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 March 31, 1998.
[ ] 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 May 1, 1998, 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
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KEMPER INVESTORS LIFE INSURANCE COMPANY
FORM 10-Q
PART I. FINANCIAL STATEMENTS PAGE NO.
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997....................3
Consolidated Statements of Operations -
Three months ended March 31, 1998 and 1997...................4
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 1998 and 1997...................5
Consolidated Statements of Stockholder's Equity -
Three months ended March 31, 1998 and 1997...................6
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997...................7
Notes to Consolidated Financial Statements...................8
Management's Discussion and Analysis
Results of Operations.....................................10
Investments...............................................14
Liquidity and Capital Resources...........................20
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................21
Signatures..................................................22
2
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Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
March 31 December 31
1998 1997
------------ -----------
ASSETS
Investments:
Fixed maturities, available for sale, at
market (cost: March 31, 1998, $3,664,342;
December 31, 1997, $3,644,075) $3,693,119 $3,668,643
Short-term investments 19,666 236,057
Joint venture mortgage loans 76,737 72,663
Third-party mortgage loans 103,398 102,974
Other real estate-related investments 42,555 44,409
Policy loans 279,229 282,439
Equity securities 50,136 24,839
Other invested assets 21,199 20,820
---------- ----------
Total investments 4,286,039 4,452,844
Cash 9,359 23,868
Accrued investment income 118,022 117,789
Goodwill 226,209 229,393
Value of business acquired 134,104 138,482
Deferred insurance acquisition costs 67,035 59,459
Deferred income taxes 45,039 39,993
Reinsurance recoverable 372,866 382,609
Receivable on sales of securities 10,532 20,076
Other assets and receivables 6,737 3,187
Assets held in separate accounts 5,608,719 5,121,950
---------- ----------
Total assets $10,884,661 $10,589,650
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $3,762,660 $3,856,871
Ceded future policy benefits 372,866 382,609
Benefits and funds payable 203,066 150,524
Other accounts payable and liabilities 60,006 212,133
Liabilities related to separate accounts 5,608,719 5,121,950
---------- ----------
Total liabilities 10,007,317 9,724,087
---------- ----------
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 806,538 806,538
Accumulated other comprehensive income 15,188 12,637
Retained earnings 53,118 43,888
---------- ----------
Total stockholder's equity 877,344 865,563
---------- ----------
Total liabilities and stockholder's equity $10,884,661 $10,589,650
========== ==========
See accompanying notes to consolidated financial statements.
3
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Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(unaudited)
Three Months Ended
March 31
-------------------------
1998 1997
-------- --------
REVENUE
Net investment income $ 70,551 $ 74,249
Realized investment gains 1,854 889
Premium income 5,203 5,008
Separate account fees and charges 17,992 7,317
Other income 2,426 1,592
------- -------
Total revenue 98,026 89,055
------- -------
BENEFITS AND EXPENSES
Interest credited to policyholders 45,690 51,521
Claims and other policyholder
benefits 12,240 6,338
Taxes, licenses and fees 6,676 576
Commissions 7,209 7,447
Operating expenses 10,096 7,175
Deferral of insurance acquisition costs (8,890) (8,102)
Amortization of insurance acquisition costs 917 886
Amortization of value of business acquired 4,427 4,821
Amortization of goodwill 3,184 2,547
------- -------
Total benefits and expenses 81,549 73,209
------- -------
Income before income tax expense 16,477 15,846
Income tax expense (benefit)
Current 13,668 5,451
Deferred (6,421) 227
------- -------
Total income tax expense 7,247 5,678
------- -------
Net income $ 9,230 $ 10,168
======= =======
See accompanying notes to consolidated financial statements.
4
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Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Three Months Ended
March 31
------------------
1998 1997
----- -----
Net income $9,230 $10,168
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on investments
arising during period:
Unrealized holding gains (losses) on investments 276 (71,003)
Adjustment to value of business acquired (306) (17,516)
Adjustment to deferred insurance acquisition costs (488) (1,098)
------ -------
Total unrealized holding losses on investments
arising during period (518) (89,617)
------ -------
Less reclassification adjustments for gains (losses)
included in net income on the preceding page:
Adjustment for (gains) losses included in realized
investment gains (679) 25
Adjustment for amortization of premium on fixed
maturities included in net investment income 4,676 4,764
Adjustment for gains included in amortization
of value of business acquired 355 232
Adjustment for gains included in amortization
ofinsurance acquisition costs 91 30
Total reclassification adjustments for gains ------ -------
included in net income 4,443 5,051
------ -------
Other comprehensive income (loss), before related
income tax expense (benefit) 3,925 (84,566)
Related income tax expense (benefit) 1,374 (6,422)
------ -------
Other comprehensive income (loss), net of tax 2,551 (78,144)
------ -------
Comprehensive income (loss) $11,781 $(67,976)
====== ======
See accompanying notes to consolidated financial statements
5
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Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(in thousands)
(unaudited)
March 31 December 31
1998 1997
----- -----
Capital stock, beginning and end of period $ 2,500 $ 2,500
------- --------
Additional paid-in capital, beginning of period 806,538 761,538
Capital contributions from Parent - 45,000
------- --------
End of period 806,538 806,538
------- --------
Accumulated other comprehensive income, beginning
of period 12,637 (47,498)
Other comprehensive income, net of tax 2,551 60,135
------- --------
End of period 15,188 12,637
------- --------
Retained earnings, beginning of period 43,888 34,421
Net income 9,230 38,717
Dividend to parent - (29,250)
------- --------
End of period 53,118 43,888
------- --------
Total stockholder's equity $877,344 $865,563
======= =======
See accompanying notes to consolidated financial statements
6
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Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
March 31
-----------------
1998 1997
------ ------
Cash flows from operating activities
Net income $ 9,230 $ 10,168
Reconcilement of net income to net cash
provided (used):
Realized investment gains (1,854) (889)
Interest credited and other charges 44,817 56,636
Amortization of value of business acquired 4,427 4,821
Amortization of goodwill 3,184 2,547
Deferred insurance acquisition costs (7,973) (7,216)
Amortization of discount and premium on investments 4,676 4,764
Deferred income taxes (6,421) 227
Net change in current Federal income taxes (88,337) 3,840
Benefits and premium taxes due related to separate
account bank-owned life insurance (4,817) -
Other, net (3,869) 15,600
------- --------
Net cash flow provided(used)by operating activities (46,937) 90,498
------- --------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 105,759 63,773
Fixed maturities sold prior to maturity 192,617 65,398
Mortgage loans, policy loans and other invested
assets 18,217 22,048
Cost of investments purchased or loans originated:
Fixed maturities (322,247) (122,314)
Mortgage loans, policy loans and other invested
assets (38,884) (22,861)
Short-term investments, net 216,391 53,813
Net change in receivable and payable for securities
transactions (7,708) 12,000
Net change in other assets - 44
-------- --------
Net cash provided by investing activities 164,145 71,901
-------- --------
Cash flows from financing activities
Policyholder account balances:
Deposits 36,603 34,320
Withdrawals (175,916) (153,220)
Dividends to parent - (26,875)
Other 7,596 (18,285)
-------- --------
Net cash used in financing activities (131,717) (164,060)
-------- --------
Net decrease in cash (14,509) (1,661)
Cash at the beginning of period 23,868 2,776
-------- --------
Cash at the end of the period $ 9,359 $ 1,115
======== ========
See accompanying notes to consolidated financial statements.
7
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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"), and Insurance Partners, L.P. ("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 owned 80 percent and 20 percent, respectively, of
Kemper and therefore KILICO. On February 27, 1998, Zurich acquired
Insurance Partner's remaining 20 percent interest for cash. As a
result of this transaction, Kemper and KILICO became wholly-owned
subsidiaries of Zurich.
The acquisition of Kemper on January 4, 1996 was accounted for using
the purchase method of accounting. Under the purchase method of
accounting, KILICO's assets and liabilities have been marked to
their relative fair values as of the acquisition date. The
difference between the cost of acquiring KILICO and the net fair
values of KILICO's assets and liabilities as of the acquisition date
has been recorded as goodwill. KILICO began to amortize goodwill
during 1996 on a straight-line basis over twenty-five years. In
December of 1997, KILICO changed its amortization period to twenty
years in order to conform to Zurich"s accounting practices and
policies.
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.
8
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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,
2003 are as follows:
(in thousands)
Projected
Year ended Beginning Accretion of ending
December 31 balance Amortization interest balance
----------- ---------- ------------ ------------ ----------
1998 $ 143,744 $(25,801) $ 8,877 $ 126,820
1999 126,820 (23,621) 7,889 111,088
2000 111,088 (21,587) 6,899 96,400
2001 96,400 (19,100) 5,995 83,295
2002 83,295 (17,820) 5,157 70,632
2003 70,632 (15,897) 4,364 59,099
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 accumulated other comprehensive income,
net of income tax. As of March 31, 1998, the accumulated affects of this
adjustment increased the value of business acquired and accumulated other
comprehensive income by approximately $5.2 million and $3.4 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 1997 Annual Report on Form
10-K/A No. 1.
3. In June 1997, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues,
expenses, gains and losses). This statement requires that all items
required to be reported be displayed with the same prominence as other
financial statements. KILICO adopted SFAS No. 130 on January 1, 1998 and
accordingly restated 1997 results for comparative purposes. The impact
of implementation did not affect KILICO's reported net income before
reporting other comprehensive income. Other comprehensive income,
however, by design, could be materially different from reported net
income, as changes in unrealized appreciation and depreciation of
investments for example are now included as a component of reported
comprehensive income.
4. During December 1997, KILICO entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance
(Bermuda) Limited ("EPICENTRE"). Under the terms of this agreement,
KILICO ceded, on a yearly renewable term basis, ninety percent of the
net amount at risk (death benefit payable to the insured less the
insured's separate account cash surrender value) related to a
non-registered variable bank-owned life insurance contract ("BOLI"),
which is held in KILICO's separate accounts. During the first quarter
of 1998, KILICO ceded to EPICENTRE approximately $38.4 million of
separate account fees (cost of insurance charges) paid to KILICO by
these policyholders for the life insurance coverage provided under the
terms of each separate account contract. KILICO has also withheld
approximately $61.4 million of such funds due to EPICENTRE under the
terms of the reinsurance agreement as a component of benefits and funds
payable in the accompanying consolidated balance sheet as of March 31,
1998. KILICO remains primarily liable to its policyholders for these
amounts.
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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 net income of $9.2 million in the first quarter of
1998, compared with net income of $10.2 million in the first quarter
of 1997. The decrease in net income in the first quarter of 1998,
compared with the first quarter of 1997, was primarily related to a
decrease in operating earnings.
The following table reflects the components of net income:
Net income:
(in millions)
Three months ended
March 31
------------------
1998 1997
---- ----
Operating earnings before amortization of goodwill $ 11.2 $ 12.1
Amortization of goodwill (3.2) (2.5)
Net realized capital gains 1.2 .6
---- ----
Net income $ 9.2 $ 10.2
==== ====
The following table reflects the major components of net realized capital
gains and losses included in net income. (See "INVESTMENTS" below.)
Net realized capital gains (losses)
Three months ended
March 31
------------------
1998 1997
---- ----
Real estate-related gains $ .6 $ 1.6
Fixed maturity write-downs - (1.0)
Other gains, net 1.3 .3
---- ----
Realized investment gains 1.9 .9
Income tax expense .7 .3
---- ----
Net capital gains $ 1.2 $ .6
==== ====
Operating earnings before amortization of goodwill decreased to
$11.2 million in the first quarter of 1998, compared with $12.1
million in the first quarter of 1997. This decrease was primarily
attributable to increases in claims and nondeferrable operating
expenses, partially offset by increases in fees and other income and
spread revenue (investment income earned, less interest credited
incurred).
Spread revenue improved during 1998, due to a net decrease in
interest credited. Interest credited declined during 1998 due to
crediting rate reductions and investment income and interest
credited both declined during 1998, due to a decrease in total cash
and invested assets and future policy benefits, respectfully,
resulting from surrenders and withdrawals during 1997 and 1998.
Investment income in 1998, compared with 1997, was positively
impacted by a $45.0 million capital contribution received by KILICO
in December 1997.
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Sales
(in millions)
Three Months Ended
March 31
------------------
1998 1997
------ ------
Annuities:
General account $ 36.5 $ 33.9
Separate account 60.6 71.4
----- -----
Total annuities 97.1 105.3
----- -----
Life insurance:
Separate account bank-owned life insurance 158.7 -
Separate account variable universal life insurance 1.2 -
Term life 5.0 5.0
Interest-sensitive life .1 .4
----- -----
Total life 165.0 5.4
----- -----
Total sales $262.1 $110.7
===== =====
Sales of annuity products consist of total deposits received. Sales
of variable annuities increase administrative fees earned, and they
pose minimal investment risk for KILICO, as policyholders invest in
one or more of several underlying investment funds which invest in
stocks and bonds.
General account fixed annuity sales increased $2.6 million in the
first quarter of 1998, compared with the first quarter of 1997, while
separate account variable annuity sales decreased $10.8 million in
the first quarter of 1998, compared with the first quarter of 1997.
Separate account annuity sales declined during the first quarter of
1998, compared with 1997, as a result of a transition in KILICO's
sales initiatives in certain markets, as well as from certain tax
proposals, as further discussed below, which have negatively impacted
KILICO's sales in certain markets.
During late 1996, KILICO introduced a registered flexible individual
variable life insurance product and in mid 1997 KILICO began to
introduce several non-registered variable universal life insurance
contracts, a variable individual and group bank-owned life insurance
contract ("BOLI") and a series of variable individual universal life
insurance contracts. Sales of these separate account variable
products, like variable annuities, pose minimal investment risk for
KILICO as policyholders also invest in one or more underlying
investment funds which invest in stocks and bonds. KILICO receives
premium tax and DAC tax expense loads from certain contract holders,
as well as administrative fees and cost of insurance charges which
compensate KILICO for providing life insurance coverage to the
contractholders in excess of their cash surrender values. Face
amount of variable universal life insurance business in force, before
reinsurance, amounted to $59.9 billion at March 31, 1998, compared
with $59.6 billion at December 31, 1997 and $45.0 million at March
31, 1997.
In early 1998, the Clinton Administration's Fiscal Year 1998
Budget("Budget") was released and contained certain proposals to
change the taxation of non-qualified fixed and variable annuities and
variable life insurance contracts. It is currently unknown whether or
not such proposals will be accepted, amended or omitted in the final
1999 Budget approved by Congress. If the current Budget proposals
are accepted, certain of KILICO's non-qualified fixed and variable
annuities and certain of its variable life insurance products,
including BOLI and the non-registered individual variable universal
life insurance contracts introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those
customers who purchase them because of their favorable tax
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attributes. Additionally, sales of such products during 1998 have
been negatively impacted, and are expected to continue to be
adversely impacted, until the likelihood of the current proposals
being enacted into law is fully determined.
KILICO also sells low-cost term life insurance products offering
initial level premiums for 5, 10, 15, 20, and 30 years in order to
balance its product mix and asset-liability structure. In December
1996, KILICO assumed $14.4 billion (face amount) of term life
insurance premiums from Federal Kemper Life Assurance Company
("FKLA"), a wholly-owned subsidiary of Kemper. Through the first
three months of 1998 and 1997, KILICO assumed premiums of $4.8
million and $5.0 million, respectively, and $6.7 million and $4.3
million of claims, respectively, under the terms of the reinsurance
agreement with FKLA.
Excluding the amounts assumed from FKLA, KILICO's total term life
sales, including new and renewal premiums, amounted to $221 thousand
in the first quarter of 1998, compared with $194 thousand in the
first quarter of 1997.
Separate account fees and charges consist of the following as of
March 31, 1997 and 1998:
(in millions)
Three Months Ended
March 31
------------------
1998 1997
------ ------
Separate account fees on non-BOLI variable $ 9.5 $ 7.3
life and annuities
BOLI cost of insurance charges 4.3<F1> --
BOLI premium tax expense loads 4.2<F2> --
----- -----
Total $ 18.0 $ 7.3
===== =====
-------------------
[FN]
<F1> KILICO ceded $38.4 million of such charges to EPICENTRE during 1998.
<F2> There is a corresponding offset in taxes, licenses and fees.
<F3> No commissions were paid on BOLI.
</FN>
Separate account fees on non-BOLI variable life and annuities
increased during the first quarter of 1998, compared with 1997, due
to an increase in the market value of separate account assets and due
to new sales during 1997 and 1998.
Policyholder surrenders, withdrawals and death benefits were as follows:
(in millions)
Three Months Ended
March 31
-------------------
1998 1997
------ ------
General account $ 178.5 $ 146.2
Separate account 60.8 61.2
------ ------
Total $ 239.3 $ 207.4
====== ======
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.
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General account surrenders, withdrawals and death benefits increased
$32.3 million in the first quarter of 1998, compared with the first
quarter of 1997, reflecting an increase in claims as well as an
increase in overall surrenders and withdrawals. KILICO expects that
the level of surrender and withdrawal activity experienced in the
first quarter of 1998 should remain at a similar level through out
1998 given current projections for relatively stable interest rates.
Claims and other policyholder benefits increased $5.9 million in the
first quarter of 1998, compared with 1997, primarily due to BOLI-
related claims and benefits.
Taxes, licenses and fees increased during the first quarter of 1998,
compared with 1997, primarily relecting premium taxes on BOLI.
KILICO received a corresponding expense load related to these
premium taxes in separate account fees and other charges during the
first quarter of 1998.
Operating expenses increased $2.9 million in the first quarter of
1998, compared with first quarter of 1997, due to increases in head
count in the sales and underwriting departments, an increase in data
processing expenses related to ongoing projects, new product
development and year 2000 compliance costs.
The difference between the cost of acquiring KILICO and the net fair
value of KILICO's assets and liabilities as of January 4, 1996 was
recorded as goodwill. As previously mentioned, KILICO changed its
amortization period in December of 1997, from 25 years to 20 years,
in order to conform to Zurich's accounting practices and policies.
As a result of the change in amortization periods, KILICO recorded
an increase in amortization expense of $639 thousand in the first
quarter of 1998, compared with 1997.
12
<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.
Invested assets and cash
(in millions)
March 31, 1998 December 31, 1997
-------------- -----------------
Cash and short-term investments $ 29 .7% $ 260 5.8%
Fixed maturities:
Investment grade:
NAIC <F1> Class 1 3,029 70.5 3,004 67.1
NAIC <F1> Class 2 618 14.4 651 14.5
Below investment grade:
Performing 45 1.0 14 .3
Nonperforming 1 - - -
Joint venture mortgage loans 77 1.8 73 1.6
Third-party mortgage loans 103 2.4 103 2.3
Other real estate-related investments 43 1.0 44 1.0
Policy loans 279 6.5 282 6.3
Equity securities 50 1.2 25 .6
Other 21 .5 21 .5
----- ----- ----- -----
Total $4,295 100.0% $4,477 100.0%
===== ===== ===== =====
__________________________________________________________
[FN]
<F1> National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
</FN>
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
component of accumulated other comprehensive income, net of any
applicable income tax expense. The aggregate unrealized appreciation
on fixed maturities at March 31, 1998 was $28.8 million, compared
with $24.6 million at December 31, 1997. 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 March 31, 1998, investment-grade fixed maturities and cash and
short-term investments accounted for 85.6 percent of KILICO's
invested assets and cash, compared with 87.4 percent at December 31,
1997.
Approximately 33.4 percent of KILICO's investment-grade fixed
maturities at March 31, 1998 were mortgage-backed securities, down
from 35.1 percent at December 31, 1997, due to sales and paydowns
during 1998. 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
14
<PAGE>
and are expected to remain liquid. KILICO plans to continue to
reduce its holding of such investments over time.
Approximately 10.9 percent of KILICO's investment-grade fixed
maturities at March 31, 1998 consisted of corporate asset-backed
securities, compared with 10.8 percent at December 31, 1997. 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
March 31, 1998, KILICO had unamortized premiums and discounts of
$19.3 million and $5.0 million, respectively, related to mortgage-
backed and asset-backed securities. Reductions to investment income
related to the amortization of premiums and discounts amounted to
$4.7 million during the first quarter of 1998, compared with $4.8
million in the first quarter of 1997. 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 further reductions to future investment income
for the remainder of 1998.
Real estate-related investments
The $222.7 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 March 31, 1998, compared with $220.0 million, or
4.9 percent, at December 31, 1997.
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 declined to $60.8 million
at March 31, 1998, compared with $75.3 million at December 31, 1997,
primarily due to sales. As of March 31, 1998, KILICO expects to fund
approximately $6.4 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.
Excluding the $2.6 million of real estate owned and $18.9 million of net
equity investments in joint ventures, KILICO's real estate loans totaled
$201.2 million at March 31, 1998, after reserves and writedowns. Of this
amount, $159.5 million are on accrual status with a weighted average
interest rate of approximately 8.8 percent. Of these accrual loans,
9.4 percent have terms requiring current periodic payments of their full
contractual interest, 52.3 percent require only partial payments or
payments to the extent of cash flow of the borrowers, and 38.3 percent
defer all interest to maturity.
15
<PAGE>
Real estate portfolio
(in millions)
Mortgage loans
------------------
Joint Third-
venture party
-------- --------
Balance at December 31, 1997 $ 72.7 $ 103.0
Additions (deductions):
Fundings 1.1 -
Interest added to principal 3.1 .6
Sales/paydowns/distributions (.2) (.2)
Operating loss - -
Realized investments gains .5 -
Other transactions, net (.5) -
------ ------
Balance at March 31, 1998 $ 76.7 $ 103.4
Real estate portfolio
(in millions)
Other real estate-related investments
-------------------------------------------
Other Real estate Equity
loans<F2> owned investments Total
-------- ----------- ----------- ------
Balance at December 31, 1997 $ 21.1 $ 4.0 $ 19.2 $220.0 <F1>
Additions (deductions):
Fundings - - - 1.1
Interest added to principal - - - 3.7
Sales/paydowns/distributions - (1.4) - (1.8)
Operating loss - - (.3) (.3)
Realized investments gains - .1 - .6
Other transactions, net - (.1) - (.6)
----- ----- ----- -----
Balance at March 31, 1998 $ 21.1 $ 2.6 $ 18.9 $222.7 <F3>
===== ===== ===== =====
__________________________
[FN]
<F1> Net of $9.2 million reserve and writedowns. Excludes $9.5 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
for various purposes.
<F3> Net of $9.2 million reserve and writedowns. Excludes $8.0 million of
real estate-related accrued interest.
</FN>
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.
Geographic distribution as of Distribution by property type as of
March 31, 1998. March 31, 1998.
California 38.8 % Hotel 41.0 %
Hawaii 14.0 Land 29.1
Colorado 9.7 Residential 13.0
Oregon 9.1 Retail 3.2
Washington 9.0 Office 3.0
Florida 6.3 Industrial 1.0
Texas 5.1 Other 9.7
Michigan 3.6 -----
Ohio 3.3 100.0 %
Other states 1.1 =====
-----
Total 100.0 %
=====
Undeveloped land represented approximately 29.1 percent of KILICO's real
estate portfolio at March 31, 1998. 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 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.
16
<PAGE>
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 March 31, 1998, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real
estate developer, have ownership interests constituted approximately $88.7
million, or 39.8 percent, of KILICO's real estate portfolio. The Nesbitt
ventures consist of nine hotel properties and two office buildings. At
March 31, 1998, KILICO did not have any Nesbitt-related off-balance sheet
legal funding commitments outstanding.
At March 31, 1998, loans to and investment in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens
Mutual Casualty Company, a former affiliate, constituted approximately
$64.7 million, or 29.1 percent, of KILICO's real estate portfolio.
Kemper's interest is 75 percent as of March 31, 1998. At March 31, 1998,
MLP-related commitments accounted for approximately $6.3 million of
KILICO's off-balance sheet legal commitments, which KILICO expects to
fund.
At March 31, 1998, KILICO no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as
all such investments have been sold or written down to zero. However,
KILICO continues to have Prime Group-related commitments, which accounted
for $25.7 million of the off-balance-sheet legal commitments at March 31,
1998. KILICO does not expect to fund any of these commitments.
The remaining significant real estate-related investment amounted to $34.4
million at March 31, 1998 and consisted of various zoned and unzoned
residential commercial lots located in Hawaii, as well as a sewer
treatment plant which is located in the same geographical area as the
residential lots. The sewer treatment plant was sold in April 1998. Due
to certain negative zoning restriction developments in January 1997 and a
continuing economic slump in Hawaii, KILICO has placed these real estate-
related investments on nonaccural status. KILICO is currently pursuing
the zoning of all remaining unzoned properties, as well as pursuing steps
to sell all remaining zoned properties. However, due to the state of the
Hawaiian economy, which has lagged behind the economic expansion of most
of the rest of the United States, KILICO anticipates that it could be
several additional years until all of KILICO's investments in Hawaii are
completely disposed of.
17
<PAGE>
Real estate outlook
The following table is a summary of KILICO's troubled real
estate-related investments:
Troubled real estate-related investments
(before reserves and write-downs, except for real estate owned)
(in millions)
March 31 December 31
1998 1997
------------ -----------
Potential problem loans <F1> $ - $ -
Past due loans <F2> - -
Nonaccrual loans <F3>
(primarily Hawaiian properties) 47.3 47.4
Real estate owned 2.6 4.0
----- -----
Total $49.9 $51.4
===== =====
____________________________________________________________________________
[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 $41.7 million and $41.8 million at March 31, 1998 and
December 31, 1997, respectively.
</FN>
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. 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. 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 or if necessary
construction or zoning permits are not obtained.
Net investment income
KILICO's pre-tax net investment income totaled $70.6 million in the
first quarter of 1998, compared with $74.2 million in the first
quarter of 1997. 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.
18
<PAGE>
KILICO's total foregone investment income before tax, on both non-
performing fixed maturity investments and nonaccrual real estate-related
investments was as follows:
Foregone investment income
(dollars in millions)
Three months ended
March 31
------------------
1998 1997
---- ----
Fixed maturities $ .1 $ .1
Real estate-related investments 1.0 .9
---- ----
Total $1.1 $1.0
==== ====
Basis points 10 9
==== ====
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans
excluded from KILICO's share of joint venture operating results. Based on
the level of nonaccrual real estate-related investments at March 31, 1998,
KILICO estimates foregone investment income in 1998, will be comparable
with the 1997 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.
Realized investment results
Reflected in net income are after-tax net realized investment gains of
$1.2 million for the first quarter of 1998, compared with $.6 million for
the first quarter of 1997.
Unrealized gains and losses on fixed maturity investments are not
reflected in KILICO's net income. These changes in unrealized value are
included within accumulated other comprehensive income, net of any
applicable income taxes, in accordance with SFAS No. 130, as previously
discussed. 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.
19
<PAGE>
Interest rates
Interest rates have been relatively stable in the first quarter of 1998,
contributing to a slight increase in unrealized fixed maturity investment
gains. Interest rate fluctuations can cause significant fluctuations in
both future investment income and future realized and unrealized
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 43 percent of
KILICO's fixed and variable annuity liabilities as of March 31, 1998 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, premium income, separate account fees, 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.
20
<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 March 31, 1998.
21
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended March 31, 1998
--------------------------------------------
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: May 13, 1998 By: /s/JOHN B. SCOTT
-------------------------------------
John B. Scott
President, Chief Executive Officer and
Director
Date: May 13, 1998 By: /s/FREDERICK L. BLACKMON
-------------------------------------
Frederick L. Blackmon
Sr. Vice President and
Chief Financial Officer
22
<PAGE>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[MULTIPLIER] 1,000
[PERIOD-TYPE] 3-MOS.
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] MAR-31-1998
[DEBT-HELD-FOR-SALE] 3,693,119
[DEBT-CARRYING-VALUE] 3,693,119
[DEBT-MARKET-VALUE] 3,693,119
[EQUITIES] 50,136
<MORTGAGES> 180,135
[REAL-ESTATE] 42,555
[TOTAL-INVEST] 4,286,039
[CASH] 9,359
[RECOVER-REINSURE] 372,866
[DEFERRED-ACQUISITION] 67,035
[TOTAL-ASSETS] 10,884,661
[POLICY-LOSSES] 3,762,660
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 203,066
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 874,844
[TOTAL-LIABILITY-AND-EQUITY] 10,884,661
[PREMIUMS] 5,203
[INVESTMENT-INCOME] 70,551
[INVESTMENT-GAINS] 1,854
[OTHER-INCOME] 20,418
[BENEFITS] 57,930
[UNDERWRITING-AMORTIZATION] 917
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 16,477
<INCOME-TAX) 7,247
[INCOME-CONTINUING] 9,230
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 9,230
[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
23
