UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30, 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 August 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
<PAGE>
KEMPER INVESTORS LIFE INSURANCE COMPANY
FORM 10-Q
PART I. FINANCIAL STATEMENTS PAGE NO.
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 ..........................3
Consolidated Statements of Operations -
Six months and three months ended June 30, 1998 and 1997......4
Consolidated Statements of Comprehensive Income -
Six months and three months ended June 30, 1998 and 1997......5
Consolidated Statements of Stockholder's Equity -
Six months ended June 30, 1998 and 1997.......................6
Consolidated Statements of Cash Flows -
Six months ended June 30, 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..............................19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................20
Signatures.......................................................21
2
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
<CAPTION>
June 30 December 31
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
market (cost: June 30, 1998, $3,550,377;
December 31, 1997, $3,644,075) $3,591,991 $3,668,643
Short-term investments 41,806 236,057
Joint venture mortgage loans 67,868 72,663
Third-party mortgage loans 104,206 102,974
Other real estate-related investments 41,891 44,409
Policy loans 277,034 282,439
Equity securities 75,341 24,839
Other invested assets 21,264 20,820
---------- ----------
Total investments 4,221,401 4,452,844
Cash 20,785 23,868
Accrued investment income 121,452 117,789
Goodwill 223,023 229,393
Value of business acquired 124,780 138,482
Deferred insurance acquisition costs 78,420 59,459
Deferred income taxes 48,819 39,993
Reinsurance recoverable 361,172 382,609
Other assets and receivables 18,562 23,263
Assets held in separate accounts 5,941,104 5,121,950
---------- ----------
Total assets $11,159,518 $10,589,650
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $3,662,012 $3,856,871
Ceded future policy benefits 361,172 382,609
Benefits and funds payable 245,884 150,524
Other accounts payable and liabilities 49,694 212,133
Liabilities related to separate accounts 5,941,104 5,121,950
---------- ----------
Total liabilities 10,259,866 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 21,609 12,637
Retained earnings 69,005 43,888
---------- ----------
Total stockholder's equity 899,652 865,563
---------- ----------
Total liabilities and stockholder's equity $11,159,518 $10,589,650
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
--------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income $ 139,018 $ 148,299 $ 68,467 $ 74,050
Realized investment gains 17,527 9,050 15,673 8,161
Premium income 11,144 9,129 5,941 4,121
Separate account fees and charges 34,380 16,827 16,388 9,510
Other income 5,960 5,043 3,534 3,451
------- ------- ------- -------
Total revenue 208,029 188,348 110,003 99,293
------- ------- ------- -------
BENEFITS AND EXPENSES
Interest credited to policyholders 90,169 101,886 44,479 50,365
Claims and other policyholder
benefits 25,700 12,616 13,460 6,278
Taxes, licenses and fees 9,758 3,064 3,082 2,488
Commissions 18,049 14,434 10,840 6,987
Operating expenses 22,253 15,955 12,157 8,780
Deferral of insurance
acquisition costs (21,600) (15,790) (12,710) (7,688)
Amortization of insurance
acquisition costs 1,644 1,697 727 811
Amortization of value of
business acquired 11,548 11,812 7,121 6,991
Amortization of goodwill 6,370 5,099 3,186 2,552
------- ------- ------- -------
Total benefits and expenses 163,891 150,773 82,342 77,564
------- ------- ------- -------
Income before income tax expense 44,138 37,575 27,661 21,729
Income tax expense (benefit)
Current 32,679 16,028 19,011 10,577
Deferred (13,658) (1,627) (7,237) (1,854)
------- ------- ------- -------
Total income tax expense 19,021 14,401 11,774 8,723
------- ------- ------- -------
Net income $ 25,117 $ 23,174 $ 15,887 $ 13,006
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income $ 25,117 $ 23,174 $ 15,887 $ 13,006
Other comprehensive income (loss),
before tax:
Unrealized holding gains (losses)
on investments arising during
period:
Unrealized holding gains
(losses) on investments 10,522 (6,178) 10,246 64,826
Adjustment to value of business
acquired (5,487) (14,602) (5,181) 2,914
Adjustment to deferred insurance
acquisition costs (1,855) (1,057) (1,367) 41
------- ------- ------- ------
Total unrealized holding gains
(losses) on investments arising
during period 3,180 (21,837) 3,698 67,781
------- ------- ------- -------
Less reclassification adjustments
for gains(losses) included in net
income on the preceding page:
Adjustment for gains included in
realized investment gains (2,421) (978) (1,742) (1,003)
Adjustment for amortization of
premium on fixed maturities
included in net investment income 8,851 8,997 4,175 4,232
Adjustment for gains included in
amortization of value of business
acquired 3,333 2,454 2,978 2,223
Adjustment for gains included in
amortization of insurance
acquisition costs 860 412 769 381
Total reclassification
adjustments for ------- ------- ------- -------
gains included in net income 10,623 10,885 6,180 5,833
------- ------- ------- -------
Other comprehensive income (loss),
before related income tax expense
(benefit) 13,803 (10,952) 9,878 73,614
Related income tax expense (benefit) 4,831 (4,477) 3,457 1,945
------- ------- ------- -------
Other comprehensive income (loss),
net of tax 8,972 (6,475) 6,421 71,669
------- ------- ------- ------
Comprehensive income $ 34,089 $ 16,699 $ 22,308 $ 84,675
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(in thousands)
(unaudited)
<CAPTION>
June 30 December 31
1998 1997
------- -------
<S> <C> <C>
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 8,972 60,135
-------- --------
End of period 21,609 12,637
-------- --------
Retained earnings, beginning of period 43,888 34,421
Net income 25,117 38,717
Dividend to parent - (29,250)
-------- --------
End of period 69,005 43,888
-------- --------
Total stockholder's equity $899,652 $865,563
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30
-----------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities
Net income $ 25,117 $ 23,174
Reconcilement of net income to net cash provided:
Realized investment gains (17,527) (9,050)
Interest credited and other charges 88,303 101,886
Amortization of value of business acquired 11,548 11,812
Amortization of goodwill 6,370 5,099
Deferred insurance acquisition costs (19,956) (14,093)
Amortization of discount and premium on investments 8,851 8,997
Deferred income taxes (13,658) (1,627)
Net change in current Federal income taxes (97,823) 3,840
Benefits and premium taxes due related to separate
account bank-owned life insurance 40,163 -
Other, net (21,795) 11,495
------- --------
Net cash flow provided by operating activities 9,593 141,533
------- --------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 258,237 104,154
Fixed maturities sold prior to maturity 505,188 209,569
Equity securities 460 -
Mortgage loans, policy loans and other invested
assets 54,780 117,093
Cost of investments purchased or loans originated:
Fixed maturities (675,192) (229,921)
Equity securities (48,585) -
Mortgage loans, policy loans and other invested
assets (26,951) (76,014)
Short-term investments, net 194,251 62,729
Net change in receivable and payable for securities
transactions (677) 13,677
Net change in other assets - 114
-------- --------
Net cash provided by investing activities 261,511 201,401
-------- --------
Cash flows from financing activities
Policyholder account balances:
Deposits 72,626 67,412
Withdrawals (356,177) (343,675)
Dividends to parent - (29,250)
Other 9,364 (37,834)
-------- --------
Net cash used in financing activities (274,187) (343,347)
-------- --------
Net decrease in cash (3,083) (413)
Cash at the beginning of period 23,868 2,776
-------- --------
Cash at the end of the period $ 20,785 $ 2,363
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
7
<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"), 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.
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
<PAGE>
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:
<TABLE>
(in thousands)
<CAPTION>
Projected
Year ended Beginning Accretion of ending
December 31 balance Amortization interest balance
----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
1998 $ 143,744 $(31,301) $ 8,877 $ 121,320
1999 121,320 (23,621) 7,889 105,588
2000 105,588 (21,587) 6,899 90,900
2001 90,900 (19,100) 5,995 77,795
2002 77,795 (17,820) 5,157 65,132
2003 65,132 (15,897) 4,364 53,599
</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 accumulated other comprehensive income,
net of income tax. As of June 30, 1998, the accumulated affects of this
adjustment increased the value of business acquired and accumulated other
comprehensive income by approximately $7.4 million and $4.8 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 97 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 $77.3 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 $95.3 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 June 30, 1998. KILICO remains primarily liable to its
policyholders for these amounts.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
KILICO recorded net income of $25.1 million in the first six months of 1998,
compared with net income of $23.2 million in the first six months of 1997. The
increase in net income in the first six months of 1998, compared with the first
six months of 1997, was primarily related to an increase in realized capital
gains, partially offset by a decrease in operating earnings before amortization
of goodwill and an increase in goodwill amortization.
The following table reflects the components of net income:
<TABLE>
Net income:
(in millions)
<CAPTION>
Six months ended
June 30
------------------
1998 1997
---- ----
<S> <C> <C>
Operating earnings before amortization of goodwill $ 20.1 $ 22.4
Amortization of goodwill (6.4) (5.1)
Net realized capital gains 11.4 5.9
---- ----
Net income $ 25.1 $ 23.2
===== =====
</TABLE>
The following table reflects the major components of net realized capital gains
included in net income. (See "INVESTMENTS" below.)
<TABLE>
Net realized capital gains (losses)
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
----------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate-related gains $ 10.5 $ 9.3 $ 9.9 $ 7.7
Fixed maturity write-downs - (1.0) - -
Other gains, net 7.0 .8 5.7 .5
---- ---- ---- ----
Realized investment gains 17.5 9.1 15.6 8.2
Income tax expense 6.1 3.2 5.4 2.9
---- ---- ---- ----
Net realized capital gains $ 11.4 $ 5.9 $ 10.2 $ 5.3
===== ===== ==== ====
</TABLE>
Operating earnings before amortization of goodwill decreased to $20.1 million
in the first six months of 1998, compared with $22.4 million in the first six
months 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 a decrease in the liability for future policy benefits.
Investment income declined due to a decrease in invested assets. Invested
assets and the liability for future policy benefits both declined due to
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.
10
<PAGE>
<TABLE>
Sales
(in millions)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Annuities:
General account $ 71.9 $ 67.2 $ 35.4 $ 33.3
Separate account 128.3 133.1 67.7 61.7
----- ----- ----- -----
Total annuities 200.2 200.3 103.1 95.0
----- ----- ----- -----
Life insurance:
Separate account bank-owned life
insurance 422.7 80.0 264.0 80.0
Separate account variable universal
life insurance 6.8 .6 5.6 .6
Term life 11.1 9.0 6.1 4.0
Interest-sensitive life .1 .2 - (.2)
----- ----- ----- -----
Total life 440.7 89.8 275.7 84.4
----- ----- ----- -----
Total sales $ 640.9 290.1 $ 378.8 $ 179.4
===== ===== ===== =====
</TABLE>
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 $4.7 million in the first six
months of 1998, compared with the first six months of 1997, while separate
account variable annuity sales decreased $4.8 million in the first six months
of 1998, compared with the first six months of 1997. Separate account
annuity sales declined during the first six months 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, which had negatively impacted KILICO's
sales in certain markets during the first part of 1998.
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 $61.0 billion at June 30,
1998, compared with $59.6 billion at December 31, 1997 and $2.0 billion at
June 30, 1997.
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 six months of 1998 and 1997, KILICO assumed premiums of $10.7 million and
$8.7 million, respectively, and $10.7 million and $8.0 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 $449 thousand in the first
six months of 1998, compared with $280 thousand in the first six months of
1997.
11
<PAGE>
Separate account fees and charges consist of the following as of June 30, 1998
and 1997:
<TABLE>
(in millions)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
---------------- ------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Separate account fees on non-BOLI
variable life and annuities $ 18.9 $ 14.4 $ 9.4 $ 7.1
BOLI cost of insurance charges and
fees 9.4<F1> .4 5.1 .4
BOLI premium tax expense loads 6.1<F2> 2.0 1.9 2.0
----- ----- ----- -----
Total $ 34.4 $ 16.8 $ 16.4 $ 9.5
====== ====== ====== ======
- -------------------
<FN>
<F1> KILICO ceded $77.3 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>
</TABLE>
Separate account fees on non-BOLI variable life and annuities increased
during the first half 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.
<TABLE>
Policyholder surrenders, withdrawals and death benefits were as follows:
(in millions)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
----------------- -----------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
General account $ 352.2 $ 326.0 $ 173.7 $ 179.8
Separate account 127.4 110.1 66.6 48.9
------ ------ ------ ------
Total $ 479.6 $ 436.1 $ 240.3 $ 228.7
====== ====== ====== ======
</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.
General account surrenders, withdrawals and death benefits increased $26.2
million in the first six months of 1998, compared with the first six
months 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 six months 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 $13.1 million in the
first six months of 1998, compared with 1997, primarily due to BOLI-
related claims and benefits.
Taxes, licenses and fees increased during the first six months 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 six months of
1998.
12
<PAGE>
Commissions and the deferral of insurance acquisition costs increased
reflecting the overall increase in new business during 1998, compared with
1997.
Operating expenses increased $6.3 million in the first six months of 1998,
compared with first six months 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 $1.3 million in the first six months of 1998, compared with 1997.
13
<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.
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
June 30, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 63 1.5% $ 260 5.8%
Fixed maturities:
Investment grade:
NAIC <F1> Class 1 2,853 67.3 3,004 67.1
NAIC <F1> Class 2 683 16.1 651 14.5
Below investment grade:
Performing 56 1.3 14 .3
Nonperforming - - - -
Joint venture mortgage loans 68 1.6 73 1.6
Third-party mortgage loans 104 2.5 103 2.3
Other real estate-related investments 42 1.0 44 1.0
Policy loans 277 6.5 282 6.3
Equity securities 75 1.8 25 .6
Other 21 .4 21 .5
----- ----- ----- -----
Total $4,242 100.0% $4,477 100.0%
===== ===== ===== =====
__________________________________________________________
<FN>
<F1> National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
</FN>
</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 component of
accumulated other comprehensive income, net of any applicable income tax
expense. The aggregate unrealized appreciation on fixed maturities at June
30, 1998 was $41.6 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 June 30, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 84.9 percent of KILICO's invested assets and
cash, compared with 87.4 percent at December 31, 1997.
Approximately 31.6 percent of KILICO's investment-grade fixed maturities at
June 30, 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 and are
expected to remain liquid. KILICO plans to continue to reduce its holding
of such investments over time.
14
<PAGE>
Approximately 10.2 percent of KILICO's investment-grade fixed maturities at
June 30, 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 June 30, 1998, KILICO had
unamortized premiums and discounts of $17.2 million and $4.8 million,
respectively, related to mortgage-backed and asset-backed securities.
Reductions to investment income related to the amortization of premiums and
discounts amounted to $8.9 million during the first half of 1998, compared
with $9.0 million in the first half 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 $214.0 million real estate portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 5.1 percent of cash and invested assets at June
30, 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 $64.7 million at June 30, 1998,
compared with $75.3 million at December 31, 1997, primarily due to sales.
As of June 30, 1998, KILICO expects to fund approximately $6.3 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 $1.7 million of real estate owned and $15.3 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $197.0
million at June 30, 1998, after reserves and writedowns. Of this amount, $164.4
million are on accrual status with a weighted average interest rate of
approximately 8.9 percent. Of these accrual loans, 8.1 percent have terms
requiring current periodic payments of their full contractual interest, 53.8
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 38.1 percent defer all interest to maturity.
15
<PAGE>
<TABLE>
Real estate portfolio
(in millions)
<CAPTION>
Mortgage loans
----------------
Joint Third-
venture party
------- -------
<S> <C> <C>
Balance at December 31, 1997 $ 72.7 $103.0
Additions (deductions):
Fundings 1.1 -
Interest added to principal 3.1 1.4
Sales/paydowns/distributions (11.0) (.2)
Operating loss - -
Realized investments gains
(losses) 4.3 2.6
Other transactions, net (2.3) (2.6)
----- -----
Balance at June 30, 1998 $ 67.9 $104.2
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, 1997 $ 21.1 $ 4.0 $19.2 $220.0 <F1>
Additions (deductions):
Fundings - .2 - 1.3
Interest added to principal - - - 4.5
Sales/paydowns/distributions - (2.9) (3.1) (17.2)
Operating loss - - (.2) (.2)
Realized investments gains
(losses) 3.9 .3 (.6) 10.5
Other transactions, net (.1) .1 - (4.9)
----- ----- ----- -----
Balance at June 30, 1998 $ 24.9 $ 1.7 $15.3 $214.0 <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 $8.8 million reserve and writedowns. Excludes $9.1 million of
real estate-related accrued interest.
</FN>
</TABLE>
Real estate concentrations
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states
and in certain types of properties. In addition to these exposures, KILICO
also has exposures to certain real estate developers and partnerships.
<TABLE>
<CAPTION>
Geographic distribution as of Distribution by property type as of
June 30, 1998. June 30, 1998.
<S> <C> <S> <C>
California 40.3 % Hotel 43.1 %
Hawaii 11.4 Land 29.8
Colorado 10.2 Residential 12.7
Oregon 9.6 Retail 3.4
Washington 9.5 Office 1.9
Florida 5.4 Industrial 1.0
Texas 5.3 Other 8.1
Michigan 3.8 -----
Ohio 3.5 100.0 %
Other states 1.0 =====
-----
Total 100.0 %
=====
</TABLE>
Undeveloped land represented approximately 29.8 percent of KILICO's real estate
portfolio at June 30, 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 June 30, 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 $89.6 million, or 41.9
percent, of KILICO's real estate portfolio. The Nesbitt ventures consist of
nine hotel properties and two office buildings. At June 30, 1998, KILICO did
not have any Nesbitt-related off-balance sheet legal funding commitments
outstanding.
At June 30, 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 30.2 percent, of KILICO's real estate portfolio. Kemper's interest is 75
percent as of June 30, 1998. At June 30, 1998, MLP-related commitments
accounted for approximately $6.3 million of KILICO's off-balance sheet legal
commitments, which KILICO expects to fund.
At June 30, 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 June 30, 1998. KILICO does not expect
to fund any of these commitments.
The remaining significant real estate-related investment amounted to $28.1
million at June 30, 1998 and consisted of various zoned and unzoned residential
and commercial lots located in Hawaii. 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:
<TABLE>
Troubled real estate-related investments
(before reserves and write-downs, except for real estate owned)
(in millions)
<CAPTION>
June 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
Potential problem loans <F1> $ - $ -
Past due loans <F2> - -
Nonaccrual loans <F3>
(primarily Hawaiian properties) 38.2 47.4
Real estate owned 1.7 4.0
----- -----
Total $39.9 $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
$32.6 million and $41.8 million at June 30, 1998 and December 31, 1997,
respectively.
</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. 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.
Realized investment results
Reflected in net income are after-tax net realized investment gains of
$11.4 million for the first half of 1998, compared with $5.9 million for the
first half 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.
18
<PAGE>
Interest rates
Interest rates have been relatively stable in the first half 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 45 percent of KILICO's fixed and variable annuity liabilities as
of June 30, 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.
19
<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 six
months ended June 30, 1998.
20
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended June 30, 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: August 12, 1998 By: /s/JOHN B. SCOTT
----------------------------------
John B. Scott
President, Chief Executive Officer and
Director
Date: August 12, 1998 By: /S/FREDERICK L. BLACKMON
---------------------------------
Frederick L. Blackmon
Sr. Vice President and
Chief Financial Officer
21
<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] 6-MOS.
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] JUN-30-1998
[DEBT-HELD-FOR-SALE] 3,591,991
[DEBT-CARRYING-VALUE] 3,591,991
[DEBT-MARKET-VALUE] 3,591,991
[EQUITIES] 75,341
<MORTGAGES> 172,074
[REAL-ESTATE] 41,891
[TOTAL-INVEST] 4,221,401
[CASH] 20,785
[RECOVER-REINSURE] 361,172
[DEFERRED-ACQUISITION] 78,419
[TOTAL-ASSETS] 11,159,518
[POLICY-LOSSES] 3,662,012
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 245,884
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 897,152
[TOTAL-LIABILITY-AND-EQUITY] 11,159,518
[PREMIUMS] 11,144
[INVESTMENT-INCOME] 139,018
[INVESTMENT-GAINS] 17,527
[OTHER-INCOME] 40,340
[BENEFITS] 115,869
[UNDERWRITING-AMORTIZATION] 1,644
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 44,138
[INCOME-TAX] 19,021
[INCOME-CONTINUING] 25,117
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 25,117
[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
22
