UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30,
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 November 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 -
September 30, 1999 and December 31, 1998...............3
Consolidated Statements of Operations -
Nine months and three months ended September 30, 1999
and 1998...............................................4
Consolidated Statements of Comprehensive Income (Loss)-
Nine months and three months ended September 30, 1999
and 1998...............................................5
Consolidated Statements of Cash Flows -
Nine months ended September 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>
September 30 December 31
1999 1998
(unaudited)
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
fair value (amortized cost: September 30,
1999, $3,341,115; December 31, 1998,
$3,421,535) $ 3,260,445 $3,482,820
Trading account securities at fair value
(amortized cost: September 30, 1999,
$143,953; December 31, 1998, $99,095) 139,490 101,781
Short-term investments 32,902 58,334
Joint venture mortgage loans 67,338 65,806
Third-party mortgage loans 63,979 76,520
Other real estate-related investments 24,705 22,049
Policy loans 263,903 271,540
Equity securities 62,032 66,854
Other invested assets 24,858 23,645
---------- ----------
Total investments 3,939,652 4,169,349
Cash 18,975 13,486
Accrued investment income 126,053 124,213
Goodwill 207,093 216,651
Value of business acquired 123,676 118,850
Deferred insurance acquisition costs 144,495 91,543
Federal income tax recoverable 33,968 -
Deferred income taxes 64,824 35,059
Reinsurance recoverable 319,071 344,837
Receivable on sales of securities - 3,500
Other assets and receivables 19,135 23,029
Assets held in separate accounts 8,174,741 7,099,204
---------- ----------
Total assets $13,171,683 $12,239,721
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $ 3,789,748 $3,906,391
Benefits and funds payable 413,947 318,369
Other accounts payable and liabilities 61,139 61,898
Liabilities related to separate accounts 8,174,741 7,099,204
---------- ----------
Total liabilities 12,439,575 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) (73,940) 32,975
Retained earnings (deficit) (799) 14,037
---------- ----------
Total stockholder's equity 732,108 853,859
---------- ----------
Total liabilities and stockholder's
equity $ 13,171,683 $ 12,239,721
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
--------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income $ 196,943 $ 205,910 $ 65,742 $ 66,892
Realized investment gains (losses) (10,787) 26,478 (7,843) 8,951
Premium income 15,868 16,422 4,990 5,278
Separate account fees and charges 49,374 50,206 12,668 15,826
Other income 8,713 7,765 2,744 1,805
------- ------- ------- -------
Total revenue 260,111 306,781 78,301 98,752
------- ------- ------- -------
BENEFITS AND EXPENSES
Interest credited to policyholders 122,047 134,147 40,763 43,978
Claims and other policyholder
benefits 12,079 35,973 3,031 10,273
Taxes, licenses and fees 16,018 10,956 2,185 1,198
Commissions 47,511 29,131 18,090 11,082
Operating expenses 33,891 32,781 11,230 10,528
Deferral of insurance acquisition
costs (52,595) (34,760) (19,495) (13,160)
Amortization of insurance
acquisition costs 7,699 5,135 4,091 3,491
Amortization of value of business
acquired 12,189 17,907 3,920 6,359
Amortization of goodwill 9,558 9,558 3,186 3,188
------- ------- ------- -------
Total benefits and expenses 208,397 240,828 67,001 76,937
------- ------- ------- ------
Income before income tax expense 51,714 65,953 11,300 21,815
Income tax expense (benefit)
Current 38,613 40,942 (1,609) 8,263
Deferred (17,063) (13,093) 6,439 565
------- ------- ------- -------
Total income tax expense 21,550 27,849 4,830 8,828
------- ------- ------- -------
Net income $ 30,164 $ 38,104 $ 6,470 $ 12,987
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income $ 30,164 $ 38,104 $ 6,470 $ 12,987
Other comprehensive income (loss),
before tax:
Unrealized holding gains (losses)
on investments arising during
period:
Unrealized holding gains (losses)
on investments (140,670) 64,374 (26,576) 53,852
Adjustment to value of business
acquired 16,683 (14,165) 3,730 (8,678)
Adjustment to deferred insurance
acquisition costs 8,915 (4,656) 2,207 (2,801)
------- ------- ------- ------
Total unrealized holding gains
(losses) on investments
arising during period (115,072) 45,553 (20,639) 42,373
------- ------- ------- -------
Less reclassification adjustments
for items included in net income:
Adjustment for (gains) losses
included in realized investment
gains (losses) 13,039 1,800 5,072 (621)
Adjustment for amortization of
premium on fixed maturities
included in net investment income (9,022) (12,882) (2,197) (4,031)
Adjustment for (gains) losses
included in amortization of value
of business acquired (331) (4,379) 267 (1,046)
Adjustment for (gains) losses
included in amortization of
insurance acquisition costs 859 (900) 567 (40)
Total reclassification
adjustments for ------- ------- ------- -------
items included in net income 4,545 (16,361) 3,709 (5,738)
------- ------- ------- -------
Other comprehensive income (loss),
before related income tax expense
(benefit) (119,617) 61,914 (24,348) 48,111
Related income tax expense (benefit) (12,702) 21,670 1,786 16,839
------- ------- ------ -------
Other comprehensive income (loss),
net of tax (106,915) 40,244 (26,134) 31,272
------- ------- ------- ------
Comprehensive income (loss) $(76,751) $78,348 $(19,664) $44,259
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
<TABLE>
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30
-----------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities
Net income $30,164 $38,104
Reconcilement of net income to net cash
provided(used):
Realized investment (gains) losses 10,787 (26,478)
Net change in trading account securities (44,739) -
Interest credited and other charges 119,646 131,438
Deferred insurance acquisition costs (44,896) (29,625)
Amortization of value of business acquired 12,189 17,907
Amortization of goodwill 9,558 9,558
Amortization of discount and premium on
investments 9,510 12,883
Deferred income taxes (17,064) (13,094)
Net change in current Federal income taxes (54,254) (89,674)
Benefits and premium taxes due related to
separate account bank-owned life insurance 96,355 59,207
Other, net 9,078 (9,054)
------- -------
Net cash flow provided by operating activities 136,334 101,172
------- -------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 281,197 373,576
Fixed maturities sold prior to maturity 1,014,262 688,702
Equity securities 11,377 571
Mortgage loans, policy loans and other
invested assets 59,554 106,515
Cost of investments purchased or loans originated:
Fixed maturities (1,233,431) (998,849)
Equity securities (8,703) (74,171)
Mortgage loans, policy loans and other
invested assets (37,154) (39,987)
Short-term investments, net 25,432 210,600
Net change in receivable and payable for
securities transactions 9,718 6,790
------- -------
Net cash provided by investing activities 122,252 273,747
------- -------
Cash flows from financing activities
Policyholder account balances:
Deposits 270,261 123,413
Withdrawals (480,783) (507,283)
Dividends to parent (45,000) -
Other 2,425 15,846
------- -------
Net cash used in financing activities (253,097) (368,024)
------- -------
Net increase in cash 5,489 6,895
Cash at the beginning of period 13,486 23,868
------- -------
Cash at the end of the period $18,975 $30,763
======= =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
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 ("ZKL"). ZKL 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 ZKL because it
is at the SBU level that ZKL can clearly identify customer segments and
then work to understand and satisfy the needs of each customer. The
contributions of ZKL'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.
ZKL 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 ZKL level. ZKL's SBUs cross legal entity lines,
as certain similar products are sold by more than one legal entity.
7
<PAGE>
Kemper Investors Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
Summarized financial information for ZKL's SBUs are as follows:
<TABLE>
As of and for the period ending September 30, 1999:
(in thousands)
<CAPTION>
Financial Retirement
Agency Institutions Solutions Direct Total
------ ------------ ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues $264,940 $153,319 $100,180 $34,566 $553,005
======= ======= ======= ====== =======
Net income (loss) $26,751 $20,161 $7,743 ($644) $54,011
====== ====== ===== ==== ======
Total assets $3,099,557 $9,376,982 $4,282,726 $85,176 $16,844,441
========= ========= ========= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Net
Total revenue, net income (loss) and Revenue Income (Loss) Assets
assets, respectively, from above: ------- ------------- ------
<S> <C> <C> <C>
$553,005 $54,011 $16,844,441
Less:
Revenue, net income & assets of FKLA 227,015 22,258 3,222,738
Revenue, net income & assets of ZLICA 37,545 7,951 445,891
Revenue, net (loss) & assets of Zurich
Direct 28,334 (6,362) 4,129
------- ------ ----------
Totals per KILICO's consolidated
financial statements $260,111 $30,164 $13,171,683
======= ====== ==========
</TABLE>
<TABLE>
As of and for the period ending September 30, 1998:
(in thousands)
<CAPTION>
Financial Retirement
Agency Institutions Solutions Direct Total
------ ------------ ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues $298,801 $185,177 $108,628 $21,733 $614,339
======= ======= ======= ====== =======
Net income $20,837 $23,000 $15,760 $1,387 $60,984
====== ====== ====== ===== ======
Total assets $3,303,280 $7,099,900 $3,938,266 $23,816 $14,365,262
========= ========= ========= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Net
Total revenue, net income (loss) and Revenue Income (Loss) Assets
assets, respectively, from above: ------- ------------- ------
<S> <C> <C> <C>
$614,339 $60,984 $14,365,262
Less:
Revenue, net income & assets of FKLA 247,935 21,780 3,031,760
Revenue, net (loss) & assets of ZLICA 41,863 (194) 400,492
Revenue, net income & assets of Zurich
Direct 17,760 1,294 4,095
------- ------ ----------
Totals per KILICO's consolidated
financial statements $306,781 $38,104 $10,928,915
======= ====== ==========
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
KILICO recorded net income of $30.2 million in the first nine months of
1999, compared with net income of $38.1 million for the same period in
1998. The decrease in net income was primarily related to net realized
capital losses of $7.0 million during 1999, compared with net realized
capital gains of $17.2 million for the period ended September 30, 1998.
The reduction in net realized investment results in 1999 was significantly
offset by an increase in operating earnings.
The following table reflects the components of net income:
<TABLE>
Net income:
(in millions)
<CAPTION>
Nine months ended
September 30
------------------
1999 1998
---- ----
<S> <C> <C>
Operating earnings before amortization of goodwill $46.8 $30.5
Amortization of goodwill (9.6) (9.6)
Net realized capital gains (losses) (7.0) 17.2
---- ----
Net income $30.2 $38.1
==== ====
</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>
Nine months ended Three months ended
September 30 September 30
----------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate-related $3.4 $ 18.7 $ - $ 8.2
Fixed maturities (9.4) 2.5 (6.7) (.9)
Trading account securities-
realized gains .3 - .1 -
Trading account securities-
holding losses (7.1) - (1.4) -
Equity securities 1.0 4.0 .1 1.7
Other 1.0 1.3 - -
---- ---- ---- ----
Realized investment
gains (losses) (10.8) 26.5 (7.9) 9.0
Income tax expense(benefit) (3.8) 9.3 (2.8) 3.2
---- ---- ---- ----
Net realized capital
gains (losses) $(7.0) $ 17.2 $ (5.1) $ 5.8
===== ===== ==== ====
</TABLE>
Operating earnings before amortization of goodwill increased to $46.8
million in the first nine months of 1999, as compared with $30.5 million
in the first nine months of 1998. This increase was primarily due to:
* an increase in spread revenue (net investment income less interest
credited to policyholders)
* 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>
Nine Months Ended Three Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
Annuities:
General account $270.6 $ 122.5 $112.0 $ 50.6
Separate account 323.2 229.1 108.1 100.8
----- ----- ----- -----
Total annuities 593.8 351.6 220.1 151.4
----- ----- ----- -----
<S> <C> <C> <C> <C>
Life insurance:
Separate account bank-owned life
insurance 780.7 432.7 84.6 10.0
Separate account variable universal
life insurance 20.0 15.2 4.8 8.4
Term life insurance 15.8 16.4 5.3 5.3
Interest-sensitive life insurance .8 - (.1) (.1)
----- ----- ----- -----
Total life 817.3 464.3 94.6 23.6
----- ----- ----- -----
Total sales $1,411.1 $ 815.9 $314.7 $ 175.0
===== ===== ===== =====
</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 $148.1 million in the first
nine months of 1999, compared with the first nine months of 1998, while
separate account variable annuity sales increased $94.1 million in the first
nine months of 1999, compared with the first nine 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.
Spread revenue increased in the first nine months of 1999, compared with
the same period in 1998, due to a more modest decrease in investment income
than in interest credited. Investment income decreased in 1999, as compared
with 1998, due to several factors. These factors include a decrease in cash
and invested assets from the 1998 levels, reflecting the surrender and
withdrawal activity in 1999 and 1998 and dividends paid to Kemper
Corporation in December 1998 as well as 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.
10
<PAGE>
<TABLE>
Separate account fees and charges consist of the following as of September 30,
1999 and 1998:
(in millions)
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
---------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Separate account fees on non-BOLI
variable life and annuities $34.4 $ 28.8 $12.2 $ 9.9
BOLI cost of insurance charges
and fees 2.3<F1> 14.2<F1> (.8) 4.8
BOLI premium tax expense loads 12.7<F2> 7.2<F2> 1.3 1.1
----- ----- ----- -----
Total $49.4 $ 50.2 $12.7 $ 15.8
====== ====== ====== ======
-------------------
<FN>
<F1> KILICO ceded $123.1 million and $116.5 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 nine months of 1999, compared with 1998, primarily due to
new sales during 1998 and 1999.
BOLI cost of insurance charges and fees decreased in the first nine months
of 1999, compared with 1998, reflecting an 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>
Nine Months Ended Three Months Ended
September 30 September 30
----------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
General account $415.4 $ 516.0 $145.3 $ 163.8
Separate account 301.3 194.1 78.8 66.7
------ ------ ------ ------
Total $716.7 $ 710.1 $224.1 $ 230.5
====== ====== ===== =====
</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
$100.6 million in the first nine months of 1999, compared with the same
period in 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
$107.2 million in the first nine months of 1999, compared with the same
period in 1998. Contributing to this increase is a partial withdrawal on
a BOLI contract of $39.8 million during the first nine months of 1999.
11
<PAGE>
Claims and other policyholder benefits decreased $23.9 million in the
first nine months 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 $1.4 million during the first nine months of 1999, compared
with 1998.
Taxes, licenses and fees increased during the first nine months of 1999,
compared with 1998, primarily reflecting an increase in premium taxes on
BOLI. KILICO receives a corresponding expense load related to these
premium taxes in separate account fees and other charges.
Commissions expense and the deferral of insurance acquisition costs
increased in the first nine months of 1999, compared with the same period
in 1998, due to the higher level of sales, excluding BOLI.
The amortization of the value of business acquired decreased during the
first nine months of 1999, compared with 1998, due to lower realized
capital gains on investments acquired prior to Zurich's purchase of
Kemper. These realized capital gains accelerate the amortization of the
value of business acquired.
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>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 52 1.3% $ 72 1.7%
Fixed maturities:
Investment grade:
NAIC <F1> Class 1 2,262 57.1 2,663 63.7
NAIC <F1> Class 2 905 22.9 724 17.3
Below investment grade:
Performing 94 2.4 96 2.3
Trading account securities 139 3.5 102 2.4
Joint venture mortgage loans 67 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 264 6.7 271 6.5
Equity securities 62 1.6 67 1.6
Other 25 .6 24 .6
----- ----- ----- -----
Total $3,959 100.0% $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
September 30, 1999 was $80.7 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 September 30, 1999, investment-grade fixed maturities and cash and
short-term investments accounted for 81.3 percent of KILICO's invested
assets and cash, compared with 82.7 percent at December 31, 1998.
Approximately 19.8 percent of KILICO's investment-grade fixed maturities
at September 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 17.4 percent of KILICO's investment-grade fixed maturities
at September 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 $156.0 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
September 30, 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>
September 30 December 31
1999 1998
------------ -----------
<S> <C> <C>
Potential problem loans <F1> $ - $ -
Past due loans <F2> - -
Nonaccrual loans <F3> 102.6 37.4
Real estate owned - -
----- -----
Total $ 102.6 $ 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 $80.6 million and $31.8
million at September 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 Mutual Casualty
Company amounted to $55.3 million (net of reserves) at September 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 $196.9 million in the
first nine months of 1999, compared with $205.9 million for the same
period in 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>
Nine months ended
September 30
------------------
1999 1998
---- ----
<S> <C> <C>
Fixed maturities $ - $ .3
Real estate-related investments 7.5 2.4
---- ----
Total $7.5 $2.7
==== ====
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 during the first nine months 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 September 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
(Year 2000 Readiness Disclosure)
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 critical systems will be compliant for the year 2000. Such
steps have included the replacement of older systems with new systems,
which are already compliant. KILICO has also determined 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
$550 thousand for the first nine months of 1999. KILICO anticipates that
it will cost an additional $108 thousand to bring all remaining systems
into compliance.
KILICO's policy administration systems have been completely renovated to
be year 2000 compliant, and have been tested and 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 September 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
16
<PAGE>
KILICO has also taken steps to determine whether all other entities with
which KILICO electronically interacts, including suppliers and other
financial services institutions, 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 has developed contingency plans to handle the most reasonably
likely worst case scenarios. The contingency plans were completed in the
third quarter of 1999 and testing of those plans will continue throughout
the fourth 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 nine
months ended September 30, 1999.
18
<PAGE>
Kemper Investors Life Insurance Company
FORM 10-Q
For the fiscal period ended September 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: October 29, 1999 By: /s/GALE K. CARUSO
----------------------------------
Gale K. Caruso
President, Chief Executive Officer and
Director
Date: October 29, 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 THIRD
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[MULTIPLIER] 1,000
[PERIOD-TYPE] 9-MOS.
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] Sep-30-1999
[DEBT-HELD-FOR-SALE] 3,260,445
[DEBT-CARRYING-VALUE] 3,260,445
[DEBT-MARKET-VALUE] 3,260,445
[EQUITIES] 62,032
<MORTGAGES> 131,317
[REAL-ESTATE] 24,705
[TOTAL-INVEST] 3,939,652
[CASH] 18,975
[RECOVER-REINSURE] 319,071
[DEFERRED-ACQUISITION] 144,495
[TOTAL-ASSETS] 13,171,683
[POLICY-LOSSES] 3,789,748
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 413,947
[NOTES-PAYABLE] 0
[COMMON] 2,500
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 729,608
[TOTAL-LIABILITY-AND-EQUITY] 13,171,683
[PREMIUMS] 15,868
[INVESTMENT-INCOME] 196,943
[INVESTMENT-GAINS] (10,787)
[OTHER-INCOME] 58,087
[BENEFITS] 134,126
[UNDERWRITING-AMORTIZATION] 7,699
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 51,714
<INCOME-TAX) 21,550
[INCOME-CONTINUING] 30,164
<DISCOUNTED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 30,164
[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
