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, 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 August 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 -
June 30, 1999 and December 31, 1998 ........................3
Consolidated Statements of Operations -
Six months and three months ended June 30, 1999 and 1998 ...4
Consolidated Statements of Comprehensive Income (Loss)-
Six months and three months ended June 30, 1999 and 1998 ...5
Consolidated Statements of Cash Flows -
Six months ended June 30, 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)
<CAPTION>
June 30 December 31
1999 1998
(unaudited)
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
fair value (amortized cost: June 30, 1999,
$3,366,661; December 31, 1998,
$3,421,535) $ 3,314,352 $3,482,820
Trading account securities at fair value
(amortized cost: June 30, 1999, $132,686;
December 31, 1998, $99,095) 129,623 101,781
Short-term investments 27,376 58,334
Joint venture mortgage loans 68,435 65,806
Third-party mortgage loans 64,139 76,520
Other real estate-related investments 24,774 22,049
Policy loans 264,618 271,540
Equity securities 64,077 66,854
Other invested assets 24,512 23,645
---------- ---------
Total investments 3,981,906 4,169,349
Cash 22,671 13,486
Accrued investment income 122,583 124,213
Goodwill 210,279 216,651
Value of business acquired 124,132 118,850
Deferred insurance acquisition costs 127,452 91,543
Federal income tax recoverable 32,075 -
Deferred income taxes 73,049 35,059
Reinsurance recoverable 326,552 344,837
Receivable on sales of securities - 3,500
Other assets and receivables 18,674 23,029
Assets held in separate accounts 8,083,141 7,099,204
---------- ---------
Total assets $13,122,514 $12,239,721
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $ 3,823,646 $3,906,391
Benefits and funds payable 383,375 318,369
Other accounts payable and liabilities 55,580 61,898
Liabilities related to separate accounts 8,083,141 7,099,204
---------- ---------
Total liabilities 12,345,742 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 (loss) (47,806) 32,975
Retained earnings 17,731 14,037
---------- ---------
Total stockholder's equity 776,772 853,859
---------- ---------
Total liabilities and stockholder's equity $ 13,122,514 $ 12,239,721
========== ==========
</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
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income $ 131,201 $ 139,018 $ 65,508 $ 68,467
Realized investment gains (losses) (2,944) 17,527 (1,979) 15,673
Premium income 10,878 11,144 5,190 5,941
Separate account fees and charges 36,706 34,380 14,060 16,388
Other income 5,969 5,960 3,385 3,534
------- ------- ------- -------
Total revenue 181,810 208,029 86,164 110,003
------- ------- ------- -------
BENEFITS AND EXPENSES
Interest credited to policyholders 81,284 90,169 39,738 44,479
Claims and other policyholder
benefits 9,048 25,700 5,875 13,460
Taxes, licenses and fees 13,833 9,758 1,102 3,082
Commissions 29,421 18,049 16,728 10,840
Operating expenses 22,661 22,253 11,895 12,157
Deferral of insurance acquisition
costs (33,100) (21,600) (18,775) (12,710)
Amortization of insurance acquisition
costs 3,608 1,644 795 727
Amortization of value of business
acquired 8,269 11,548 3,309 7,121
Amortization of goodwill 6,372 6,370 3,186 3,186
------- ------- ------- -------
Total benefits and expenses 141,396 163,891 63,853 82,342
------- ------- ------- ------
Income before income tax expense 40,414 44,138 22,311 27,661
Income tax expense (benefit)
Current 40,222 32,679 7,392 19,011
Deferred (23,502) (13,658) 1,820 (7,237)
------- ------- ------- -------
Total income tax expense 16,720 19,021 9,212 11,774
------- ------- ------- -------
Net income $ 23,694 $ 25,117 $ 13,099 $ 15,887
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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
------------------- ------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income $ 23,694 $ 25,117 $ 13,099 $ 15,887
Other comprehensive income (loss),
before tax:
Unrealized holding gains (losses)
on investments arising during
period:
Unrealized holding gains
(losses) on investments (114,094) 10,522 (73,736) 10,246
Adjustment to value of business
acquired 12,953 (5,487) 8,702 (5,181)
Adjustment to deferred
insurance acquisition costs 6,708 (1,855) 4,569 (1,367)
------- ------- ------- ------
Total unrealized holding
gains (losses) on investments
arising during period (94,433) 3,180 (60,465) 3,698
------- ------- ------- -------
Less reclassification adjustments
for items included in net income:
Adjustment for (gains) losses
included in realized investment
gains (losses) 7,967 2,421 5,852 1,742
Adjustment for amortization of
premium on fixed maturities
included in net investment
income (6,825) (8,851) (3,151) (4,175)
Adjustment for gains included in
amortization of value of
business acquired (598) (3,333) (287) (2,978)
Adjustment for (gains) losses
included in amortization of
insurance acquisition costs 292 (860) 314 (769)
Total reclassification ------- ------- ------- -------
adjustments for items
included in net income 836 (10,623) 2,728 (6,180)
------- ------- ------ -------
Other comprehensive income (loss),
before related income tax expense
(benefit) (95,269) 13,803 (63,193) 9,878
Related income tax expense
(benefit) (14,488) 4,831 (3,262) 3,457
------- ------- ------- -------
Other comprehensive income (loss),
net of tax (80,781) 8,972 (59,931) 6,421
------- ------- ------- -------
Comprehensive income (loss) $ (57,087) $ 34,089 $ (46,832) $ 22,308
======= ======= ======= =======
</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>
Six Months Ended
June 30
-----------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities
Net income $23,694 $25,117
Reconcilement of net income to net cash provided(used):
Realized investment (gains) losses 2,944 (17,527)
Net change in trading account securities (33,477) -
Interest credited and other charges 79,879 88,303
Deferred insurance acquisition costs (29,492) (19,956)
Amortization of value of business acquired 8,269 11,548
Amortization of goodwill 6,372 6,370
Amortization of discount and premium on investments 7,156 8,851
Deferred income taxes (23,503) (13,658)
Net change in current Federal income taxes (52,393) (97,823)
Benefits and premium taxes due related to separate
account bank-owned life insurance 63,849 40,163
Other, net (5,312) (21,795)
------- -------
Net cash flow provided by operating activities 47,986 9,593
------- -------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 210,552 258,237
Fixed maturities sold prior to maturity 695,091 505,188
Equity securities 1,645 460
Mortgage loans, policy loans and other invested
assets 47,079 54,780
Cost of investments purchased or loans originated:
Fixed maturities (860,285) (675,192)
Equity securities - (48,585)
Mortgage loans, policy loans and other invested
assets (24,790) (26,951)
Short-term investments, net 30,958 194,251
Net change in receivable and payable for securities
transactions 20,767 (677)
------- -------
Net cash provided by investing activities 121,017 261,511
------- -------
Cash flows from financing activities
Policyholder account balances:
Deposits 159,011 72,626
Withdrawals (303,350) (356,177)
Dividends to parent (20,000) -
Other 4,521 9,364
------- ------
Net cash used in financing activities (159,818) (274,187)
------- -------
Net increase (decrease) in cash 9,185 (3,083)
Cash at the beginning of period 13,486 23,868
------- ------
Cash at the end of the period $22,671 $20,785
======= =======
</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 presentation 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 Institutions,
Retirement Solutions 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 June 30, 1999:
(in thousands)
<CAPTION>
Financial Retirement
Agency Institutions Solutions Direct Total
--------- -------------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Total revenues $ 179,958 $ 106,220 $ 68,599 $ 20,830 $ 375,607
========= ========= ======== ======== =========
Net income (loss) $ 19,746 $ 16,879 $ 5,252 $ (2,440) $ 39,437
========= ========= ======== ======== =========
Total assets $ 3,054,067 $ 9,382,556 $ 4,311,762 $ 68,724 $16,817,109
=========== =========== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Net
Revenue Income (Loss) Assets
------- ------------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above: $ 375,607 $ 39,437 $ 16,817,109
Less:
Revenue, net income & assets of FKLA 151,547 16,307 3,260,258
Revenue, net income & assets of ZLICA 26,279 4,622 430,679
Revenue, net (loss) & assets of Zurich
Direct 15,971 (5,186) 3,658
--------- -------- ------------
Totals per KILICO's consolidated
financial statements $ 181,810 $ 23,694 $ 13,122,514
========= ======== ============
</TABLE>
<TABLE>
As of and for the period ending June 30, 1998:
(in thousands)
<CAPTION>
Financial Retirement
Agency Institutions Solutions Direct Total
------ ------------ ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 200,236 $ 126,326 $ 73,739 $ 14,393 $ 414,694
========= ========= ======== ======== =========
Net income $ 12,503 $ 15,586 $ 9,855 $ 1,773 $ 39,717
========= ========= ======== ======== =========
Total assets $ 3,313,185 $ 7,058,722 $ 4,206,985 $ 29,155 $14,608,047
=========== =========== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Net
Revenue Income (Loss) Assets
------- ------------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above: $ 414,694 $ 39,717 $ 14,608,047
Less:
Revenue, net income & assets of FKLA 166,178 13,599 3,045,393
Revenue, net (loss) & assets of ZLICA 28,758 (642) 399,066
Revenue, net income & assets of Zurich
Direct 11,729 1,643 4,070
--------- -------- ------------
Totals per KILICO's consolidated
financial statements $ 208,029 $ 25,117 $ 11,159,518
========= ======== ============
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
KILICO recorded net income of $23.7 million in the first six months of
1999, compared with net income of $25.1 million in the first six months of
1998. The decrease in net income in the first six months of 1999, compared
with the first six months of 1998, was primarily related to a net realized
capital loss during 1999, significantly offset by an increase in operating
earnings.
The following table reflects the components of net income:
<TABLE>
<CAPTION>
Net income:
(in millions)
Six months ended
June 30
------------------
1999 1998
---- ----
<S> <C> <C>
Operating earnings before amortization
of goodwill $32.0 $20.1
Amortization of goodwill (6.4) (6.4)
Net realized capital gains (losses) (1.9) 11.4
---- ----
Net income $23.7 $25.1
==== ====
</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)
(in millions)
<CAPTION>
Six months ended Three months ended
June 30 June 30
----------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate-related $ 3.4 $ 10.5 $ 2.1 $ 9.9
Fixed maturities (2.7) 3.4 (1.7) 2.3
Trading account securities-
realized gains .2 - .2 -
Trading account securities-
holding losses (5.7) - (3.8) -
Equity securities .9 2.3 .2 2.1
Other 1.0 1.3 1.0 1.3
---- ---- ---- ----
Realized investment
gains (losses) (2.9) 17.5 (2.0) 15.6
Income tax expense(benefit) (1.0) 6.1 (.7) 5.4
---- ---- ---- ----
Net realized capital
gains (losses) $ (1.9) $ 11.4 $ (1.3) $ 10.2
===== ===== ==== ====
</TABLE>
Operating earnings before amortization of goodwill increased to $32.0
million in the first six months of 1999, compared with $20.1 million in
the first six months of 1998. This increase was primarily due to:
- an increase in spread revenue (net investment income less interest
credited to policyholders)
- 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,
- a decrease in the amortization of value of business acquired, offset by
- an increase in taxes, licenses and fees and commissions, and
- an increase in amortization of insurance acquisition costs
9
<PAGE>
<TABLE>
Sales
(in millions)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Annuities:
General account $ 158.6 $ 71.9 $ 96.1 $ 35.4
Separate account 215.1 128.3 119.5 67.7
----- ----- ----- -----
Total annuities 373.7 200.2 215.6 103.1
----- ----- ----- -----
Life insurance:
Separate account bank-owned life
insurance 696.1 422.7 28.9 264.0
Separate account variable
universal life insurance 15.2 6.8 4.2 5.6
Term life 10.5 11.1 5.2 6.1
Interest-sensitive life .9 .1 .9 -
----- ----- ----- -----
Total life 722.7 440.7 39.2 275.7
----- ----- ----- -----
Total sales $ 1,096.4 $ 640.9 $ 254.8 $ 378.8
======= ====== ====== ======
</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 $86.7 million in the first
six months of 1999, compared with the first six months of 1998, while
separate account variable annuity sales increased $86.8 million in the
first six months of 1999, compared with the first six months 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 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 June 30,
1999 and 1998:
<CAPTION>
(in millions)
Six Months Ended Three Months Ended
June 30 June 30
---------------- -----------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Separate account fees on non-BOLI
variable life and annuities $ 22.2 $ 18.9 $ 11.5 $ 9.4
BOLI cost of insurance charges
and fees 3.1<F1> 9.4<F1> 2.6 5.1
BOLI premium tax expense loads 11.4<F2> 6.1<F2> .- 1.9
----- ----- ----- ----
Total $ 36.7 $ 34.4 $ 14.1 $ 16.4
====== ====== ====== ======
-------------------
<FN>
<F1> KILICO ceded $83.7 million and $77.3 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. No
commissions were paid on BOLI.
</FN>
</TABLE>
Separate account fees on non-BOLI variable life and annuities increased
during the first half of 1999, compared with 1998, primarily due to new sales
during 1998 and 1999.
BOLI cost of insurance changes and fees decreased in the first half of 1999,
compared with 1998, reflecting the increase in the percentage
ceded to ZC Life in 1998 from 90 percent to 100 percent.
BOLI premium tax expense loads increased in 1999, compared with 1998,
due to the increase in BOLI sales in 1999.
<TABLE>
Policyholder surrenders, withdrawals and death benefits were as follows:
(in millions)
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
----------------- ------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
General account $ 270.1 $ 352.2 $ 134.6 $ 173.7
Separate account 222.5 127.4 107.5 66.6
------ ------ ------ -----
Total $ 492.6 $ 479.6 $ 242.1 $ 240.3
====== ====== ===== =====
</TABLE>
Reflecting the current interest rate environment and other competitive
market factors, KILICO adjusts its crediting rates on interestsensitive
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
$82.1 million in the first half of 1999, compared with the first half
of 1998, reflecting a decrease in death benefits as well as a decrease
in overall surrenders and withdrawals.
Separate account surrenders, withdrawals and death benefits increased
$95.1 million in the first half of 1999, compared with the first half
of 1998. Contributing to this increase is a partial withdrawal on a
BOLI contract of $39.8 million during the first half of 1999.
11
<PAGE>
Claims and other policyholder benefits decreased $16.7 million in the
first half 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 half of 1999, compared with
1998.
Taxes, licenses and fees increased during the first half 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 half of 1999.
Commissions expense and the deferral of insurance acquisition costs
increased in the first half of 1999, compared with the first half of
1998, due to the higher level of sales, excluding BOLI.
The amortization of the value of business acquired decreased during the
first half of 1999, compared with 1998, due to lower realized capital
gains on pre-purchase investments which caused less accelerated
amortization of the value of business acquired during the first half of
1999, compared with 1998.
Spread revenue increased in the first half of 1999, compared with the
first half of 1998, due to a lesser 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 the surrender and withdrawal activity in 1999 and
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>
June 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 50 1.3% $ 72 1.7%
Fixed maturities:
Investment grade:
NAIC <F1> Class 1 2,402 60.0 2,663 63.7
NAIC <F1> Class 2 815 20.4 724 17.3
Below investment grade:
Performing 97 2.4 96 2.3
Trading account securities 130 3.2 102 2.4
Joint venture mortgage loans 68 1.7 66 1.6
Third-party mortgage loans 64 1.6 76 1.8
Other real estate-related investments 25 .6 22 .5
Policy loans 265 6.6 271 6.5
Equity securities 64 1.6 67 1.6
Other 25 .6 24 .6
----- ----- ----- -----
Total $4,005 100.0% $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 depreciation on fixed maturities at
June 30, 1999 was $52.3 million, compared with unrealized appreciation of
$61.3 million at December 31, 1998. KILICO does not record a net
deferred tax benefit for the aggregate unrealized depreciation on
investments. Fair values are sensitive to movements in interest rates
and other economic developments and can be expected to fluctuate, at
times significantly, from period to period.
At June 30, 1999, investment-grade fixed maturities and cash and short-
term investments accounted for 81.7 percent of KILICO's invested assets
and cash, compared with 82.7 percent at December 31, 1998.
Approximately 21.3 percent of KILICO's investment-grade fixed maturities
at June 30, 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 16.8 percent of KILICO's investment-grade fixed maturities
at June 30, 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 $157.3 million real estate portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-
related investments, constituted 3.9 percent of cash and invested assets
at June 30, 1999, compared with $164.4 million, or 3.9
percent, at December 31, 1998.
Real estate outlook
<TABLE>
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)
<CAPTION>
June 30 December 31
1999 1998
----------------------
<S> <C> <C>
Potential problem loans<F1> $ - $ -
Past due loans<F2> - -
Nonaccrual loans<F3> 104.4 37.4
Real estate owned - -
----- ----
Total $ 104.4 $ 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 $82.4 million and $31.8 million at June 30, 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 June 30, 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 $131.2 million in the
first six months of 1999, compared with $139.0 million in the first six
months 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>
<TABLE>
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)
<CAPTION>
Six months ended
June 30
-----------------
1999 1998
---- ----
<S> <C> <C>
Fixed maturities $ - $ .3
Real estate-related investments 5.1 1.6
---- ----
Total $5.1 $ 1.9
==== ====
Basis points 24 8
==== ====
</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 half of 1999, after falling in the fourth
quarter of 1998. This contributed to a significant decrease from the
aggregate unrealized fixed maturity investment gain position at December 31,
1998, to the aggregate unrealized loss position at June 30, 1999. 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 service 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 $337 thousand
in the first half of 1999. KILICO anticipates that it will cost an
additional $141 thousand to bring all remaining systems into compliance.
16
<PAGE>
KILICO's policy administration systems have been completely renovated to be
year 2000 compliant, have been tested and have been placed back into
production as of June 30, 1999. All of KILICO's ancillary systems confirmed
to be year 2000 compliant were in production at June 30, 1999. 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 six
months ended June 30, 1999.
18
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended June 30, 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: August 13, 1999 By: /s/GALE K. CARUSO
---------------------------------
Gale K. Caruso
President, Chief Executive Officer and
Director
Date: August 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] 6-MOS.
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] JUN-30-1999
[DEBT-HELD-FOR-SALE] 3,314,352
[DEBT-CARRYING-VALUE] 3,314,352
[DEBT-MARKET-VALUE] 3,314,352
[EQUITIES] 64,077
<MORTGAGES> 132,574
[REAL-ESTATE] 24,774
[TOTAL-INVEST] 3,981,906
[CASH] 22,671
[RECOVER-REINSURE] 326,552
[DEFERRED-ACQUISITION] 124,132
[TOTAL-ASSETS] 13,122,514
[POLICY-LOSSES] 3,823,646
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 383,375
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 774,272
[TOTAL-LIABILITY-AND-EQUITY] 13,122,514
[PREMIUMS] 10,878
[INVESTMENT-INCOME] 131,201
[INVESTMENT-GAINS] (2,944)
[OTHER-INCOME] 42,675
[BENEFITS] 90,332
[UNDERWRITING-AMORTIZATION] 3,608
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 40,414
<INCOME-TAX) 16,720
[INCOME-CONTINUING] 23,694
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 23,694
[EPS-BASIC] 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
