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, 1999.
[ ] 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, 1999, 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 -
March 31, 1999 and December 31, 1998.........................3
Consolidated Statements of Operations -
Three months ended March 31, 1999 and 1998...................4
Consolidated Statements of Comprehensive Income (Loss)-
Three months ended March 31, 1999 and 1998...................5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998...................6
Notes to Consolidated Financial Statements......................7
Management's Discussion and Analysis
Results of Operations........................................9
Investments.................................................13
Liquidity and Capital Resources.............................16
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K......................18
Signatures.....................................................19
2
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
<CAPTION>
March 31 December 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
fair value (amortized cost: March 31, 1999,
$3,430,143; December 31, 1998,
$3,421,535) $ 3,452,289 $ 3,482,820
Trading account securities at fair value
(amortized cost: March 31, 1999, $117,058;
December 31, 1998, $99,095) 117,837 101,781
Short-term investments 32,072 58,334
Joint venture mortgage loans 68,937 65,806
Third-party mortgage loans 76,488 76,520
Other real estate-related investments 21,778 22,049
Policy loans 269,070 271,540
Equity securities 66,631 66,854
Other invested assets 24,521 23,645
---------- ----------
Total investments 4,129,623 4,169,349
Cash 10,204 13,486
Accrued investment income 127,335 124,213
Goodwill 213,465 216,651
Value of business acquired 118,453 118,850
Deferred insurance acquisition costs 105,215 91,543
Deferred income taxes 71,607 35,059
Reinsurance recoverable 336,061 344,837
Receivable on sales of securities 4,242 3,500
Other assets and receivables 21,493 23,029
Assets held in separate accounts 7,845,973 7,099,204
---------- ----------
Total assets $ 12,983,671 $ 12,239,721
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $ 3,860,075 $ 3,906,391
Benefits and funds payable 356,731 318,369
Other accounts payable and liabilities 77,288 61,898
Liabilities related to separate accounts 7,845,973 7,099,204
---------- ----------
Total liabilities 12,140,067 11,385,862
---------- ----------
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 804,347 804,347
Accumulated other comprehensive income 12,125 32,975
Retained earnings 24,632 14,037
---------- ----------
Total stockholder's equity 843,604 853,859
---------- ----------
Total liabilities and stockholder's equity $ 12,983,671 $ 12,239,721
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
March 31
-------------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUE
Net investment income $ 65,693 $ 70,551
Realized investment gains (losses) (965) 1,854
Premium income 5,688 5,203
Separate account fees and charges 22,646 17,992
Other income 2,584 2,426
------- -------
Total revenue 95,646 98,026
------- -------
BENEFITS AND EXPENSES
Interest credited to policyholders 41,546 45,690
Claims incurred and other policyholder
benefits 3,173 12,240
Taxes, licenses and fees 12,731 6,676
Commissions 12,693 7,209
Operating expenses 10,766 10,096
Deferral of insurance acquisition costs (14,325) (8,890)
Amortization of insurance acquisition costs 2,813 917
Amortization of value of business acquired 4,960 4,427
Amortization of goodwill 3,186 3,184
------- -------
Total benefits and expenses 77,543 81,549
------- -------
Income before income tax expense 18,103 16,477
Income tax expense (benefit)
Current 32,830 13,668
Deferred (25,322) (6,421)
------- -------
Total income tax expense 7,508 7,247
------- -------
Net income $ 10,595 $ 9,230
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
----- -----
<S> <C> <C>
Net income $ 10,595 $ 9,230
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on investments
arising during period:
Unrealized holding gains (losses) on
investments (40,358) 276
Adjustment to value of business acquired 4,251 (306)
Adjustment to deferred insurance acquisition
costs 2,139 (488)
-------- --------
Total unrealized holding losses on
investments arising during period (33,968) (518)
-------- --------
Less reclassification adjustments for items
included in net income:
Adjustment for (gains) losses included in
realized investment gains (losses) 2,115 679
Adjustment for amortization of premium on
fixed maturities included in net investment
income (3,674) (4,676)
Adjustment for gains included in amortization
of value of business acquired (311) (355)
Adjustment for gains included in amortization
of insurance acquisition costs (22) (91)
Total reclassification adjustments for items ------- -------
included in net income (1,892) (4,443)
------- -------
Other comprehensive income (loss), before related
income tax expense (benefit) (32,076) 3,925
Related income tax expense (benefit) (11,226) 1,374
------- -------
Other comprehensive income (loss), net of tax (20,850) 2,551
------- -------
Comprehensive income (loss) $(10,255) $ 11,781
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities
Net income $ 10,595 $ 9,230
Reconcilement of net income to net cash
provided(used):
Realized investment (gains) losses 965 (1,854)
Net change in trading account securities (18,011) -
Interest credited and other charges 40,957 44,817
Deferred insurance acquisition costs (11,512) (7,973)
Amortization of value of business acquired 4,960 4,427
Amortization of goodwill 3,186 3,184
Amortization of discount and premium on
investments 3,833 4,676
Deferred income taxes (25,323) (6,421)
Net change in current Federal income taxes 6,708 (88,337)
Benefits and premium taxes due related to
separate account bank-owned life insurance 36,897 (4,817)
Other, net 142 (3,869)
------- -------
Net cash flow provided by (used in) operating
activities 53,397 (46,937)
------- -------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 128,690 105,759
Fixed maturities sold prior to maturity 158,279 192,617
Equity securities 732 331
Mortgage loans, policy loans and other
invested assets 16,586 17,886
Cost of investments purchased or loans
originated:
Fixed maturities (300,295) (322,247)
Equity securities - (25,433)
Mortgage loans, policy loans and other
invested assets (11,786) (13,451)
Short-term investments, net 26,262 216,391
Net change in receivable and payable for
securities transactions (742) (7,708)
------- -------
Net cash provided by investing activities 17,726 164,145
------- -------
Cash flows from financing activities
Policyholder account balances:
Deposits 62,848 36,603
Withdrawals (141,344) (175,916)
Other 4,091 7,596
------- -------
Net cash used in financing activities (74,405) (131,717)
------- -------
Net decrease in cash (3,282) (14,509)
Cash at the beginning of period 13,486 23,868
------- -------
Cash at the end of the period $ 10,204 $ 9,359
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles.
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 1998 Annual
Report on Form 10-K.
3. KILICO, along with its affiliates Federal Kemper Life Assurance Company,
Zurich Life Insurance Company of America, Fidelity Life Association, A
Mutual Legal Reserve Company and Zurich Direct, Inc. operate under the
trade name Zurich Kemper Life. Zurich Kemper Life is segregated by
Strategic Business Unit ("SBU"). The SBU concept has each SBU
concentrate on a specific customer market. The SBU is the focal point
of Zurich Kemper Life, because it is at the SBU level that Zurich Kemper
Life can clearly identify customer segments and then work to understand
and satisfy the needs of each customer. The contributions of Zurich
Kemper Life's SBUs to consolidated revenues, operating results and
certain balance sheet data pertaining thereto, are shown in the
following tables on the basis of generally accepted accounting
principles.
Zurich Kemper Life is segregated into the Agency, Financial, Group
Retirement and Direct SBUs. The SBUs are not managed at the legal
entity level, but rather at the Zurich Kemper Life level. Zurich Kemper
Life's SBUs cross legal entity lines, as certain similar products are
sold by more than one legal entity.
7
<PAGE>
Summarized financial information for Zurich Kemper Life's SBUs are as follows:
<TABLE>
As of and for the period ending March 31, 1999:
(in thousands)
<CAPTION>
Group
Agency Financial Retirement Direct Total
------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues 90,520 57,285 33,743 8,955 190,503
====== ====== ====== ===== =======
Net income (loss) 4,781 6,716 2,139 (1,617) 12,019
====== ====== ====== ===== =======
Total assets 3,134,465 8,946,914 4,234,473 54,234 16,370,086
========= ========= ========= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Net
Revenue Income (Loss) Assets
------- ------------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above: 190,503 12,019 16,370,086
Less:
Revenue, net income & assets of FKLA 75,584 3,060 2,968,386
Revenue, net income & assets of ZLICA 13,208 1,233 414,970
Revenue, net (loss) & assets of Zurich
Direct 6,065 (2,869) 3,059
Totals per KILICO's consolidated
financial statements 95,646 10,595 12,983,671
====== ====== ==========
</TABLE>
<TABLE>
As of and for the period ending March 31, 1998:
(in thousands)
<CAPTION>
Group
Agency Financial Retirement Direct Total
------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues 96,957 60,672 33,900 7,867 199,396
====== ====== ====== ===== =======
Net income 3,408 7,076 3,208 1,148 14,840
====== ====== ====== ===== =======
Total assets 3,342,148 6,944,936 4,043,465 35,725 14,371,274
========= ========= ========= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Net
Revenue Income (Loss) Assets
------- ------------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above: 199,396 14,840 14,371,274
Less:
Revenue, net income & assets of FKLA 80,482 4,837 3,086,027
Revenue, net (loss) & assets of ZLICA 14,380 (542) 394,407
Revenue, net income & assets of Zurich
Direct 6,508 1,315 6,179
------- ------ ----------
Totals per KILICO's consolidated
financial statements 98,026 9,230 10,884,66
======= ====== ==========
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
KILICO recorded net income of $10.6 million in the first quarter of
1999, compared with net income of $9.2 million in the first quarter of
1998. The increase in net income in the first quarter of 1999, compared
with the first quarter of 1998, was primarily related to an increase in
operating earnings.
The following table reflects the components of net income:
<TABLE>
Net income:
(in millions)
<CAPTION>
Three months ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Operating earnings before amortization of goodwill $ 14.4 $ 11.2
Amortization of goodwill (3.2) (3.2)
Net realized capital gains (losses) (.6) 1.2
---- ----
Net income $ 10.6 $ 9.2
==== ====
</TABLE>
The following table reflects the major components of net realized capital
gains and losses included in net income.
<TABLE>
Net realized capital gains (losses)
<CAPTION>
Three months ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Real estate-related gains $ 1.3 $ .6
Fixed maturities (1.0) 1.1
Trading account securities-holding losses (1.9) -
Equity securities .7 .2
---- ----
Realized investment gains (losses) (.9) 1.9
Income tax expense (benefit) (.3) .7
---- ----
Net realized capital gains (losses) $ (.6) $ 1.2
==== ====
</TABLE>
Operating earnings before amortization of goodwill increased to $14.4
million in the first quarter of 1999, compared with $11.2 million in the
first quarter of 1998. This increase was primarily due to:
* an increase in separate account fees and charges
* a decrease in claims incurred and other policyholder benefits
* an increase in the deferral of insurance acquisition costs, offset by
* an increase in taxes, licenses and fees
* an increase in commissions and operating expenses
* an increase in amortization of insurance acquisition costs, and
* a decrease in spread revenue
9
<PAGE>
<TABLE>
Sales
(in millions)
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
----- -----
<S> <C> <C>
Annuities:
General account $ 62.5 $ 36.5
Separate account 95.6 60.6
----- -----
Total annuities 158.1 97.1
----- -----
Life insurance:
Separate account bank-owned life insurance ("BOLI") 667.2 158.7
Separate account variable universal life insurance 11.0 1.2
Term life 5.3 5.0
Interest-sensitive life - .1
----- -----
Total life 683.5 165.0
----- -----
Total sales $ 841.6 $ 262.1
===== =====
</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 $26.0 million in the
first quarter of 1999, compared with the first quarter of 1998, while
separate account variable annuity sales increased $35.0 million in the
first quarter of 1999, compared with the first quarter of 1998. The
increase in general account and separate account annuity sales was
primarily due to the introduction of a new variable annuity product
with both a variable option and a fixed option in the second half of
1998.
The increase in BOLI sales in 1999 was primarily due to the nature of
the BOLI product-high dollar volume per sale, low frequency of sales.
10
<PAGE>
<TABLE>
Separate account fees and charges consist of the following as of
March 31, 1999 and 1998:
(in millions)
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
------ ------
<S> <C> <C>
Separate account fees on non-BOLI variable $ 10.7 $ 9.5
life and annuities
BOLI cost of insurance charges and fees <F1> <F3> .5 4.3
BOLI premium tax expense loads <F2> 11.4 4.2
------ ------
Total $ 22.6 $ 18.0
====== ======
- -------------------
<FN>
<F1> KILICO ceded $46.0 million and $38.4 million of such charges to ZC
Life Reinsurance Limited ("ZC Life"), an affiliate, during 1999 and
1998, respectively.
<F2> There is a corresponding offset in taxes, licenses and fees.
<F3> No commissions were paid on BOLI.
</FN>
</TABLE>
BOLI cost of insurance charges and fees decreased $3.8 million in the first
quarter of 1999, compared with 1998, reflecting the increase in the
percentage ceded to ZC Life in 1998 from 90% to 100%.
<TABLE>
Policyholder surrenders, withdrawals and death benefits were as follows:
(in millions)
<CAPTION>
Three Months Ended
March 31
-------------------
1999 1998
------ ------
<S> <C> <C>
General account $ 135.5 $ 178.5
Separate account 115.0 60.8
------ ------
Total $ 250.5 $ 239.3
====== ======
</TABLE>
Reflecting the current interest rate environment and other
competitive market factors, KILICO adjusts its crediting rates on
interest-sensitive products over time in order to manage spread
revenue and policyholder surrender and withdrawal activity. KILICO
can also improve spread revenue over time by increasing investment
income.
General account surrenders, withdrawals and death benefits decreased
$43.0 million in the first quarter of 1999, compared with the first
quarter of 1998, reflecting a decrease in claims as well as a
decrease in overall surrenders and withdrawals.
Separate account surrenders, withdrawals and death benefits
increased $54.2 million in the first quarter of 1999, compared with
the first quarter of 1998. Contributing to this increase is a
partial withdrawal on a BOLI contract of $27.8 million during the
first quarter of 1999.
11
<PAGE>
Claims and other policyholder benefits decreased $9.1 million in the
first quarter of 1999, compared with 1998, primarily due to a
decrease in BOLI-related claims and benefits reflecting the 1998
amendment to the BOLI reinsurance agreement with ZC Life. Claims
assumed from FKLA also decreased $2.7 million during the first
quarter of 1999, compared to 1998.
Taxes, licenses and fees increased during the first quarter of 1999,
compared with 1998, primarily reflecting 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 1999.
Commissions expense and the deferral of insurance acquisition costs
increased in the first quarter of 1999, compared with the first
quarter of 1998, due to the higher level of sales, excluding BOLI.
Spread revenue decreased in the first quarter of 1999, compared with
the first quarter of 1998, due to a greater decrease in investment
income than in interest credited. Investment income decreased in
1999, compared with 1998, due to a decrease in cash and invested
assets from the 1998 levels reflecting negative operating cash flow
in 1998, the dividends paid to Kemper Corporation in December 1998,
and the reinvestment of 1998 sales proceeds and CMO prepayments at
lower yields due to the low interest rate environment in 1998. Net
investment income was also negatively impacted by the placement of a
real estate-related investment on non-accrual status effective
January 1, 1999. The decrease in interest credited was primarily
due to a decrease in policyholder liabilities due to surrender and
withdrawal activity in 1999 and 1998, and a decrease in crediting
rates during 1999 and 1998.
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.
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 42 1.0% $ 72 1.7%
Fixed maturities:
Investment grade:
NAIC <F1> Class 1 2,597 62.7 2,663 63.7
NAIC <F1> Class 2 770 18.6 724 17.3
Below investment grade:
Performing 85 2.1 96 2.3
Trading account securities 118 2.9 102 2.4
Joint venture mortgage loans 69 1.7 66 1.6
Third-party mortgage loans 76 1.8 76 1.8
Other real estate-related investments 22 .5 22 .5
Policy loans 269 6.5 271 6.5
Equity securities 67 1.6 67 1.6
Other 25 .6 24 .6
----- ----- ----- -----
Total $ 4,140 100.0% $ 4,183 100.0%
===== ===== ===== =====
__________________________________________________________
<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 March 31, 1999 was $22.1 million, compared with
$61.3 million at December 31, 1998. 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, 1999, investment-grade fixed maturities and cash and
short-term investments accounted for 82.3 percent of KILICO's invested
assets and cash, compared with 82.7 percent at December 31, 1998.
Approximately 25.1 percent of KILICO's investment-grade fixed
maturities at March 31, 1999 were mortgage-backed securities, down
from 28.0 percent at December 31, 1998, due to sales and paydowns
during 1999. KILICO plans to continue to reduce its holding of such
investments over time.
Approximately 16.4 percent of KILICO's investment-grade fixed
maturities at March 31, 1999 consisted of corporate asset-backed
securities, compared with 15.4 percent at December 31, 1998. The
majority of KILICO's investments in asset-backed securities were
backed by manufactured housing loans, auto loans and home equity
loans.
13
<PAGE>
Real estate-related investments
The $167.2 million real estate portfolio held by KILICO, consisting
of joint venture and third-party mortgage loans and other real
estate-related investments, constituted 4.1 percent of cash and
invested assets at March 31, 1999, compared with $164.4 million, or
3.9 percent, at December 31, 1998.
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>
March 31 December 31
1999 1998
------------ -----------
<S> <C> <C>
Potential problem loans <F1> $ - $ -
Past due loans <F2> - -
Nonaccrual loans <F3> 108.6 37.4
Real estate owned - -
----- -----
Total $ 108.6 $ 37.4
===== =====
____________________________________________________________________
<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 $86.6 million and $31.8 million at March 31, 1999 and
December 31, 1998, respectively.
</FN>
</TABLE>
KILICO's loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens, amounted to
$55.3 million (net of reserves) at March 31, 1999. The MLP's
underlying investment primarily consists of a water development
project located in California's Sacramento River Valley. This project
is currently in the final stages of a permit process with various
Federal and California State agencies which will determine the long-
term economic viability of the project. Due to management's desire
not to increase book value of the MLP over the 1998 levels, as
interest has historically been added to principal, the Company placed
these loans on non-accrual status effective January 1, 1999.
Net investment income
KILICO's pre-tax net investment income totaled $65.7 million in the
first quarter of 1999, compared with $70.6 million in the first
quarter of 1998. 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.
14
<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:
<TABLE>
Foregone investment income
(dollars in millions)
<CAPTION>
Three months ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Fixed maturities $ - $ .1
Real estate-related investments 2.6 1.0
---- ----
Total $2.6 $1.1
==== ====
Basis points 25 10
==== ====
</TABLE>
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. 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.
15
<PAGE>
Interest rates
Interest rates rose in the first quarter of 1999, after falling in the
fourth quarter of 1998, contributing to a significant decrease 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.
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.
Year 2000 Compliance
Many existing computer programs were originally designed without
considering the impact of the year 2000 and currently use only two digits
to identify the year in the date field. This issue affects nearly all
companies and organizations and could cause computer applications and
systems to fail or create erroneous results for any transaction with a
date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000
issue. Each company's costs and uncertainties will depend on a number of
factors, including its software and hardware, and the nature of the
industry. Companies must also coordinate with other entities with which
they electronically interact, including suppliers, customers, creditors
and other financial services institutions.
If a company does not successfully address its year 2000 issues, it could
face material adverse consequences in the form of lawsuits against the
company, lost business, erroneous results and substantial operating
problems after January 1, 2000.
KILICO has taken substantial steps over the last several years to ensure
that its systems will be compliant for the year 2000. Such steps have
included the replacement of older systems with new systems which are
already compliant. In 1996, KILICO replaced its investment accounting
system, and, in 1997, KILICO replaced its general ledger and accounts
payable system. KILICO has also ensured that new systems developed to
support new product introductions in 1997, 1998 and beyond are already
year 2000 compliant. Data processing expenses related solely to bringing
KILICO's systems in compliance with the year 2000 amounted to $290
thousand in the first quarter of 1999. KILICO anticipates that it will
cost an additional $480 thousand to bring all remaining systems into
compliance.
16
<PAGE>
KILICO's policy administration systems have been completely renovated to
be year 2000 compliant and are currently running in a test environment.
Approximately 95 percent of KILICO's ancillary systems confirmed to be
year 2000 compliant were in production at March 31, 1999. It is
anticipated that all such systems will be in production at May 31, 1999 or
sooner. Testing procedures have confirmed the performance, functionality,
and integration of converted or replaced platforms, applications,
databases, utilities and interfaces in an operational environment.
KILICO's testing and verification for year 2000 compliance has encompassed
the following:
* Mainframe computing systems
* Mainframe hardware and systems software
* PC/LAN computing systems
* PC/LAN hardware and systems software
* End-user computing systems
* Interfaces to and from third parties, and
* Other miscellaneous electronic non-information systems
KILICO has also taken steps requiring all other entities with which KILICO
electronically interacts, including suppliers and other financial services
institutions, to attest in writing to KILICO that their systems are year
2000 compliant.
If KILICO does not successfully address its year 2000 issues, it could
face material adverse consequences from lawsuits, lost business, erroneous
results and substantial operating problems after January 1, 2000.
Although KILICO fully expects to be year 2000 compliant by the close of
1999, KILICO is currently developing contingency plans to handle the most
reasonably likely worst case scenarios. These contingency plans are
scheduled for completion in the third quarter of 1999.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX.
Exhibit No.
-----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three
months ended March 31, 1999.
18
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended March 31, 1999
--------------------------------------------
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, 1999 By: /s/JOHN B. SCOTT
----------------------------------
John B. Scott
President, Chief Executive Officer and
Director
Date: May 13, 1999 By: /S/FREDERICK L. BLACKMON
---------------------------------
Frederick L. Blackmon
Sr. Vice President and
Chief Financial Officer
19
<PAGE>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 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-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] MAR-31-1999
[DEBT-HELD-FOR-SALE] 3,452,289
[DEBT-CARRYING-VALUE] 3,452,289
[DEBT-MARKET-VALUE] 3,452,289
[EQUITIES] 66,631
<MORTGAGES> 145,425
[REAL-ESTATE] 21,778
[TOTAL-INVEST] 4,129,623
[CASH] 10,204
[RECOVER-REINSURE] 336,061
[DEFERRED-ACQUISITION] 105,215
[TOTAL-ASSETS] 12,983,671
[POLICY-LOSSES] 3,860,075
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 356,731
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 841,104
[TOTAL-LIABILITY-AND-EQUITY] 12,983,671
[PREMIUMS] 5,688
[INVESTMENT-INCOME] 65,693
[INVESTMENT-GAINS] (965)
[OTHER-INCOME] 25,230
[BENEFITS] 44,719
[UNDERWRITING-AMORTIZATION] 2,813
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 18,103
<INCOME-TAX) 7,508
[INCOME-CONTINUING] 10,595
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 10,595
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
20
11
