related investments 46,873 50,157
Policy loans 283,624 288,302
Other invested assets 29,378 23,507
---------- ----------
Total investments 4,319,537 4,517,649
Cash 9,589 2,776
Accrued investment income 118,441 115,199
Reinsurance recoverable 393,775 427,165
Goodwill 237,042 244,688
Value of business acquired 150,324 189,639
Federal income tax recoverable 6,355 3,840
Deferred insurance acquisition costs 47,094 26,811
Receivable on sales of securities 12,973 32,569
Other assets and receivables 7,148 30,277
Assets held in separate accounts 2,626,614 2,127,247
---------- ----------
Total assets $7,928,892 $7,717,860
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $3,979,763 $4,256,521
Ceded future policy benefits 393,775 427,165
Benefits and claims payable to policyholders 21,928 36,142
Other accounts payable and liabilities 61,345 59,462
Deferred income taxes 49,604 60,362
Liabilities related to separate accounts 2,626,614 2,127,247
---------- ----------
Total liabilities 7,133,029 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 (624) (47,498)
Retained earnings 32,449 34,421
--------- ----------
Total stockholder's equity 795,863 750,961
--------- ----------
Total liabilities and stockholder's equity $7,928,892 $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>
Nine Months Ended Three Months Ended
September 30 September 30
------------------ ------------------
1997 1996 1997 1996
---- --- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income $221,249 $223,019 $ 72,950 $ 76,070
Realized capital gains (losses) 6,018 9,831 (3,032) 13,518
Premium income 13,067 389 3,938 150
Fees and other income 34,085 25,925 12,215 8,478
------- ------- ------- -------
Total revenue 274,419 259,164 86,071 98,216
------- ------- ------- -------
BENEFITS AND EXPENSES
Benefits and interest credited to
policyholders 157,809 173,069 51,889 57,512
Claims incurred 14,658 74 6,076 --
Commissions, taxes, licenses
and fees 25,887 20,173 8,389 6,819
Operating expenses 25,969 17,334 10,014 6,974
Amortization of value of
business acquired 18,555 18,603 6,743 11,582
Amortization of goodwill 7,648 7,648 2,549 2,549
Deferral of insurance
acquisition costs (23,999) (20,793) (8,209) (7,531)
Amortization of insurance
acquisition costs 2,435 3,025 738 2,097
------- ------- ------- ------
Total benefits and expenses 228,962 219,133 78,189 80,002
------- ------- ------- ------
Income before income tax expense 45,457 40,031 7,882 18,214
------- ------- ------- ------
Income tax expense (benefit)
Current 21,223 22,289 5,195 8,908
Deferred (3,044) (4,983) (1,417) (1,517)
------- ------- ------- ------
Total income tax expense 18,179 17,306 3,778 7,391
------- ------- ------- ------
Net income $ 27,278 $ 22,725 $ 4,104 $10,823
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 27,278 $ 22,725
Reconcilement of net income to net
cash provided:
Realized capital gains (6,018) (9,831)
Interest credited and other charges 153,726 168,467
Amortization of value of business acquired 18,555 18,603
Amortization of goodwill 7,648 7,648
Deferred insurance acquisition costs (21,564) (17,768)
Amortization of discount and premium
on investments 13,561 21,451
Deferred income taxes (3,044) (3,834)
Federal income taxes recoverable (2,515) 112,646
Other, net 19,601 (8,956)
------- --------
Net cash flow provided from operating
activities 207,228 311,151
------- --------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 155,760 212,636
Fixed maturities sold prior to maturity 462,556 512,297
Mortgage loans, policy loans and other
invested assets 229,747 127,850
Cost of investments purchased or loans
originated:
Fixed maturities (468,660) (854,695)
Mortgage loans, policy loans and other
invested assets (174,555) (130,723)
Short-term investments, net 49,244 194,704
Net change in receivable and payable for
securities transactions 19,596 (12,365)
Net change in other assets 148 140
------- -------
Net cash provided by investing activities 273,836 49,844
------- -------
Cash flows from financing activities
Policyholder account balances:
Deposits 106,565 111,587
Withdrawals (537,049) (526,547)
Dividends to parent (29,250) --
Other (14,517) 30,367
------- -------
Net cash used in financing activities (474,251) (384,593)
-------- --------
Net increase (decrease)in cash 6,813 (23,598)
Cash at the beginning of period 2,776 25,811
-------- -------
Cash at the end of the period $ 9,589 $ 2,213
======= =======
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 KILICO 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
- ----------- --------- ------------ ------------ ---------
<C> <C> <C> <C> <C>
1997 $ 168,692 $(33,007) $ 10,015 $ 145,700
1998 145,700 (26,040) 9,047 128,707
1999 128,707 (24,083) 7,969 112,593
2000 112,593 (22,009) 6,957 97,541
2001 97,541 (19,340) 6,041 84,242
2002 84,242 (18,040) 5,224 71,426
</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 September 30, 1997, this adjustment increased the value of
business
6
<PAGE>
acquired and stockholder's equity by approximately $.2 million and $.1
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 $27.3 million in the first nine
months of 1997, compared with net income of $22.7 million in the first
nine months of 1996. The improvement in net income in 1997, compared with
1996, was related to an increase in operating earnings offset by a
decrease in realized investment results.
The following table reflects the components of net income:
<TABLE>
Net income:
(in millions)
<CAPTION>
Nine months ended
September 30
-------------------
1997 1996
---- ----
<S> <C> <C>
Operating earnings $ 23.4 $ 16.3
Net realized capital gains 3.9 6.4
----- -----
Net income $ 27.3 $ 22.7
===== =====
</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>
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate-related gains (losses) $ 8.9 $ 8.5 $ (.4) $ 7.9
Fixed maturity write-downs (1.2) (1.2) (.2) (.1)
Other gains (losses), net (1.7) 2.5 (2.4) 5.7
---- ---- ---- ----
Realized investment gains (losses) 6.0 9.8 (3.0) 13.5
Income tax expense (benefit) 2.1 3.4 (1.0) 4.7
---- ---- ---- ----
Net realized capital gains (losses) $ 3.9 $ 6.4 $(2.0) $ 8.8
===== ===== ===== =====
</TABLE>
Operating earnings (net income excluding realized capital gains and losses)
increased to $23.4 million in the first nine months of 1997, compared with
$16.3 million in the first nine months of 1996, due to an increase in spread
revenue, caused by a decrease in interest credited, an increase in term life
insurance premium production and an increase in fees and other income,
offset by an increase in death claims incurred and operating expenses.
Investment income was negatively impacted in the first nine months of 1997,
compared with the first nine months of 1996, by a decrease in KILICO's
average total invested assets due to policyholder surrenders and
withdrawals during 1997 and dividends paid to KILICO's parent. This
decrease in investment income was somewhat offset by a $440 million
repositioning of the bond portfolio during the
8
<PAGE>
second half of 1996, from lower yielding U.S. treasuries and cash, to
higher yielding U.S. corporate bonds and asset-backed securities.
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>
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuities:
General account $106.6 $110.8 $ 39.4 $ 26.0
Separate account 197.2 173.9 64.1 68.4
----- ----- ----- -----
Total annuities 303.8 284.7 103.5 94.4
----- ----- ----- -----
Life insurance:.
Separate account bank
owned variable
universal life 80.0 - - -
Separate account variable
universal life 4.3 - 3.7 -
Term life 13.0 0.5 4.0 0.2
Interest sensitive life - 0.3 (0.2) 0.1
----- ----- ----- -----
Total life 97.3 0.8 7.5 0.3
----- ----- ----- -----
Total sales $401.1 $285.5 $111.0 $ 94.7
===== ===== ===== =====
</TABLE>
Sales of annuity products consist of total deposits received. The decrease
in the first nine months of 1997 general account (fixed annuity) sales,
compared with the first nine months of 1996, is reflective of the current
interest rate environment as well as the overall strong stock market which
has made variable annuities more attractive to consumers in the first nine
months of 1997.
The increase in separate account (variable sales) in the first nine months
of 1997, compared with the first nine months 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 overall 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 Federal Kemper Life Assurance Company
("FKLA"), an affiliated company. Through September 30, 1997, KILICO has
assumed $12.5 million of premiums and $13.1 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 $523 thousand in the first nine months of 1997, compared with
$558 thousand in the first nine months of 1996. Face amount of new
business issued during 1997 and 1996 amounted to approximately $301
million and $235 million, respectively.
9
<PAGE>
Beginning in late 1996 and in early 1997, KILICO introduced several new
separate account variable universal life insurance products; bank owned
and variable universal life and flexible premium variable universal life
insurance.
The separate account bank owned and variable universal life insurance
products are primarily marketed to banks, while the separate account
flexible premium variable universal life products are primarily sold to
individuals. In addition to the premiums shown in the table above, KILICO
also received an additional $1.0 billion of bank owned variable universal
life insurance premiums on October 31, 1997.
Included in fees and other income are administrative fees received from
KILICO's separate account products of $26.6 million in the first nine
months of 1997, compared with $18.4 million in the first nine months of
1996. Administrative fee revenue increased due to growth in average
separate account assets and the receipt of $80.0 million of bank owned
variable universal life insurance ("BOLI") premiums which generated $3.7
million of expense loads and fees. Other income also included surrender
charge revenue of $4.0 million in the first nine months of 1997, compared
with $4.2 million in the first nine months of 1996.
<TABLE>
Policyholder surrenders and withdrawals
(in millions)
<CAPTION>
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
General account $515.4 $491.6 $189.4 $167.5
Separate account 177.9 140.1 67.8 48.8
------ ------ ----- -----
Total $693.3 $631.7 $257.2 $216.3
====== ====== ====== ======
</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 1997, could be adversely
affected by a future rise in interest rates and by reductions to crediting
rates during 1997 as interest rates also declined.
Commissions, taxes, licenses and fees and the deferral of insurance
acquisition costs increased in the first nine months of 1997, compared
with the first nine months of 1996, primarily due to an increase in
commissions related to the increase in sales in the first nine months of
1997 and as a result of $2.0 million in premium taxes related to $80.0
million of BOLI premiums received in 1997.
Operating expenses increased in the first nine months of 1997, compared
with the first nine months 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.
The net amortization of the value of business acquired in the first nine
months of 1997 and 1996 were adversely impacted by net realized capital
gains. 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.
10
<PAGE>
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.
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>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 32 .7% $ 74 1.6%
Fixed maturities:
Investment grade
NAIC <F1> Class 1 3,148 72.7 3,231 71.5
NAIC <F1> Class 2 603 13.9 621 13.7
Below investment grade:
Performing 9 .2 13 .3
Nonperforming - - 1 -
Joint venture mortgage loans 75 1.7 111 2.4
Third-party mortgage loans 102 2.4 107 2.4
Other real estate-related investments 47 1.1 50 1.1
Policy loans 284 6.6 288 6.4
Other 29 .7 24 .6
----- ----- ----- -----
Total $4,329 100.0% $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
September 30, 1997 was $2.2 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 September 30, 1997, investment-grade fixed maturities and cash and
short-term investments accounted for 87.3 percent of KILICO's invested
assets and cash, compared with 86.8 percent at December 31, 1996.
Approximately 35.5 percent of KILICO's investment-grade fixed maturities
at September 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
11
<PAGE>
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 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
9.1 percent of KILICO's investment-grade fixed maturities at September 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 September 30, 1997,
KILICO had unamortized premiums and discounts of $20.9 million and $5.2
million, respectively, related to mortgage-backed and asset-backed
securities. Reductions to investment income related to the amortization of
premiums and discounts amounted to $13.6 million during the first nine
months of 1997, compared with $21.5 million in the first nine months 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 $224.2 million real estate portfolio held by KILICO, consisting of joint
venture and third-party mortgage loans and other real estate-related
investments, constituted 5.2 percent of cash and invested assets at
September 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 $124.6 million at September 30, 1997,
compared with $197.4 million at December 31, 1996. As of September 30, 1997,
KILICO expects to fund approximately $36.2 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. KILICO
anticipates that as certain mortgages mature they could be rolled over,
restructured or foreclosed if not earlier disposed of.
Excluding the $5.6 million of real estate owned and $11.9 million of net
equity investments in joint ventures, KILICO's real estate loans totaled
$206.7 million at September 30, 1997. Of this amount, $164.4 million are on
accrual status with a weighted average interest rate of approximately
8.7 percent. Of these accrual loans, 11.2 percent have terms requiring
current periodic payments of their full contractual interest, 52.7 percent
require only partial payments or payments to the extent of cash flow of the
borrowers, and 36.1 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 9.2 -
Interest added to principal 5.6 .4
Sales/paydowns/distributions (42.4) (13.7)
Operating gain - -
Realized investments gains 6.9 .1
Other transactions, net (15.5) 9.1
------ -----
Balance at September 30, 1997 $ 74.8 $102.5
====== =====
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 - - - 9.2
Interest added to principal - - - 6.0
Sales/paydowns/distributions (1.2) (3.0) (1.2) (61.5)
Operating gain - - .8 .8
Realized investments gains .9 .6 .4 8.9
Other transactions, net (1.2) .5 .2 (6.9)
----- ----- ----- -----
Balance at September 30, 1997 $ 29.4 $ 5.6 $11.9 $224.2 <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 $11.6 million reserve and writedowns. Excludes $7.9 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
September 30, 1997. September 30, 1997.
<S> <C> <S> <C>
California 38.2% Hotel 40.4%
Hawaii 14.8 Land 29.0
Colorado 9.6 Residential 13.1
Oregon 9.0 Retail 3.2
Washington 8.9 Industrial 1.0
Florida 6.3 Office 0.7
Texas 5.0 Other 12.6
Michigan 3.5 -----
Ohio 3.3 Total 100.0%
Other 1.4 =====
----
Total 100.0%
=====
</TABLE>
Real estate markets in which KILICO has investments are generally improving,
with the hotel market being particularly strong. However, the Hawaiian
market continues to be soft and continues to show little signs of
improvement.
Undeveloped land represented approximately 29.0 percent of KILICO's real
estate portfolio at September 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
13
<PAGE>
Kemper's and KILICO's plans with respect thereto, obtaining necessary
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 September 30, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have an interest constituted
approximately $88.1 million, or 39.3, percent of KILICO's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel
properties. At September 30, 1997, KILICO had $100 thousand of Nesbitt-
related off-balance-sheet legal funding commitments outstanding.
At September 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 $59.5 million, or 26.5 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 September 30,
1997. At September 30, 1997, MLP-related commitments accounted for
approximately $8.3 million of KILICO's off-balance-sheet legal commitments,
which KILICO expects to fund.
At September 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 $74.1 million of the off-balance-sheet legal
commitments at September 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>
September 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
Potential problem loans <F1> $ 2.0 $ 3.2
Past due loans <F2> - -
Nonaccrual loans <F3> 47.9 43.5
Restructured loans (currently performing)<F4> - -
Real estate owned 5.6 7.5
---- ----
Total $55.5 $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 $42.3 million and $38.2 million at September 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 $9.2
million and $9.5 million at September 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 be
reduced 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 $221.2 million in the first
nine months of 1997, compared with $223.0 million in the first nine months
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 nine months 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>
Nine months ended
September 30
------------------
1997 1996
---- ----
<S> <C> <C>
Fixed maturities $ .4 $ .6
Real estate-related investments 2.9 .4
---- ----
Total $3.3 $1.0
==== ====
Basis points 10 3
==== ====
</TABLE>
Based on the level of nonaccrual real estate-related investments at
September 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 have resulted from KILICO having lower levels of investment
risk and higher financial strength and claims-paying ability ratings.
Realized investment results
Reflected in net income are after-tax net realized investment gains of
$3.9 million and $6.4 million for the first nine months of 1997 and 1996,
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 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 September 30, 1997 are down compared with the level
experienced at December 31, 1996. Although interest rates have fluctuated
during the first nine months of 1997, they have been on a downward trend
since the first quarter of the year. 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 somewhat by charging surrender fees which decrease over
time when annuity holders withdraw funds prior to maturity on certain annuity
products. However, approximately 49 percent of KILICO's fixed and variable
annuity liabilities as of September 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.
In October 1997, Zurich announced a planned merger with B.A.T. Industries
plc. In connection with that merger, Zurich's and KILICO's claims-paying
ability ratings were negatively impacted by certain ratings agencies.
KILICO's claims-paying ability ratings were impacted as follows:
<TABLE>
<CAPTION>
Current Rating Current Status
<S> <C> <C>
A. M. Best Company A (Excellent) Affirmed
Moody's Investors Service Aa3 (Excellent) Under review--
possible downgrade
Duff & Phelps Credit
Rating Co. AA (Very High) Rating watch--
developing
Standard & Poor's AA- (Excellent) Affirmed
</TABLE>
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 $795.9 million at September 30, 1997, compared
with $751.0 million at December 31, 1996. The 1997 increase in
stockholder's equity was primarily due a $46.7 million decrease in KILICO's
unrealized loss position and net income of $27.3 million, offset by $29.3
million of cash dividends paid to Kemper during the first nine months of
1997.
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.
A report on Form 8-K was filed on September 12, 1997.
Such report indicated that KILICO dismissed its prior
auditors, KPMG Peat Marwick, L.L.P. and retained
Coopers & Lybrand, L.L.P. ("Coopers") as its new
auditors. The decision to change auditors, which was
approved by KILICO's Board of Directors, reflects the
fact that Coopers is Zurich's primary world-wide
auditor.
18
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended September 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: November 12, 1997 By: /s/JOHN B. SCOTT
--------------------------------------
John B. Scott,
President, Chief Executive Officer and
Director
Date: November 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] 9-MOS.
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] SEPTEMBER-30-1997
[DEBT-HELD-FOR-SALE] 3,759,897
[DEBT-CARRYING-VALUE] 3,759,897
[DEBT-MARKET-VALUE] 3,759,897
[EQUITIES] 0
<MORTGAGES> 177,313
[REAL-ESTATE] 46,873
[TOTAL-INVEST] 4,319,537
[CASH] 9,589
[RECOVER-REINSURE] 393,775
[DEFERRED-ACQUISITION] 47,094
[TOTAL-ASSETS] 7,928,892
[POLICY-LOSSES] 3,979,763
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 21,928
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 793,363
[TOTAL-LIABILITY-AND-EQUITY] 7,928,892
[PREMIUMS] 13,067
[INVESTMENT-INCOME] 221,249
[INVESTMENT-GAINS] 6,018
[OTHER-INCOME] 34,085
[BENEFITS] 172,467
[UNDERWRITING-AMORTIZATION] 2,435
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 45,457
[INCOME-TAX] 18,179
[INCOME-CONTINUING] 27,278
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 27,278
[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
