<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 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)
ONE KEMPER DRIVE
LONG GROVE, ILLINOIS
(Address of Principal Executive Offices)
36-3050975
(I.R.S. Employer
Identification Number)
60049
(Zip Code)
Registrant's telephone number, including area code: (847) 550-5500
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
>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 March 1, 2000, 250,000 shares of Common Stock (all held by an affiliate,
Kemper Corporation) were outstanding. There is no market value for any such
shares. See ITEM 5 of this Form 10-K.
* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-K also
relates to Commission file numbers 33-33547, 33-43462 and 33-46881.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, 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 non-operating
holding company. KILICO and Kemper are wholly-owned subsidiaries of Zurich
Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG and
Allied Zurich p.l.c., fifty-seven percent and forty-three percent, respectively.
Zurich Allied AG is listed on the Swiss Market Index. Allied Zurich p.l.c. is
included in the FTSE-100 Share Index in London.
STRATEGIC INITIATIVES
KILICO's management, operations and strategic directions are integrated with
those of several other Kemper subsidiaries, Federal Kemper Life Assurance
Company ("FKLA"), Zurich Life Insurance Company of America ("ZLICA") and Zurich
Direct, Inc., ("ZD"). This integration streamlines management, controls costs,
improves profitability, increases operating efficiencies and productivity, and
helps to expand the companies' distribution capabilities. Headquartered in Long
Grove, Illinois, FKLA markets term and interest-sensitive life insurance, as
well as certain annuity products through brokerage general agents and other
independent distributors. ZLICA markets term life insurance products primarily
through ZD. ZD is an affiliated direct marketing life insurance agency currently
marketing basic, low-cost term life insurance through various marketing media.
Over the last several years, KILICO increased the competitiveness of its
variable annuity products by adding multiple variable subaccount investment
options and investment managers to existing variable annuity products. In 1997,
KILICO introduced a non-registered individual and group variable bank-owned life
insurance contract ("BOLI") and a series of individual variable life insurance
contracts. In 1998, KILICO introduced a new registered individual variable
annuity product with 37 variable subaccount investment options and various
investment managers.
NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and individual and group variable life insurance products
through various distribution channels. KILICO offers investment-oriented
products, guaranteed returns or a combination of both, to help policyholders
meet multiple insurance and financial objectives. Financial institutions,
securities brokerage firms, insurance agents and financial planners are
important distribution channels for KILICO's products. KILICO's sales mainly
consist of deposits received on certain long duration annuity and variable life
insurance contracts as well as reinsurance premiums assumed from FKLA.
KILICO's fixed and variable annuities generally have surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its existing and new
separate account products. Unlike the fixed-rate annuity business where KILICO
manages spread revenue, such variable products pose minimal investment risk for
KILICO, as policyholders direct their premium to one or more subaccounts that
invest in underlying investment funds. KILICO, in turn, receives administrative
fee revenue on such variable products which compensates KILICO for providing
death benefits potentially in excess of cash surrender values. In addition, on
variable life insurance contracts, cost of insurance charges compensate KILICO
for providing death benefit coverage substantially in excess of surrender
values.
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As a result of this strategy, KILICO's separate account assets and related sales
of its variable annuity and life products have increased over the last couple of
years. KILICO's separate account assets and sales were as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Separate account assets..................................... $9,778.1 $7,099.2 $5,122.0
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Variable annuity sales...................................... $ 468.9 $ 300.4 $ 259.8
Variable life sales......................................... 1,661.1 1,523.0 2,708.6
-------- -------- --------
Total separate account sales...................... $2,130.0 $1,823.4 $2,968.4
======== ======== ========
</TABLE>
During mid-1998, KILICO introduced DESTINATIONS, a registered individual
variable annuity product. DESTINATIONS offers 37 variable subaccount investment
options with various investment managers, ten guarantee period accounts and a
fixed account, dollar cost averaging and a guaranteed retirement income benefit
option.
During mid-1997, KILICO introduced variable BOLI, a group variable life
insurance contract that is primarily marketed to banks and other large corporate
entities. Also in 1997, KILICO issued a series of non-registered variable
individual universal life insurance contracts that are marketed primarily to
high net worth individuals. Significant fluctuations in KILICO's sales of the
variable life products are due mainly to the nature of the BOLI product--high
dollar volume per sale, low frequency of sales--and the uncertainty surrounding
BOLI's tax advantaged status since the release of the Clinton Administration's
fiscal year budgets, from 1998 through 2001.
Investors Brokerage Services, Inc., ("IBS"), a wholly-owned subsidiary of
KILICO, is the principal underwriter and distributor of KILICO's registered
variable annuity and variable life products. IBS, Life Insurance Solutions,
L.L.C., an affiliate, and Benefit Finance Securities, L.L.C., a non-affiliate,
are distributors of KILICO's BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted KILICO's general account fixed annuity sales over
the last several years. KILICO's general account fixed annuity sales were as
follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
General account fixed annuity sales......................... $383.8 $179.9 $145.7
====== ====== ======
</TABLE>
KILICO's general account fixed annuity sales increased $203.9 million in 1999,
compared with 1998. This increase is primarily due to strong sales of the new
variable annuity product introduced in mid-1998 that offers both a variable and
a fixed option, including dollar cost averaging. Dollar cost averaging allows
contractholders the option to deposit amounts in the general account and
authorize pro-rated amounts to be automatically transferred into the separate
account over a specified period of time in order to reduce the effects of
significant market fluctuations.
During 1999, 1998 and 1997, KILICO assumed $21.3 million, $21.6 million and
$21.1 million, respectively, of term life insurance premiums from FKLA.
Excluding the amounts assumed from FKLA, KILICO's total term life sales,
including new and renewal premiums, net of reinsurance ceded, amounted to $677
thousand in 1999, compared with $846 thousand in 1998 and $1.1 million in 1997.
FEDERAL INCOME TAX DEVELOPMENTS
In early 2000, the Clinton Administration's Fiscal Year 2001 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore less attractive to those customers who purchase them in
recognition of their favorable tax attributes. Additionally, sales of these
products during 2000 may also be negatively impacted until the likelihood of the
current proposals being enacted into law has been determined.
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<PAGE> 4
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1999, KILICO had three
ratios outside the usual ranges; the change in capital and surplus ratios, gross
and net, and the change in reserving ratio. KILICO's change in capital and
surplus ratios, both gross and net is due to the payment of dividends to Kemper
in 1999 of $115.0 million. KILICO's change in reserving ratio primarily
reflected the level of interest-sensitive life surrenders and withdrawals during
1999, as well as an increase in individual variable life renewal premiums, as
compared to 1998. The increase in individual variable life renewal premiums in
1999 is mainly due to an increase in sales of individual universal life
insurance in 1998. Other than certain states requesting quarterly financial
reporting and/or explanations of the underlying causes for certain ratios, no
state regulators have taken any action due to KILICO's IRIS ratios for 1999 or
earlier years.
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based capital rules is a risk-based
formula that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. KILICO has capital
levels substantially exceeding any that would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001. KILICO has not quantified
the impact that codification will have on its statutory financial position or
results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
General account annuities................................... $2,729 $2,864
Interest-sensitive life insurance and other................. 671 688
Term life reserves.......................................... 9 9
Ceded future policy benefits................................ 310 345
------ ------
Total............................................. $3,719 $3,906
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where KILICO insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with an affiliate, Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces policies not produced by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 1999 and 1998, KILICO's reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $309.7 million and $344.8
million, respectively. Utilizing FKLA's employees, KILICO is the servicing
company for this coinsured business and is reimbursed by FLA for the related
servicing expenses.
During December 1997, KILICO entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, Zurich Insurance Company, Bermuda Branch
("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, KILICO ceded, on a yearly renewable term basis, 90 percent of the net
amount at risk (death benefit payable to the insured less the insured's separate
account cash surrender value) related to BOLI, which is held in KILICO's
separate accounts. As consideration for this reinsurance coverage, KILICO cedes
separate account fees (cost of insurance charges) to ZICBB and retains a portion
of such funds under the terms of the reinsurance agreement in a funds withheld
account which is included as a component of benefits and funds payable in the
accompanying consolidated balance sheets. During 1998, KILICO modified the
reinsurance agreement to increase the reinsurance from 90 percent to 100
percent.
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<PAGE> 5
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
KILICO has a funds withheld account ("FWA") supporting reserve credits on
reinsurance ceded on the BOLI product. Amendments to the reinsurance contracts
during 1998 changed the methodology used to determine increases to the FWA. A
substantial portion of the FWA was marked-to-market based predominantly upon the
total return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, KILICO recorded a $2.5 million increase to the
FWA related to this mark-to-market. In November 1998, to properly match revenue
and expenses, KILICO had also placed assets supporting the FWA in a segmented
portion of its General Account. This portfolio was classified as "trading" under
Statement of Financial Accounting Standards No. 115 ("FAS 115") at December 31,
1998 and through November 30, 1999. FAS 115 mandates that assets held in a
trading account be valued at fair value, with changes in fair value flowing
through the income statement as realized capital gains and losses. During 1998,
KILICO recorded a realized capital gain of $2.8 million upon transfer of these
assets from "available for sale" to the trading portfolio as required by FAS
115. In addition, KILICO recorded realized capital losses of $7.3 million and
$0.2 million related to the changes in fair value of this portfolio during 1999
and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, KILICO no longer marked-to-market a portion of the
FWA liability and therefore no longer designated the related portion of assets
as "trading". As a result, changes in fair value to the FWA and the assets
supporting the FWA no longer flow through KILICO's operating results.
In 1996, KILICO assumed, on a yearly renewable term basis, term life insurance
from FKLA. As a result of this transaction, KILICO recorded reserves in 1999 and
1998 of approximately $8.0 million and $8.5 million, respectively.
COMPETITION
KILICO is in a highly competitive business. KILICO competes with a large number
of other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principle methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents.
To address its competition, KILICO has adopted certain business strategies.
These include:
- systematic review of investment risk and its capital position
- customer segmentation and focus
- continued focus on existing and new variable annuity and variable life
insurance products
- distribution through diversified channels, and
- ongoing efforts to continue as a low-cost provider of insurance products
and high-quality services to agents and policyholders through the use of
technology
RANKINGS AND RATINGS
According to BEST'S INSURANCE REPORTS, 1999, as of December 31, 1998, KILICO
ranked 60th of 1,282 life insurers by admitted assets; 55th of 984 by insurance
in force; and 68th of 1,206 by net premiums written.
4
<PAGE> 6
In October 1997, Zurich announced a planned merger with B.A.T. Industries plc.
In connection with that merger, KILICO's claims-paying ability ratings were
placed on ratings watch with negative implications by certain rating agencies.
However, during 1998 the current ratings were affirmed by each rating agency.
During 1999, KILICO received rating upgrades from both A.M. Best and Standard &
Poor's, primarily due to the perceived long-term strategic benefit of the merger
and the increased financial strength of Zurich and Zurich Kemper Life (discussed
below). KILICO's current ratings and their current status are as follows:
<TABLE>
<CAPTION>
CURRENT RATING CURRENT STATUS
------------------- --------------
<S> <C> <C>
A.M. Best Company....................................... A+ (Superior) Affirmed
Moody's Investors Service............................... Aa3 (Excellent) Affirmed
Standard & Poor's....................................... AA+ (Very Strong) Affirmed
</TABLE>
EMPLOYEES
At December 31, 1999, KILICO used the services of approximately 940 employees of
FKLA, which are also shared with FLA and ZLICA. KILICO, FKLA, FLA and ZLICA
collectively operate under the trade name Zurich Kemper Life.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where KILICO is licensed to do
business. These departments enforce laws and regulations designed to assure that
insurance companies maintain adequate capital and surplus, manage investments
according to prescribed character, standards and limitations and comply with a
variety of operational standards. The departments also make periodic
examinations of individual companies and review annual and other reports on the
financial condition of each company operating within their respective
jurisdictions. Regulations, which often vary from state to state, cover most
aspects of the life insurance business, including market practices, policy forms
and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, certain of KILICO's variable life insurance and annuity products,
and the related separate accounts, are subject to regulation by the Securities
and Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations. For information on regulatory and other dividend restrictions, see
ITEM 5(c).
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, KILICO has
systematically reduced its investment risk and strengthened its capital
position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Scudder Kemper Investments, Inc. ("SKI") and
its subsidiaries and affiliates. KILICO's real estate-related investments are
handled by a majority-owned Kemper real estate subsidiary. Investment policy is
directed by KILICO's board of directors. KILICO's investment strategies take
into account the nature of each annuity and life insurance product, the
respective crediting rates and the estimated future policy benefit maturities.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in other filings by KILICO with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
KILICO's products and trends in KILICO's operations or financial results, as
well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements
5
<PAGE> 7
are subject to known and unknown risks, uncertainties and other factors which
may cause actual results to be materially different from those contemplated by
the forward-looking statements. These factors include, among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the
ability of KILICO to sell its products, the market value of KILICO's
investments and the lapse rate and profitability of KILICO's contracts
(ii) KILICO's ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives
(iii) customer response to new products, distribution channels and marketing
initiatives
(iv) mortality, morbidity, and other factors which may affect the profitability
of KILICO's insurance products
(v) changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of KILICO's products
(vi) increasing competition which could affect the sale of KILICO's products
(vii) regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and
underwriting of insurance products, regulations of the sale and
underwriting and pricing of insurance products, and
(viii) the risk factors or uncertainties listed from time to time in KILICO's
other filings with the SEC
ITEM 2. PROPERTIES
KILICO primarily shares 84,270 sq. ft. of office space leased by FKLA from
Lumbermens Mutual Casualty Company, a former affiliate, ("Lumbermens"), located
in Long Grove, Illinois. KILICO also shares 93,666 sq. ft. of office space
leased by FKLA and ZLICA from Zurich American Insurance Company, an affiliate,
located in Schaumburg, Illinois.
ITEM 3. LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. Based upon the advice of legal counsel, KILICO's management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
6
<PAGE> 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) There is no established public trading market for KILICO's common stock.
(b) Kemper owns all of the common stock of KILICO as of the date of this filing.
(c) Cash dividends of $29.3 million were declared and paid to Kemper during
1997. Cash dividends of $40.0 million and $55.0 million were declared and paid
to Kemper on October 31, 1998 and December 30, 1998, respectively. Cash
dividends of $20.0 million, $25.0 million and $70.0 million were declared and
paid to Kemper on June 29, 1999, September 29, 1999 and December 29, 1999,
respectively. No additional dividends have been declared or paid through the
date of filing this Form 10-K.
RESTRICTIONS ON DIVIDENDS
Dividend distributions from KILICO to its stockholder are restricted by state
insurance laws. In Illinois, where KILICO is domiciled, if such dividend,
together with other distributions during the 12 preceding months would exceed
the greater of (a) ten percent of the insurer's statutory surplus as regards
policyholders as of the preceding December 31, or (b) the statutorily adjusted
net income for the preceding calendar year, then such proposed dividend must be
reported to the director of insurance at least 30 days prior to the proposed
payment date. The dividend then may be paid only if not disapproved. The
Illinois insurance laws also permit payment of dividends only out of earned
surplus, exclusive of most unrealized capital gains. During 1999, KILICO paid
dividends to Kemper in the amount of $115.0 million, which were approved by the
Illinois Department of Insurance. The maximum amount of dividends which can be
paid by KILICO without prior approval in 2000 is $59.1 million.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1999, and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in ITEM 8 of this Annual Report on Form 10-K. All amounts are shown in
millions.
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 JANUARY 4 --------------
1999 1998 1997 1996 1996(2) 1995
----------- ----------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE.......... $ 363.4 $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1)
========= ========= ========= ======== ======== ========
NET INCOME EXCLUDING
REALIZED INVESTMENT
RESULTS.............. $ 51.1 $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2
========= ========= ========= ======== ======== ========
NET INCOME (LOSS)...... $ 44.9 $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1)
========= ========= ========= ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets............... $ 9,778.1 $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1
========= ========= ========= ======== ======== ========
Total assets........... $14,655.7 $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7
========= ========= ========= ======== ======== ========
Future policy
benefits............. $ 3,409.1 $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2
========= ========= ========= ======== ======== ========
Stockholder's equity... $ 630.0 $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9
========= ========= ========= ======== ======== ========
</TABLE>
- ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net loss for 1995. These losses reflect a change in KILICO's strategy with
respect to its real estate-related investments resulting from the January 4,
1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
7
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
KILICO recorded net income of $44.9 million in 1999, compared with net income of
$65.1 million in 1998 and $38.7 million in 1997. The decrease in net income in
1999, compared with 1998, was due to a significant decrease in net realized
investment results, offset by an increase in operating earnings before
amortization of goodwill.
The following table reflects the components of net income:
NET INCOME
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Operating earnings before amortization of
goodwill................................... $ 63.8 $ 44.1 $ 47.2
Amortization of goodwill..................... (12.7) (12.7) (15.3)
Net realized investment gains (losses)....... (6.2) 33.7 6.8
------ ------ ------
Net income.............................. $ 44.9 $ 65.1 $ 38.7
====== ====== ======
</TABLE>
The following table reflects the major components of net realized investment
results included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Real estate-related gains.................... $ 2.7 $ 26.9 $ 12.8
Fixed maturities and write-downs............. (6.3) 1.4 (6.7)
Trading account securities................... (4.7) 1.7 --
Other gains, net............................. 2.1 3.7 0.7
------ ------ ------
Total................................... $ (6.2) $ 33.7 $ 6.8
====== ====== ======
</TABLE>
The real estate-related gains over the last three years reflect KILICO's
adoption of Zurich's strategy for disposition of real estate-related
investments. This strategy to reduce exposure to real estate-related
investments, as well as improving real estate market conditions in most areas of
the country, generated the real estate-related gains during the last three
years. Net realized investment losses on fixed maturities in 1999 were primarily
the result of rising interest rates throughout the year leading to lower market
values in fixed maturity investments. Net realized investment gains on fixed
maturities in 1998 were offset by other-than-temporary declines in value of
certain U.S. dollar denominated fixed maturity investments which had significant
exposure to countries in Southeast Asia, as well as other U.S. dollar
denominated securities that had other-than-temporary declines in value in 1998.
The net realized investment losses on fixed maturities generated in 1997 arose
primarily from the sales of lower yielding U.S. Treasury bonds, collateralized
mortgage obligations and corporate bonds, related to ongoing repositionings of
KILICO's fixed maturity investment portfolio. The proceeds from the
repositionings, together with cash and short-term investments, were reinvested
into higher yielding corporate bonds and asset-backed securities in 1997.
Trading account securities were used to manage KILICO's reinsurance strategy on
the BOLI product. Effective November 1, 1998, the methodology used to determine
the increase to the FWA was changed and a substantial portion of this liability
was marked-to-market based predominately upon the total return of the
Governmental Bond Division of KILICO's Series 1 Separate Account. KILICO also
placed assets supporting the FWA in a segmented portfolio and classified this
asset segment as "trading" under Statement of Financial Standards No. 115 ("FAS
115") at December 31, 1998 and through November 30, 1999. During 1998, KILICO
recorded a net realized capital gain of $2.8 million upon transfer of these
assets to the trading portfolio as required by FAS 115. KILICO recorded realized
capital losses of $7.3 million and $0.2 million related to the changes in fair
values of this portfolio during 1999 and 1998, respectively. Due to a change in
the reinsurance strategy related to the BOLI product, effective December 1,
1999, KILICO no longer marked-to-market a portion of the FWA liability and
therefore no longer designated the related portion of assets as "trading". As a
result, changes in fair value to the FWA and the assets supporting the FWA no
longer flow through KILICO's operating results.
8
<PAGE> 10
Other realized investment gains, net, relate primarily to the sale of equity
securities as KILICO took advantage of favorable market conditions.
Operating earnings before the amortization of goodwill increased to $63.8
million in 1999, compared with $44.1 million in 1998, primarily due to:
- an increase in spread revenue (investment income earned less interest
credited)
- an increase in separate account fees and charges
- a decrease in claims incurred and other policyholder benefits
- a decrease in the amortization of insurance acquisition costs and value
of business acquired, offset by
- an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997, primarily due to:
- a decrease in separate account fees and charges
- an increase in commissions and operating expenses
- an increase in the amortization of insurance acquisition costs, offset by
- a decrease in taxes, licenses and fees
- an increase in the deferral of insurance acquisition costs, and
- a decrease in the amortization of the value of business acquired
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Annuities:
General account.................................... $ 383.8 $ 179.9 $ 145.7
Separate account................................... 468.9 300.4 259.8
-------- -------- --------
Total annuities................................. 852.7 480.3 405.5
-------- -------- --------
Life Insurance:
Separate account bank-owned variable universal life
("BOLI")........................................ 1,622.0 1,501.0 2,700.0
Separate account variable universal life........... 39.1 22.0 8.6
Term life.......................................... 21.9 22.4 22.2
Interest-sensitive life............................ 0.7 .2 --
-------- -------- --------
Total life...................................... 1,683.7 1,545.6 2,730.8
-------- -------- --------
Total sales........................... $2,536.4 $2,025.9 $3,136.3
======== ======== ========
</TABLE>
Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. KILICO's
general account annuity sales increased $203.9 million in 1999 when compared
with 1998. This increase is primarily due to strong sales of the new variable
annuity product introduced in the second half of 1998 that offers both a
variable and a fixed option, including dollar cost averaging. Dollar cost
averaging allows contractholders the option to deposit amounts in the general
account and authorize pro-rated amounts to be automatically transferred into the
separate account over a specified period of time in order to reduce the effects
of significant market fluctuations.
Total separate account annuity (variable) sales increased $168.5 million in
1999, compared with 1998, also due to strong sales of the new variable annuity
product mentioned earlier. The increase in variable annuity sales in 1998,
compared with 1997, was due, in part, to the addition of new separate account
investment fund options, the addition of new investment fund managers, a strong
overall underlying stock and bond market and the new variable annuity product
introduced during 1998.
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying investment funds
which
9
<PAGE> 11
invest in stocks and bonds. KILICO believes that the increase in its financial
strength and performance ratings in 1999, together with KILICO's association
with Zurich, will continue to assist in KILICO's future sales efforts.
In 1997, KILICO introduced several non-registered variable universal life
insurance contracts, BOLI and a series of individual universal life insurance
contracts. Sales of BOLI increased $121.0 million to $1,622.0 million in 1999,
compared with $1,501.0 million in 1998. Sales of individual variable universal
life insurance increased $17.1 million to $39.1 in 1999, compared with $22.0
million in 1998. Strong sales for these products continue due to favorable tax
treatment afforded these products as well as the opportunity for potentially
higher returns for contractholders. Sales of these separate account variable
products, like variable annuities, pose minimal investment risk for KILICO as
policyholders also direct their premium to one or more subaccounts that invest
in underlying investment funds which invest in stocks and bonds. KILICO receives
premium tax and DAC tax expense loads from certain contractholders, as well as
administrative fees and cost of insurance charges. These fees and charges
compensate KILICO for providing life insurance coverage to the contractholders
potentially in excess of their cash surrender values. Face amount of new
variable universal life insurance business issued amounted to $16.6 billion in
1999, compared with $7.7 billion in 1998 and $59.6 billion in 1997. The decrease
in face amount issued in 1999 and 1998, compared with 1997 is due to a
significant portion of renewal premiums in 1999 and 1998 and higher funded
policies issued in 1999 and 1998, compared to those issued in 1997.
In early 2000, the Clinton Administration's Fiscal Year 2001 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final 2001 Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore no longer attractive to those customers who purchase them because
of their favorable tax attributes. Sales of these products during 2000 may be
negatively impacted until the likelihood of the current proposals being enacted
into law has been determined.
In 1999, 1998 and 1997 KILICO assumed $21.3 million, $21.6 million and $21.1
million, respectively, of term life insurance premiums from FKLA. Excluding the
amounts assumed from FKLA, KILICO's total term life sales, including new and
renewal premiums, amounted to $677 thousand in 1999, compared with $846 thousand
in 1998 and $1.1 million in 1997.
Spread revenue increased in 1999 compared with 1998 and 1997 due to a more
modest decrease in investment income than in interest credited. Investment
income decreased in 1999, compared with 1998 and 1997 due to several factors.
These factors include a decrease in cash and invested assets from the 1998 and
1997 levels, reflecting the surrender and withdrawal activity during the last
three years, dividends paid to Kemper during 1999 and 1998 and the reinvestment
of 1998 sales proceeds and collateralized mortgage obligation ("CMO")
prepayments at lower yields due to the lower 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. With
overall interest rates increasing during 1999, sales proceeds, maturities and
prepayments were reinvested at higher yields during 1999.
The decrease in interest credited in 1999, compared with 1998 and 1997, was
primarily due to a decrease in policyholder liabilities due to the surrender and
withdrawal activity over the last three years and a decrease in crediting rates
during 1999 and 1998.
Investment income was also reduced over the last three years reflecting purchase
accounting adjustments related to the amortization of premiums on fixed maturity
investments. Under purchase accounting, the fair value of KILICO's fixed
maturity investments as of January 4, 1996, the date Kemper was acquired by
Zurich became KILICO's new cost basis in the investments. The difference between
the new cost basis and original par is then amortized against investment income
over the remaining effective lives of the fixed maturity investments. As a
result of the interest rate environment as of January 4, 1996, the market value
of KILICO's fixed maturity investments was approximately $133.9 million greater
than original par. Premium amortization decreased investment income by
approximately $7.8 million in 1999, compared with $14.4 million in 1998 and
$15.3 million in 1997.
Included in separate account fees and charges are administrative fees received
from KILICO's separate account products of $46.1 million in 1999, compared with
$38.3 million and $31.0 million in 1998 and 1997, respectively. Administrative
fee revenue increased in each of the last three years due to growth in average
separate account assets.
Also included in separate account fees and charges are cost of insurance ("COI")
charges related to variable universal life insurance, primarily BOLI, of $167.9
million, $167.6 million and $27.6 million in 1999, 1998 and 1997, respectively.
Of these COI charges, $166.4 million, $175.5 million and $24.3 million were
ceded, respectively, to a Zurich affiliated company, Zurich Insurance Company,
Bermuda Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement. Separate account fees and charges in 1999, 1998 and 1997
also include BOLI-related premium tax expense loads of $26.8 million, $29.1
million and $51.1 million, respectively.
10
<PAGE> 12
Other income includes surrender charge revenue of $5.0 million in 1999, compared
with $4.0 million and $5.2 million in 1998 and 1997, respectively. The increase
in surrender charge revenue in 1999, compared with 1998, reflects the increased
policyholder surrender and withdrawal activity in the separate accounts during
1999, compared with 1998. Similarly, the decrease in surrender charge revenue in
1998, compared with 1997, reflects the decrease in total general account
policyholder surrenders and withdrawals during 1998, compared with 1997.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
General account................................ $564.2 $645.5 $703.1
Separate account............................... 399.8 260.9 236.2
------ ------ ------
Total..................................... $964.0 $906.4 $939.3
====== ====== ======
</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 $81.3
million in 1999, compared with 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 $138.9
million in 1999, compared with 1998. Contributing to this increase was a partial
withdrawal on a BOLI contract of $39.8 million in 1999. The remaining increase
is primarily due to the growth of assets under management in the separate
account and a related increase in surrenders and withdrawals as contractholders
seek alternative investment options during a period of strong market
performance.
The trend of decreasing policyholder surrenders, withdrawals and death benefits
in the general account and increasing in the separate account reflects a shift
in assets under management from the general account to the separate account over
the past three years, reflecting KILICO's increased emphasis on marketing its
existing and new separate account products.
Taxes, licenses and fees primarily reflect premium taxes on BOLI. Excluding the
taxes due on BOLI, for which KILICO received a corresponding expense load in
separate account fees and other charges, taxes, licenses and fees amounted to
$3.4 million in 1999, compared with $1.5 million in 1998 and $1.5 million in
1997.
Commission expense was higher in 1999, compared with both 1998 and 1997, due to
an increase in total sales.
Operating expenses increased slightly in 1999, to $46.0 million, compared with
$44.6 million and $36.8 million in 1998 and 1997, respectively. Operating
expenses increased in 1998, compared with 1997, as a result of staffing for new
business initiatives, an increase in various outside consulting fees, an
increase in printing and stationary expenses for sales materials and an increase
in data processing expenses.
Data processing expenses related to bringing KILICO's systems in compliance with
the year 2000 amounted to $0.6 million in 1999 and $1.3 million in 1998.
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1999, 1998 and 1997. The deferral of insurance acquisition
costs increased in 1999, compared with both 1998 and 1997, reflecting an
increase in commissions expense and operating expenses related directly to the
increased production of new business over the last several years.
Operating earnings were positively impacted by a decrease in the amortization of
deferred insurance acquisition costs in 1999, compared with 1998. This decrease
was primarily due to significant appreciation in KILICO's separate account
assets due to rising equity markets during 1999, as well as realized capital
losses on post-purchase investments during 1999, compared with realized capital
gains on post-purchase investments during 1998. Appreciation in separate account
assets increases estimated future gross profits, shifting amortization to later
years. Realized capital losses on post-purchase investments decreases current
gross profits and defers amortization into future periods. Realized capital
gains on post-purchase investments increases current gross profits and
accelerates amortization in the current period. The lower amortization in 1997
reflects a smaller deferred insurance acquisition cost asset in 1997. The
deferred insurance acquisition cost asset was $159.7 million, $91.5 million and
$59.5 million at December 31, 1999, 1998 and 1997, respectively.
Deferred insurance acquisition costs, and their related amortization, for
policies sold prior to January 4, 1996 have been replaced under purchase
accounting by the value of business acquired. The value of business acquired
reflects the
11
<PAGE> 13
present value of the right to receive future cash flows from insurance contracts
existing at the date of acquisition. The amortization of the value of business
acquired is calculated assuming an interest rate equal to the liability or
contract rate on the value of the business acquired. Deferred insurance
acquisition costs are established on all new policies sold after January 4,
1996.
The amortization of the value of business acquired decreased in 1999, compared
with 1998, as a result of:
- significant appreciation in separate account assets, which increases
estimated future gross profits and shifts amortization to later years
- a decreasing block of business previously acquired, resulting in less
amortization as gross profits on this business decrease, and
- a significant decrease in realized investment results on pre-purchase
investments.
The significant realized capital gains in 1998 increased gross profits for that
period and accelerated the amortization of the value of business acquired during
1998.
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, KILICO began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, KILICO changed its amortization period
to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, KILICO recorded an
increase in amortization expense of $5.1 million during 1997.
OPERATIONS BY BUSINESS SEGMENT
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 establishes
standards for how to report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
KILICO, FKLA, ZLICA, and FLA operate under the trade name Zurich Kemper Life.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS 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. For purposes of operating
segment disclosure, Zurich Kemper Life includes the operations of Zurich Direct,
Inc., an affiliated direct marketing life insurance agency and excludes FLA, as
it is owned by its policyholders.
Zurich Kemper Life is segregated into the Life Brokerage, Financial, Retirement
Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at the legal
entity level, but rather at the Zurich Kemper Life level. Since Zurich Kemper
Life's SBUs cross legal entity lines, as certain similar products are sold by
more than one legal entity, discussion regarding results of operations in this
Form 10-K relate solely to KILICO. The vast majority of KILICO's business is
derived from the Financial and RSG SBUs. The contributions of Zurich Kemper
Life's SBUs to combined revenues, operating results and certain balance sheet
data pertaining thereto, are shown in the Notes to Consolidated Financial
Statements.
The principle products and markets of the Financial and RSG SBUs are as follows:
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners. Institutional business includes BOLI and funding agreements (included
in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
fixed and variable annuities to K-12 schoolteachers, administrators, and
healthcare workers, along with college professors and certain employees of
selected non-profit organizations. This target market is eligible for what the
IRS designates as retirement-oriented savings or investment plans that qualify
for special tax treatment.
12
<PAGE> 14
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors:
- its evaluation of risk and return in various markets
- consistency with KILICO's business strategy and investment guidelines
approved by the board of directors
- the interest rate environment
- liability durations, and
- changes in market and business conditions
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Cash and short-term investments............................. $ 54 1.4% $ 72 1.7%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........................................ 2,164 56.5 2,663 63.7
NAIC(1) Class 2........................................ 994 25.9 724 17.3
Below investment grade (NAIC classes 3 through 6):
Performing............................................. 118 3.1 96 2.3
Trading account securities.................................. -- -- 102 2.4
Joint venture mortgage loans................................ 67 1.8 66 1.6
Third-party mortgage loans.................................. 64 1.7 76 1.8
Other real estate-related investments....................... 21 0.5 22 0.5
Policy loans................................................ 262 6.8 271 6.5
Equity securities........................................... 62 1.6 67 1.6
Other....................................................... 25 0.7 24 0.6
------ ----- ------ -----
Total(2).......................................... $3,831 100.0% $4,183 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized depreciation on fixed maturities at December 31, 1999 was $121.2
million, compared with unrealized appreciation of $61.3 million at December 31,
1998. KILICO does not record tax benefits related to 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 December 31, 1999, investment-grade fixed maturities, cash and short-term
investments accounted for 83.8 percent of KILICO's invested assets and cash,
compared with 82.7 percent at December 31, 1998. Approximately 45.9 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1999,
compared with 53.4 percent at December 31, 1998.
Approximately 20.0 percent of KILICO's investment-grade fixed maturities at
December 31, 1999 were mortgage-backed securities, down from 28.0 percent at
December 31, 1998, due to sales and paydowns during 1999. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
13
<PAGE> 15
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
Approximately 16.8 percent and 15.4 percent of KILICO's investment-grade fixed
maturities at December 31, 1999 and 1998, respectively, consisted of corporate
asset-backed securities. The majority of KILICO's investments in asset-backed
securities were backed by home equity loans (24.0%), commercial mortgage-backed
securities (22.8%), manufactured housing loans (12.5%), other commercial assets
(11.3%), and collateralized loan and bond obligations (10.6%).
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of KILICO's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums. Accelerated
amortization would result in reductions of investment income related to such
securities.
At December 31, 1999 and 1998, KILICO had unamortized premiums and discounts
related to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
----- -----
<S> <C> <C>
Unamortized premiums........................................ $11.6 $15.8
===== =====
Unamortized discounts....................................... $ 6.5 $ 4.6
===== =====
</TABLE>
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1999 2000 2001 2002 2003 2004 THEREAFTER 1999
------------- ------------ ----- ----- ----- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds..... $ 630.4 $19.6 $21.6 $47.3 $149.5 $135.2 $257.2 $ 630.4
Average yield.......... 6.61% 6.61% 6.63% 6.63% 6.67% 7.09% 7.14% 6.61%
Asset-backed bonds........ $ 409.8 $11.4 $27.0 $33.6 $ 48.8 $ 39.0 $250.0 $ 409.8
Average yield.......... 7.11% 7.17% 7.25% 7.18% 7.16% 7.34% 7.60% 7.11%
CMBs...................... $ 120.7 $ -- $ -- $ -- $ -- $ -- $120.7 $ 120.7
Average yield.......... 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.73% 6.75%
-------- --------
$1,160.9 $1,160.9
======== ========
</TABLE>
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ---------------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1998 1999 2000 2001 2002 2003 THEREAFTER 1998
------------- ------------ ------ ----- ----- ----- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds........ $ 946.7 $137.2 $85.7 $48.3 $47.7 $149.6 $478.2 $ 946.7
Average yield............. 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45%
Asset-backed bonds........... $ 407.4 $ 17.9 $36.1 $49.8 $36.1 $ 31.9 $235.6 $ 407.4
Average yield............. 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67%
CMBs......................... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5
Average yield............. 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25%
-------- --------
$1,469.6 $1,469.6
======== ========
</TABLE>
14
<PAGE> 16
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1999, is 4.5 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .26
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately .93 of a year.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1998, was 4.0 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately .65 of
a year, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.45 years.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 48 issuers at December 31, 1999, totaled 3.1 percent
of cash and invested assets at December 31, 1999 and 2.3 percent at December 31,
1998. Below investment-grade securities are generally unsecured and often
subordinated to other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers. KILICO's strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for higher-
quality investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $151.6 million real estate-related portfolio held by KILICO, consists of
joint venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1999, compared with $164.4 million, or 3.9
percent, at December 31, 1998. The decrease in real estate-related investments
during 1999 was primarily due to sales and loan paydowns.
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $29.8 million at December 31, 1999. This amount represented a net decrease
of $34.6 million since December 31, 1998, primarily due to the cancellation of
several standby financing commitments in 1999. As of December 31, 1999, KILICO
expects to fund approximately $0.1 million of these legal commitments, along
with providing capital to existing projects. The disparity between total legal
commitments and the amount expected to be funded relates principally to standby
financing arrangements that provide credit enhancements to certain tax-exempt
bonds. KILICO does not currently expect to fund these commitments. The total
legal commitments, along with estimated working capital requirements, are
considered in KILICO's evaluation of reserves and write-downs.
Excluding the $0.9 million of net equity investments in joint ventures, KILICO's
real estate loans totaled $150.7 million at December 31, 1999, after reserves
and write-downs. Of this amount, $74.4 million are on accrual status with a
weighted average interest rate of approximately 7.85 percent. Of these accrual
loans:
- 15.6 percent have terms requiring current periodic payments of their full
contractual interest
- 84.4 percent require only partial payments or payments to the extent of
borrowers' cash flow.
The equity investments in real estate at December 31, 1999 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate of an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain joint ventures.
15
<PAGE> 17
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-
MORTGAGE LOANS RELATED INVESTMENTS
---------------- ----------------------
JOINT THIRD- OTHER EQUITY
VENTURE PARTY LOANS(2) INVESTMENTS TOTAL
------- ------ -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998............................ $65.8 $ 76.5 $20.9 $ 1.2 $164.4(1)
Additions (deductions):
Fundings................................................ 0.3 -- -- -- 0.3
Interest added to principal............................. 3.5 0.4 -- -- 3.9
Sales/paydowns/distributions............................ (2.4) (13.0) (4.2) (0.5) (20.1)
Operating gain.......................................... -- -- -- 0.1 0.1
Net realized investments gains.......................... 0.8 3.3 -- 0.1 4.2(3)
Other transactions, net................................. (0.8) (3.3) 2.9 -- (1.2)(3)
----- ------ ----- ----- ------
Balance at December 31, 1999............................ $67.2 $ 63.9 $19.6 $ 0.9 $151.6(4)
===== ====== ===== ===== ======
</TABLE>
- ---------------
(1) Net of $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Included in this amount is $2.9 million of contingent interest payments
related to a 1995 real estate sale. These payments were recorded as realized
investment gains and then deducted from other transactions because they did
not affect the carrying value.
(4) Net of $23.7 million reserve and write-downs. Excludes $0.6 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships.
As a result of KILICO's ongoing strategy to reduce its exposure to real
estate-related investments, as of December 31, 1999, KILICO had investments in
three projects that accounted for approximately 92.3 percent of KILICO's $151.6
million real estate-related portfolio.
The largest of these investments at December 31, 1999 amounted to $63.9 million
and consisted of second mortgages on nine hotel properties, one office building,
and one retail property. Patrick M. Nesbitt or his affiliates, a third-party
real estate developer, have ownership interests in these properties. These
properties are geographically dispersed and the current market values of the
underlying properties substantially exceed the balances due on KILICO's
mortgages. These loans are on accrual status.
KILICO's loans to a master limited partnership (the "MLP") between subsidiaries
of Kemper and subsidiaries of Lumbermens, amounted to $55.4 million at December
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 impact the long-term economic
viability of the project. Loans to the MLP were placed on non-accrual status at
the beginning of 1999 to ensure that book value of the MLP did not increase over
net realizable value.
The remaining significant real estate-related investment amounted to $20.7
million at December 31, 1999 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, KILICO has placed these real estate-related investments on nonaccrual
status. KILICO is currently pursuing the zoning of all remaining unzoned
properties, as well as pursuing steps to sell all remaining zoned properties.
However, due to the state of Hawaii's economy, which has lagged behind the
economic expansion of most of the rest of the United States, KILICO anticipates
that it could be several additional years until it completely disposes of all
investments in Hawaii.
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments observable market price, net of
estimated selling costs. Because KILICO's real estate review process includes
estimates involving changing economic conditions and other factors, there can be
no assurance that current estimates will prove
16
<PAGE> 18
accurate over time. KILICO's real estate-related investments are expected to
continue to decline further through future sales and paydowns. KILICO's net
income could be reduced in future periods if:
- real estate market conditions worsen in areas where KILICO's portfolio is
located
- Kemper's and KILICO's plans with respect to certain projects change, or
- necessary construction or zoning permits are not obtained.
KILICO's only troubled real estate-related investments were loans on nonaccrual
status, before reserves and write-downs, totaling $98.3 million and $37.4
million at December 31, 1999 and 1998, respectively. KILICO does not accrue
interest on real estate-related investments when it judges that the likelihood
of interest collection is doubtful. Loans on nonaccrual status after reserves
and write-downs amounted to $76.3 million and $31.8 million at December 31, 1999
and 1998, respectively. The increase in nonaccrual loans in 1999, compared with
1998, is due to the previously discussed placement of loans to the MLP on
nonaccrual status at the beginning of 1999.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $264.6 million in 1999, compared
with $273.5 million in 1998 and $296.2 million in 1997. This includes KILICO's
share of the operating 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 that are on nonaccrual status. As
previously discussed, KILICO's net investment income in 1999, 1998 and 1997, has
been negatively impacted by purchase accounting adjustments.
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities...................................... $-- $0.3 $0.5
Real estate-related investments....................... 9.9 3.2 3.9
---- ---- ----
Total.......................................... $9.9 $3.5 $4.4
==== ==== ====
</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
nonperforming securities, and either worsening or stagnant real estate
conditions, would increase the expected adverse effect on KILICO's future
investment income and realized investment results.
REALIZED INVESTMENT RESULTS
Net income reflects after-tax realized investment losses of $6.2 million in
1999, and after-tax realized investment gains of $33.7 million and $6.8 million
in 1998 and 1997, respectively. Included in the after-tax realized investment
losses are trading account security losses of $4.7 million in 1999. As
previously discussed, KILICO segregated a portion of its General Account
investment portfolio in the first eleven months of 1999 into a "trading" account
under FAS 115. FAS 115 mandates that assets held in a trading account be valued
at fair value, with changes in fair value flowing through the income statement
as realized capital gains and losses. Also, as previously discussed, effective
December 1, 1999, KILICO no longer segregated its General Account investment
portfolio as "trading". As a result, all investments previously designated as
"trading" are currently classified as available for sale and changes in fair
value to the FWA and the assets supporting the FWA no longer flow through
KILICO's operating results.
Unrealized gains and losses on fixed maturity investments that are available for
sale are not reflected in KILICO's net income. These changes in unrealized value
are recorded as a component of accumulated other comprehensive income, net of
any applicable income taxes. If, and to the extent, a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates involving changing economic conditions and
other factors, there can be no assurance that current estimates will prove
accurate over time.
17
<PAGE> 19
A valuation allowance has been established to reduce the deferred tax asset for
investment losses to a net realizable amount. The valuation allowance is
evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1997, before declining in 1998.
During 1998, the Federal Open Market Committee lowered interest rates three
times. This trend was reversed in 1999 when the Federal Open Market Committee
raised rates three times over the course of the year, resulting in a flatter
yield curve due to higher short-term interest rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield.
This can result in narrower spreads.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses. A
declining interest rate environment can decrease net investment income as well
as contribute to both realized and unrealized fixed maturity investment gains.
Also, lower renewal crediting rates on annuities, compared with competitors'
higher new money crediting rates, have influenced certain annuity holders to
seek alternative products. KILICO mitigates this risk somewhat by charging
surrender fees, which decrease over time, when annuity holders withdraw funds
prior to maturity on certain annuity products. Approximately 36 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1999,
however, were no longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
During 1999, KILICO received rating upgrades from both A.M. Best and Standard &
Poor's, primarily due to the perceived long-term strategic benefit of the merger
and the increased financial strength of Zurich and Zurich Kemper Life.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $630.0 million at December 31, 1999, compared with
$853.9 million at December 31, 1998 and $865.6 million at December 31, 1997. The
decrease in stockholder's equity in 1999 was primarily due to a decrease in
accumulated other comprehensive income (loss) of $153.8 million and dividends of
$115.0 million paid to Kemper, offset by net income of $44.9 million. The
decrease in accumulated other comprehensive income (loss) was primarily related
to unrealized depreciation of KILICO's fixed maturity investment portfolio due
to rising interest rates during 1999. The decrease in stockholder's equity in
1998 was primarily due to dividends of $95.0 million paid to Kemper during 1998.
This decrease was offset by 1998 net income of $65.1 million and an increase of
$20.3 million in accumulated other comprehensive income. The increase in
accumulated other comprehensive income was primarily related to the increase in
unrealized appreciation of KILICO's fixed maturity investment portfolio due to
falling interest rates during 1998.
18
<PAGE> 20
EMERGING ISSUE
In June 1998, the FASB issued Statement of Financial Accounting Standard 133,
("FAS 133") ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In
June 1999, the FASB issued Statement of Financial Accounting Standard 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133. This statement defers the effective
date of FAS 133 to fiscal quarters of fiscal years beginning after June 15,
2000. KILICO has not determined the impact that implementation of FAS 133 would
have on its results of operations or financial position, however, the impact of
implementation is not expected to be material.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Reports of Independent Public Accountants................... 20
Consolidated Balance Sheets, December 31, 1999 and 1998..... 21
Consolidated Statements of Operations, three years ended
December 31, 1999......................................... 22
Consolidated Statements of Comprehensive Income, three years
ended December 31, 1999................................... 23
Consolidated Statements of Stockholder's Equity, three years
ended December 31, 1999................................... 24
Consolidated Statements of Cash Flows, three years ended
December 31, 1999......................................... 25
Notes to Consolidated Financial Statements.................. 26-42
Financial Statement Schedules:
Supplementary Insurance Information....................... 49
Reinsurance............................................... 50
Valuation and Qualifying Accounts......................... 51
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kemper Investors Life Insurance Company and subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 2000
20
<PAGE> 22
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1999, $3,397,188, December
31, 1998, $3,421,535)..................................... $3,276,017 $ 3,482,820
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... -- 101,781
Equity securities (cost: December 31, 1999, $65,235;
December 31, 1998,
$66,776).................................................. 61,592 66,854
Short-term investments...................................... 42,391 58,334
Joint venture mortgage loans................................ 67,242 65,806
Third-party mortgage loans.................................. 63,875 76,520
Other real estate-related investments....................... 20,506 22,049
Policy loans................................................ 261,788 271,540
Other invested assets....................................... 25,621 23,645
----------- -----------
Total investments................................. 3,819,032 4,169,349
Cash........................................................ 12,015 13,486
Accrued investment income................................... 127,219 124,213
Goodwill.................................................... 203,907 216,651
Value of business acquired.................................. 119,160 118,850
Deferred insurance acquisition costs........................ 159,667 91,543
Deferred income taxes....................................... 93,502 35,059
Reinsurance recoverable..................................... 309,696 344,837
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 29,950 23,029
Assets held in separate accounts............................ 9,778,068 7,099,204
----------- -----------
Total assets...................................... $.14,655,716 $12,239,721
=========== ===========
LIABILITIES
Future policy benefits...................................... $3,718,833 $ 3,906,391
Other policyholder benefits and funds payable............... 457,328 318,369
Other accounts payable and liabilities...................... 71,482 61,898
Liabilities related to separate accounts.................... 9,778,068 7,099,204
----------- -----------
Total liabilities................................. 14,025,711 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)............... (120,819) 32,975
Retained earnings (deficit)................................. (56,023) 14,037
----------- -----------
Total stockholder's equity........................ 630,005 853,859
----------- -----------
Total liabilities and stockholder's equity........ $14,655,716 $12,239,721
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $264,640 $273,512 $296,195
Realized investment gains (losses).......................... (9,549) 51,868 10,546
Premium income.............................................. 21,990 22,346 22,239
Separate account fees and charges........................... 74,715 61,982 85,413
Other income................................................ 11,623 10,031 11,087
-------- -------- --------
Total revenue..................................... 363,419 419,739 425,480
-------- -------- --------
BENEFIT AND EXPENSES
Interest credited to policyholders.......................... 162,243 176,906 199,782
Claims incurred and other policyholder benefits............. 18,185 28,029 28,372
Taxes, licenses and fees.................................... 30,234 30,292 52,608
Commissions................................................. 67,555 39,046 32,602
Operating expenses.......................................... 45,989 44,575 36,837
Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177)
Amortization of insurance acquisition costs................. 5,524 12,082 3,204
Amortization of value of business acquired.................. 12,955 17,677 24,948
Amortization of goodwill.................................... 12,744 12,744 15,295
-------- -------- --------
Total benefits and expenses....................... 285,615 314,786 355,471
-------- -------- --------
Income before income tax expense............................ 77,804 104,953 70,009
Income tax expense.......................................... 32,864 39,804 31,292
-------- -------- --------
Net income........................................ $ 44,940 $ 65,149 $ 38,717
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717
--------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802
Adjustment to value of business acquired.................. 12,811 (9,332) (28,562)
Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680)
--------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... (161,730) 13,178 29,560
--------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................. 16,651 6,794 (9,016)
Adjustment for amortization of premium on fixed
maturities included in net investment income.......... (10,533) (17,064) (17,866)
Adjustment for (gains) losses included in amortization
of value of business acquired......................... (454) (7,378) (2,353)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs........................ 1,892 (463) (355)
--------- -------- --------
Total reclassification adjustments for items
included in net income.......................... 7,556 (18,111) (29,590)
--------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... (169,286) 31,289 59,150
Related income tax expense (benefit)........................ (15,492) 10,952 (985)
--------- -------- --------
Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135
--------- -------- --------
Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538
Capital contributions from parent........................... -- 4,261 45,000
Adjustment to prior period capital contribution from
parent.................................................... -- (6,452) --
--------- -------- --------
End of period..................................... 804,347 804,347 806,538
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 32,975 12,637 (47,498)
Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135
--------- -------- --------
End of period..................................... (120,819) 32,975 12,637
--------- -------- --------
RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421
Net income.................................................. 44,940 65,149 38,717
Dividends to parent......................................... (115,000) (95,000) (29,250)
--------- -------- --------
End of period..................................... (56,023) 14,037 43,888
--------- -------- --------
Total stockholder's equity........................ $ 630,005 $853,859 $865,563
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 44,940 $ 65,149 $ 38,717
Reconcilement of net income to net cash provided:
Realized investment (gains) losses..................... 9,549 (51,868) (10,546)
Net change in trading account securities............... (51,239) (6,727) --
Interest credited and other charges.................... 158,557 173,958 198,206
Deferred insurance acquisition costs, net.............. (64,290) (34,483) (34,973)
Amortization of value of business acquired............. 12,955 17,677 24,948
Amortization of goodwill............................... 12,744 12,744 15,295
Amortization of discount and premium on investments.... 11,157 17,353 17,866
Deferred income taxes.................................. (42,952) (12,469) (99,370)
Net change in current federal income taxes............. (10,594) (73,162) 97,386
Benefits and premium taxes due related to separate
account bank-owned life insurance..................... 149,477 123,884 180,546
Other, net (11,901) (41,477) 17,168
----------- ----------- ---------
Net cash provided from operating activities....... 218,403 190,579 445,243
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 335,735 491,699 229,208
Fixed maturities sold prior to maturity................ 1,269,290 882,596 633,872
Equity securities...................................... 11,379 107,598 --
Mortgage loans, policy loans and other invested
assets................................................ 75,389 180,316 131,866
Cost of investments purchased or loans originated:
Fixed maturities....................................... (1,455,496) (1,319,119) (606,028)
Equity securities...................................... (8,703) (83,303) --
Mortgage loans, policy loans and other invested
assets................................................ (43,665) (66,331) (76,350)
Short-term investments, net............................... 15,943 177,723 (164,361)
Net change in receivable and payable for securities
transactions........................................... -- (677) 29,746
Net change in other assets................................ (2,725) -- 244
----------- ----------- ---------
Net cash provided from investing activities....... 197,147 370,502 178,197
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 383,874 180,124 145,687
Withdrawals............................................ (694,848) (649,400) (745,510)
Capital contributions from parent......................... -- 4,261 45,000
Dividends to parent....................................... (115,000) (95,000) (29,250)
Other..................................................... 8,953 (11,448) (18,275)
----------- ----------- ---------
Net cash used in financing activities............. (417,021) (571,463) (602,348)
----------- ----------- ---------
Net increase (decrease) in cash.............. (1,471) (10,382) 21,092
CASH, beginning of period................................... 13,486 23,868 2,776
----------- ----------- ---------
CASH, end of period......................................... $ 12,015 $ 13,486 $ 23,868
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). Kemper and the Company are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG
and Allied Zurich p.l.c., fifty-seven percent and forty-three percent,
respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied
Zurich p.l.c. is included in the FTSE-100 Share Index in London.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements in order for them to conform to the 1999
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 1999, 1998 and 1997, have been
prepared in conformity with accounting principles generally accepted in the
United States.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that could affect the reported amounts of assets and liabilities
as well as the disclosure of contingent assets or liabilities at the date of the
financial statements. As a result, actual results reported as revenue and
expenses could differ from the estimates reported in the accompanying financial
statements. As further discussed in the accompanying notes to the consolidated
financial statements, significant estimates and assumptions affect goodwill,
deferred insurance acquisition costs, the value of business acquired, provisions
for real estate-related losses and reserves, other-than-temporary declines in
values for fixed maturities, the valuation allowance for deferred income taxes
and the calculation of fair value disclosures for certain financial instruments.
GOODWILL
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1999, the Company
believes that no such adjustment is necessary.
In December of 1997, the Company changed its amortization period from
twenty-five years to twenty years in order to conform to Zurich's accounting
practices and policies. As a result of the change in amortization periods, the
Company recorded an increase in goodwill amortization expense of $5.1 million
during 1997.
VALUE OF BUSINESS ACQUIRED
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or
26
<PAGE> 28
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract rate on the value of business acquired. The estimated amortization and
accretion of interest for the value of business acquired for each of the years
through December 31, 2004 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- -------------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1997 (actual)........................................... 168,692 (34,906) 9,958 143,744
1998 (actual)........................................... 143,744 (26,807) 9,129 126,066
1999 (actual)........................................... 126,066 (20,891) 7,936 113,111
2000.................................................... 113,111 (23,418) 6,971 96,664
2001.................................................... 96,664 (21,493) 5,890 81,061
2002.................................................... 81,061 (17,805) 4,970 68,226
2003.................................................... 68,226 (16,160) 4,185 56,251
2004.................................................... 56,251 (14,625) 3,438 45,064
</TABLE>
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to accumulated other comprehensive income, net of income tax. This
adjustment increased the value of business acquired by $6.0 million as of
December 31, 1999 and decreased the value of business acquired by $7.2 million
as of December 31, 1998. Accumulated other comprehensive income increased by
approximately $3.9 million as of December 31, 1999 due to this adjustment and
decreased accumulated other comprehensive income by $4.7 million as of December
31, 1998.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to accumulated other comprehensive income,
net of income tax. The deferred insurance acquisition costs for term-life
insurance products are being amortized over the premium paying period of the
policies.
27
<PAGE> 29
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 10.0 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 7.1 percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1999 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities and equity securities are carried at fair value.
Short-term investments are carried at cost, which approximates fair value.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans and other real estate loans
where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. Real
estate reserves are established when declines in collateral values, estimated in
light of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily of
venture capital investments and a leveraged lease, are carried primarily at
cost.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or losses
on revaluation of investments are credited or charged to accumulated other
comprehensive income (loss). Such unrealized gains are recorded net of deferred
income tax expense, while unrealized losses are not tax benefitted.
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and
28
<PAGE> 30
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
retains varying amounts of withdrawal charges to cover expenses in the event of
early withdrawals by contract holders. The assets and liabilities of the
separate accounts are carried at fair value.
INCOME TAX
The Company files a separate Federal income tax return. Deferred taxes are
provided on the temporary differences between the tax and financial statement
basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. The Company
paid federal income taxes of $83.8 million, $126.0 million and $29.0 million
directly to the United States Treasury Department during 1999, 1998 and 1997,
respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value of fixed maturities compared with amortized cost, adjusted for other-than-
temporary declines in value, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
UNREALIZED
CARRYING AMORTIZED -------------------
VALUE COST GAINS LOSSES
(in thousands) ---------- ---------- ------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. treasury securities and obligations of U.S. government
agencies and authorities.................................. $ 6,516 $ 6,631 $ -- $ (115)
Obligations of states and political subdivisions, special
revenue and nonguaranteed................................. 21,656 22,107 -- (451)
Debt securities issued by foreign governments............... 23,890 24,749 380 (1,239)
Corporate securities........................................ 2,063,054 2,147,606 2,750 (87,302)
Mortgage and asset-backed securities........................ 1,160,901 1,196,095 450 (35,644)
---------- ---------- ------- ---------
Total fixed maturities............................... $3,276,017 $3,397,188 $ 3,580 $(124,751)
========== ========== ======= =========
DECEMBER 31, 1998
U.S. treasury securities and obligations of U.S. government
agencies and authorities.................................. $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and political subdivisions, special
revenue and nonguaranteed................................. 27,039 26,768 362 (91)
Debt securities issued by foreign governments............... 69,357 67,239 2,266 (148)
Corporate securities........................................ 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed securities........................ 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- ---------
Total fixed maturities............................... $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= =========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1999, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or
29
<PAGE> 31
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
prepay obligations with or without call or prepayment penalties and because
mortgage-backed and asset-backed securities provide for periodic payments
throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) ---------- ----------
<S> <C> <C>
One year or less............................................ $ 49,221 $ 48,953
Over one year through five years............................ 747,086 765,064
Over five years through ten years........................... 1,022,850 1,073,468
Over ten years.............................................. 295,959 313,608
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,160,901 1,196,095
---------- ----------
Total fixed maturities............................... $3,276,017 $3,397,188
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.9 years.
Proceeds from sales of investments in fixed maturities prior to maturity were
$1,269.3 million, $882.6 million and $633.9 million during 1999, 1998 and 1997,
respectively. Gross gains of $7.9 million, $10.1 million and $3.1 million and
gross losses of $17.7 million, $8.0 million and $13.7 million were realized on
sales and write-downs of fixed maturities in 1999, 1998 and 1997, respectively.
Excluding agencies of the U.S. government, there were no individual investments
that exceeded ten percent of stockholder's equity at December 31, 1999.
At December 31, 1999, securities carried at approximately $6.2 million were on
deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed maturity
securities, the issue(s) of such issuer would be placed on nonaccrual status
and, since declines in fair value would no longer be considered by the Company
to be temporary, would be analyzed for possible write-down. Any such issue would
be written down to its net realizable value during the fiscal quarter in which
the impairment was determined to have become other than temporary. Thereafter,
each issue on nonaccrual status is regularly reviewed, and additional
write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $151.6 million real estate portfolio at December 31, 1999 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1999 and 1998, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
(in millions) ------------ ------------
<S> <C> <C>
Impaired loans without reserves--gross...................... $ 74.9 $ 83.9
Impaired loans with reserves--gross......................... 23.4 25.0
------ ------
Total gross impaired loans........................... 98.3 108.9
Reserves related to impaired loans.......................... (18.5) (18.5)
Write-downs related to impaired loans....................... (3.5) (3.5)
------ ------
Net impaired loans................................... $ 76.3 $ 86.9
====== ======
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. The Company had an average balance of $100.0 million
and $54.6 million in impaired loans for 1999 and 1998, respectively. Cash
payments received on impaired loans are generally applied to reduce the
outstanding loan balance.
30
<PAGE> 32
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1999 and 1998, loans on nonaccrual status, before reserves and
write-downs, amounted to $98.3 million and $37.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
NET INVESTMENT INCOME
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $231,176 $232,707 $250,170
Dividends on equity securities.............................. 4,618 2,143 2,123
Income from short-term investments.......................... 3,568 5,391 4,128
Income from mortgage loans.................................. 6,296 14,964 16,283
Income from policy loans.................................... 20,131 21,096 20,549
Income from other real estate-related investments........... 155 352 6,631
Income from other loans and investments..................... 2,033 2,223 2,045
-------- -------- --------
Total investment income.............................. $267,977 $278,876 $301,929
Investment expense.......................................... (3,337) (5,364) (5,734)
-------- -------- --------
Net investment income................................ $264,640 $273,512 $296,195
======== ======== ========
</TABLE>
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the years ended December 31, 1999,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1999 1998 1997
(in thousands) ------- -------- --------
<S> <C> <C> <C>
Real estate-related......................................... $ 4,201 $ 41,362 $ 19,758
Fixed maturities............................................ (9,755) 2,158 (10,656)
Trading account securities--gross gains..................... 491 3,254 --
Trading account securities--gross losses.................... (7,794) (417) --
Trading account securities--holding losses.................. -- (151) --
Equity securities........................................... 1,039 5,496 914
Other....................................................... 2,269 166 530
------- -------- --------
Realized investment gains (losses) before income tax
expense (benefit)...................................... $(9,549) $ 51,868 $ 10,546
Income tax expense (benefit)................................ (3,342) 18,154 3,691
------- -------- --------
Net realized investment gains (losses).................... $(6,207) $ 33,714 $ 6,855
======= ======== ========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities............................................ $(182,456) $36,717 $ 87,787
Equity and other securities................................. (3,929) (1,075) (103)
Adjustment to deferred insurance acquisition costs.......... 3,834 (2,399) (2,325)
Adjustment to value of business acquired.................... 13,265 (1,954) (26,209)
--------- ------- --------
Unrealized gain (loss) before income tax expense
(benefit).............................................. (169,286) 31,289 59,150
Income tax expense (benefit)................................ (15,492) 10,952 (985)
--------- ------- --------
Net unrealized gain (loss) on investments............ $(153,794) $20,337 $ 60,135
========= ======= ========
</TABLE>
31
<PAGE> 33
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES
At December 31, 1999 and 1998 the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
As of December 31, 1999 and 1998, the Company's net equity investment in
unconsolidated investees amounted to $0.9 million and $1.2 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $155 thousand, $241 thousand and $835 thousand in 1999,
1998 and 1997, respectively.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 20.0 percent of the Company's investment-grade fixed maturities at
December 31, 1999 were mortgage-backed securities, down from 28.0 percent at
December 31, 1998, due to sales and paydowns during 1999. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 16.8 percent and 15.4 percent of the Company's investment-grade
fixed maturities at December 31, 1999 and 1998, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (24.0%), commercial
mortgage-backed securities (22.8%), manufactured housing loans (12.5%), other
commercial assets (11.3%) and collateralized loan and bond obligations (10.6%).
The Company's real estate portfolio is distributed by geographic location and
property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1999 was as follows: California (36.8%), Hawaii
(13.6%), Washington (10.9%) and Colorado (10.1%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1999 was as
follows: hotels (36.3%), land (36.1%) and residential (13.5%).
To maximize the value of certain land and other projects, additional development
has been proceeding or has been planned. Such development of existing projects
would continue to require funding, either from the Company or third parties. In
the present real estate markets, third-party financing can require credit
enhancing arrangements (e.g., standby financing arrangements and loan
commitments) from the Company. The values of development projects are dependent
on a number of factors, including Kemper's and the Company's plans with respect
thereto, obtaining necessary construction and zoning permits and market demand
for the permitted use of the property. There can be no assurance that such
permits will be obtained as planned or at all, nor that such expenditures will
occur as scheduled, nor that Kemper's and the Company's plans with respect to
such projects may not change substantially.
Slightly more than half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have taken
ownership positions in joint ventures with a small number of partners.
At December 31, 1999, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $63.9 million, or
42.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 1999, the Company did not have any Nesbitt-related off-balance-
sheet legal funding commitments outstanding.
At December 31, 1999, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $55.4 million, or
36.5 percent, of the Company's real estate portfolio. Kemper's interest in the
MLP is 75.0 percent at December 31, 1999. Loans to the MLP were placed on
non-accrual status at the beginning of 1999 due to management's
32
<PAGE> 34
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
desire not to increase book value of the MLP over net realizable value, as
interest on these loans has historically been added to principal. At December
31, 1999, MLP-related commitments accounted for approximately $0.1 million of
the Company's off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $20.7
million at December 31, 1999 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
it completely disposes of all of its investments in Hawaii. At December 31,
1999, off-balance sheet legal commitments related to Hawaiian properties totaled
$4.0 million.
At December 31, 1999, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 1999.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current..................................................... $ 75,816 $ 52,273 $130,662
Deferred.................................................... (42,952) (12,469) (99,370)
-------- -------- --------
Total............................................. $ 32,864 $ 39,804 $ 31,292
======== ======== ========
</TABLE>
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- ------- -------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $(21,477) $12,476 $ 9,002
Value of business acquired.................................. 4,643 (684) (9,173)
Deferred insurance acquisition costs........................ 1,342 (840) (814)
-------- ------- -------
Total............................................. $(15,492) $10,952 $ (985)
======== ======= =======
</TABLE>
The actual income tax expense for 1999, 1998 and 1997 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1999, 1998, and 1997 to income before income tax expense.
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $27,232 $36,734 $24,503
Difference between "expected" and actual tax expense:
State taxes............................................... 1,608 (434) 1,801
Amortization of goodwill.................................. 4,460 4,460 5,353
Dividend received deduction............................... -- (540) --
Foreign tax credit........................................ (306) (250) (278)
Other, net................................................ (130) (166) (87)
------- ------- -------
Total actual tax expense.......................... $32,864 $39,804 $31,292
======= ======= =======
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
33
<PAGE> 35
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The Company only records deferred tax assets if future realization of the tax
benefit is more likely than not, with a valuation allowance recorded for the
portion that is not likely to be realized. The valuation allowance is subject to
future adjustments based upon, among other items, the Company's estimates of
future operating earnings and capital gains.
The Company has established a valuation allowance to reduce the deferred federal
tax asset related to real estate and unrealized losses on investments to a
realizable amount. This amount is based on the evidence available and
management's judgment. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in the Company's federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs ("DAC Tax").......... $121,723 $ 86,332 $ 75,522
Unrealized losses on investments.......................... 43,758 -- --
Life policy reserves...................................... 43,931 27,240 43,337
Unearned revenue.......................................... 59,349 42,598 37,243
Real estate-related....................................... 7,103 13,944 13,400
Other investment-related.................................. 928 5,770 3,298
Other..................................................... 3,133 4,923 4,371
-------- -------- --------
Total deferred federal tax assets...................... 279,925 180,807 177,171
Valuation allowance....................................... (58,959) (15,201) (15,201)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance............................................ 220,966 165,606 161,970
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired................................ 55,884 41,598 48,469
Deferred insurance acquisition costs...................... 41,706 32,040 20,811
Depreciation and amortization............................. 19,957 19,111 20,201
Other investment-related.................................. 7,670 14,337 18,774
Unrealized gains on investments........................... -- 21,477 9,002
Other..................................................... 2,247 1,984 4,720
-------- -------- --------
Total deferred federal tax liabilities................. 127,464 130,547 121,977
-------- -------- --------
Net deferred federal tax assets............................. $ 93,502 $ 35,059 $ 39,993
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the DAC Tax
associated with $1.6 billion and $1.5 billion of new and renewal sales in 1999
and 1998, respectively, from a non-registered individual and group variable
bank-owned life insurance contract ("BOLI"). Management believes that it is more
likely than not that the results of future operations will generate sufficient
taxable income over the ten year amortization period of the unearned revenue and
DAC Tax to realize such deferred tax assets.
The tax returns through the year 1993 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1994 through 1996 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million and $45.0
million during 1998 and 1997, respectively. The Company paid cash dividends of
$115.0 million, $95.0 million and $29.3 million to Kemper during 1999, 1998 and
1997, respectively.
34
<PAGE> 36
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1999 and 1998, joint venture mortgage loans
totaled $67.2 million and $65.8 million, respectively, and during 1999, 1998 and
1997, the Company earned interest income on these joint venture loans of $0.6
million, $6.8 million and $7.5 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Scudder Kemper Investments, Inc. ("SKI") an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1999
and 1998, expenses allocated to the Company from SKI amounted to $17 thousand
and $43 thousand, respectively. During 1997, expenses allocated to the Company
from SKI and KSvC amounted to $114 thousand. The Company also paid to SKI
investment management fees of $1.8 million, $3.1 million and $3.5 million during
1999, 1998 and 1997, respectively. In addition, expenses allocated to the
Company from FKLA during 1999, 1998 and 1997 amounted to $34.1 million, $35.5
million and $30.0 million, respectively. The Company also paid to Kemper real
estate subsidiaries fees of $1.0 million, $1.5 million and $2.2 million in 1999,
1998 and 1997, respectively, related to the management of the Company's real
estate portfolio.
(8) REINSURANCE
As of December 31, 1999 and 1998, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $309.7 million
and $344.8 million, respectively.
In 1996, the Company assumed, on a yearly renewable term basis, term life
insurance from FKLA. Premiums assumed during 1999 under the terms of the treaty
amounted to $21.3 million and the face amount which remained outstanding at
December 31, 1999 amounted to $10.4 billion.
Effective January 1, 1997, the Company ceded 90 percent of all new direct life
insurance premiums to outside reinsurers. Life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $595
thousand and $413 thousand as of December 31, 1999 and 1998, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, Zurich Insurance Company, Bermuda
Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, the Company ceded, on a yearly renewable term basis, 90 percent of
the net amount at risk (death benefit payable to the insured less the insured's
separate account cash surrender value) related to BOLI, which is held in the
Company's separate accounts. As consideration for this reinsurance coverage, the
Company cedes separate account fees (cost of insurance charges) to ZICBB and
retains a portion of such funds under the terms of the reinsurance agreement in
a funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, the
Company modified the reinsurance agreement to increase the reinsurance from
ninety percent to one hundred percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
35
<PAGE> 37
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
The Company has a funds withheld account ("FWA") supporting reserve credits on
reinsurance ceded on the BOLI product. Amendments to the reinsurance contracts
during 1998 changed the methodology used to determine increases to the FWA. A
substantial portion of the FWA was marked-to-market based predominantly upon the
total return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, the Company recorded a $2.5 million increase to
the FWA related to this mark-to-market. In November 1998, to properly match
revenue and expenses, the Company had also placed assets supporting the FWA in a
segmented portion of its General Account. This portfolio was classified as
"trading" under Statement of Financial Accounting Standards No. 115 ("FAS 115")
at December 31, 1998 and through November 30, 1999. FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, the Company recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, the Company recorded realized capital losses
of $7.3 million and $0.2 million related to the changes in fair value of this
portfolio during 1999 and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion of
the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a health and welfare benefit plan that provides insurance benefits
covering substantially all eligible, active and retired employees of FKLA and
their covered dependents and beneficiaries. The Company is allocated a portion
of the costs of providing such benefits. The Company is self insured with
respect to medical benefits, and the plan is not funded except with respect to
certain disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.2 million and $2.0 million at December 31, 1999 and 1998,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 8.0 percent and 7.0 percent for 1999 and 1998, respectively. The
assumed health care trend rate used was based on projected experience for 1999,
7.2 percent for 2000, gradually declining to 5.6 percent by the year 2004 and
gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1999 and 1998 by $190 thousand and $312 thousand, respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of, or lending to, real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing
36
<PAGE> 38
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
and extent of corrective actions that may be required, the determination of the
Company's liability in proportion to others and the extent such costs may be
covered by insurance or various environmental indemnification agreements.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1999, the Company had future legal loan commitments and stand-by
financing agreements totaling $29.8 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be collateralized by assets of the joint ventures,
including first mortgage liens on the real estate. The Company's criteria in
making these arrangements are the same as for its mortgage loans and other real
estate investments. These commitments are included in the Company's analysis of
real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. Fair value estimates for financial instruments not
carried at fair value are generally determined using discounted cash flow models
and assumptions that are based on judgments regarding current and future
economic conditions and the risk characteristics of the investments. Although
fair value estimates are calculated using assumptions that management believes
are appropriate, changes in assumptions could significantly affect the estimates
and such estimates should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: Fair values were determined by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, SKI.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
MORTGAGE LOANS AND OTHER REAL ESTATE-RELATED INVESTMENTS: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty in estimating the fair value of real estate due to the lack
of a liquid quotable market.
OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the consolidated
balance sheets for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
LIFE POLICY BENEFITS: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1999 and
37
<PAGE> 39
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
1998 to be 4.78 percent and 4.75 percent, respectively, while the assumed
average market crediting rate was 5.0 percent in both 1999 and 1998.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities....................................... $3,276,017 $3,276,017 $3,482,820 $3,482,820
Trading account securities............................. -- -- 101,781 101,781
Cash and short-term investments........................ 54,406 54,406 71,820 71,820
Mortgage loans and other real estate-related assets.... 151,623 151,623 164,375 164,375
Policy loans........................................... 261,788 261,788 271,540 271,540
Equity securities...................................... 61,592 61,592 66,854 66,854
Other invested assets.................................. 25,620 26,226 23,645 27,620
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life reserves..... 3,399,299 3,299,254 3,551,050 3,657,510
Funds withheld account................................. 263,428 263,428 170,920 170,920
</TABLE>
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 2000 is $59.1 million. The
Company paid cash dividends of $115.0 million, $95.0 million and $29.3 million
to Kemper during 1999, 1998 and 1997, respectively.
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 59,116 $ 64,871 $ 58,372
======== ======== ========
Statutory capital and surplus............................... $394,966 $455,213 $476,924
======== ======== ========
</TABLE>
In March 1998, the National Association of Insurance Commissioners approved the
codification of statutory accounting principles. Codification is effective
January 1, 2001. The Company has not quantified the impact that codification
will have on its statutory financial position or results of operations.
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1999 OPERATING SUMMARY
Revenues.................................... $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income, excluding realized
gains (losses)........................... $11,222 $ 14,385 $11,568 $ 13,971 $ 51,147
Net realized investment gains (losses)...... (627) (1,286) (5,098) 805 (6,207)
------- -------- ------- -------- --------
Net income.......................... $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
</TABLE>
38
<PAGE> 40
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1998 OPERATING SUMMARY
Revenues.................................... $98,026 $110,003 $98,752 $112,958 $419,739
======= ======== ======= ======== ========
Net operating income, excluding realized
gains.................................... $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435
Net realized investment gains............... 1,205 10,187 5,818 16,504 33,714
------- -------- ------- -------- --------
Net income.......................... $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149
======= ======== ======= ======== ========
1997 OPERATING SUMMARY
Revenues.................................... $89,055 $ 99,293 $86,071 $151,061 $425,480
======= ======== ======= ======== ========
Net operating income, excluding realized
gains(losses)............................ $ 9,590 $ 7,701 $ 6,075 $ 8,496 $ 31,862
Net realized investment gains (losses)...... 578 5,305 (1,971) 2,943 6,855
------- -------- ------- -------- --------
Net income.......................... $10,168 $ 13,006 $ 4,104 $ 11,439 $ 38,717
======= ======== ======= ======== ========
</TABLE>
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 established
standards for how to report information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted FAS 131 as of December
31, 1998 and the impact of implementation did not affect the Company's
consolidated financial position, results of operations or cash flows. In the
initial year of adoption, FAS 131 requires comparative information for earlier
years to be restated, unless impracticable to do so.
The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, operate under the trade name Zurich Kemper Life. For purposes of
this operating segment disclosure, Zurich Kemper Life will also include the
operations of Zurich Direct, Inc., an affiliated direct marketing life insurance
agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS 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 accounting principles generally accepted in the United States.
Zurich Kemper Life is segregated into the Life Brokerage, Financial, Retirement
Solutions Group ("RSG") 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. The vast majority of the Company's business is derived from
the Financial and RSG SBUs.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1999, 1998 and 1997, Zurich Kemper Life did not derive net revenue
from one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBUs are as follows:
LIFE BROKERAGE: The Life Brokerage SBU develops low cost term and universal life
insurance, as well as fixed annuities, to market through independent agencies
and national marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners. Institutional business includes BOLI and funding agreements (included
in FKLA).
39
<PAGE> 41
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
variable annuities to K-12 schoolteachers, administrators, and healthcare
workers, along with college professors and certain employees of selected
non-profit organizations. This target market is eligible for what the IRS
designates as retirement-oriented savings or investment plans that qualify for
special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income.............................. $ 145,533 $ 410 $ -- $ 8,038 $ 153,981
Net investment income....................... 137,106 175,590 101,202 1,297 415,195
Realized investment gains (losses).......... 976 (6,980) (98) -- (6,102)
Fees and other income....................... 70,477 48,873 35,742 44,528 199,620
---------- ----------- ---------- -------- -----------
Total revenue....................... 354,092 217,893 136,846 53,863 762,694
---------- ----------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits....................... 200,161 112,869 68,801 3,529 385,360
Intangible asset amortization............... 54,957 12,053 13,989 -- 80,999
Net deferral of insurance acquisition
costs.................................... (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes, licenses and fees.... 21,881 66,702 26,700 17,411 132,694
Operating expenses.......................... 56,179 25,101 23,611 71,194 176,085
---------- ----------- ---------- -------- -----------
Total benefits and expenses......... 295,745 173,061 112,477 50,722 632,005
---------- ----------- ---------- -------- -----------
Income before income tax expense.............. 58,347 44,832 24,369 3,141 130,689
Income tax expense............................ 25,707 19,235 10,966 1,114 57,022
---------- ----------- ---------- -------- -----------
Net income.......................... $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== =========== ========== ======== ===========
BALANCE SHEET
Total assets................................ $3,066,956 $10,311,850 $4,755,437 $144,189 $18,278,432
========== =========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -------------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $762,694 $73,667 $18,278,432
-------- ------- -----------
Less:
Revenue, net income and assets of FKLA.................... 305,334 24,801 3,162,048
Revenue, net income and assets of ZLICA................... 49,460 8,528 456,283
Revenue, net loss and assets of Zurich Direct............. 44,481 (4,602) 4,385
-------- ------- -----------
Totals per the Company's consolidated financial
statements............................................. $363,419 $44,940 $14,655,716
======== ======= ===========
</TABLE>
40
<PAGE> 42
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income............................... $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment income........................ 141,171 180,721 100,695 271 422,858
Realized investment gains.................... 20,335 33,691 15,659 30 69,715
Fees and other income........................ 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total revenue........................... 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits........................ 243,793 117,742 73,844 2,110 437,489
Intangible asset amortization................ 58,390 15,669 15,703 -- 89,762
Net deferral of insurance acquisition
costs..................................... (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and taxes, licenses and fees..... 29,539 43,919 22,227 11,707 107,392
Operating expenses........................... 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits and expenses............. 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income tax expense............... 64,592 62,079 38,339 2,820 167,830
Income tax expense............................. 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income.............................. $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets................................. $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- -------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $834,186 $100,921 $15,646,539
-------- -------- -----------
Less:
Revenue, net income and assets of FKLA.................... 336,841 35,953 2,986,381
Revenue, net loss and assets of ZLICA..................... 54,058 (1,066) 416,115
Revenue, net income and assets of Zurich Direct........... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's consolidated financial
statements.......................................... $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
41
<PAGE> 43
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income................................ $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income......................... 155,885 212,767 91,664 455 460,771
Realized investment gains..................... 2,503 7,744 2,692 50 12,989
Fees and other income......................... 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue............................ 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits......................... 247,878 153,327 60,061 2,234 463,500
Intangible asset amortization................. 58,534 25,593 15,589 -- 99,716
Net deferral of insurance acquisition costs... (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes, licenses and fees...... 39,477 66,552 16,668 3,518 126,215
Operating expenses............................ 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and expenses.............. 351,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income tax expense
(benefit)..................................... 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit).................... 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss)........................ $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets.................................. $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of FKLA.................... 338,854 24,740 3,105,396
Revenue, net income and assets of ZLICA................... 57,233 2,193 398,786
Revenue, net loss and assets of Zurich Direct............. 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's consolidated financial
statements.......................................... $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
(16) SUBSEQUENT EVENT
In February 2000, the Company announced that it had entered into an agreement to
purchase for $5.5 million the following related entities, all privately held New
York corporations:
- PMG Securities Corporation
- PMG Asset Management, Inc.
- PMG Life Agency, Inc., and
- PMG Marketing, Inc.
These companies were primarily purchased for their specialization in the target
market of the RSG SBU. The acquisition is expected to close at the end of the
first quarter 2000.
42
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
43
<PAGE> 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Gale K. Caruso (42) President and Chief Executive Officer of Federal Kemper Life
President and Chief Executive Officer Assurance Company ("FKLA"), Fidelity Life Association
since June 1999. Director since July ("FLA"), Zurich Life Insurance Company of America ("ZLICA")
1999. and Zurich Direct, Incorporated ("ZD") since June 1999.
Director of FKLA, FLA and ZLICA since July 1999. Chairman,
President and Chief Executive Officer of Scudder Canada
Investor Services, Ltd. from 1995 to June 1999. Managing
Director of Scudder Kemper Investments, Inc. from July 1986
to June 1999.
John B. Scott (55) Chairman of the Board of FKLA, FLA, ZLICA and ZD since June
Chairman of the Board since June 1999. Director of FKLA and FLA since April 1988. Director of
1999. Director since February 1992. ZLICA and ZD since March 1996. Chief Executive Officer of
KILICO from February 1992 to June 1999. President of Kemper
Investors Life Insurance Company ("KILICO") from November
1993 to June 1999. Chief Executive Officer and President of
FKLA and FLA from April 1988 to June 1999. Chief Executive
Officer and President of ZLICA and ZD from March 1996 to
June 1999. Chairman of the Board of FKLA and FLA from April
1988 to January 1996. Chairman of the Board of KILICO from
February 1992 to January 1996. Chairman of the Board and
Director of Investors Brokerage Services, Inc. ("IBS") and
Investors Brokerage Services Insurance Agency, Inc.
("IBSIA") since 1993. Executive Vice President and Director
of Kemper Corporation ("Kemper") since January 1994 and
March 1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Eliane C. Frye (52) Executive Vice President of FKLA and FLA since March 1995.
Executive Vice President since March Executive Vice President of ZLICA and ZD since March 1996.
1995. Director since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to 1995.
Vice President of FKLA and FLA from 1988 to 1993.
Frederick L. Blackmon (48) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA and ZD since
March 1996. Director of FLA since May 1998. Director of ZD
from March 1996 to March 1997. Treasurer and Chief Financial
Officer of Kemper since January 1996. Chief Financial
Officer of Alexander Hamilton Life Insurance Company from
April 1989 to November 1995.
Russell M. Bostick (43) Senior Vice President and Chief Information Officer of FKLA,
Senior Vice President and Chief FLA, ZLICA and ZD since March 1999. Vice President and Chief
Information Officer since March 1999. Information Officer of FKLA, FLA, KILICO, ZLICA and ZD from
April 1998 to March 1999. Chief Technology Officer of
Corporate Software & Technology from June 1997 to April
1998. Vice President, Information Technology Department of
CNA Insurance Companies from January 1995 to June 1997.
James C. Harkensee (41) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA and ZD since 1995. Director
1996. of ZD from April 1993 to March 1997 and since March 1998.
Vice President of ZLICA from 1992 to 1995. Vice President of
ZD from 1994 to 1995.
James E. Hohmann (44) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD since March 1996. Chief
Actuary of ZLICA and ZD from March 1996 to January 1999.
Director of FLA since June 1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from March 1996 to March
1997. Managing Principal (Partner) of Tillinghast-Towers
Perrin from January 1991 to December 1995.
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Edward K. Loughridge (45) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of Zurich-
American Insurance Group from February 1992 to March 1996.
Debra P. Rezabek (44) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA and ZD since March 1996.
Director of ZD from March 1996 to March 1997. Secretary of
IBS and IBSIA since 1993. Director of IBS and IBSIA from
1993 to 1996. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary
of Kemper since January 1996.
Edward L. Robbins (60) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA
Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA,
Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to March 1999. Principal
of KPMG Peat Marwick LLP from May 1984 to July 1998.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Senior Vice President of ZD since March 1998. Director
1998. of IBS since May 1998. Director of IBSIA since September
1998. Vice President--Aetna Life Brokerage of Aetna Life &
Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (57) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
William H. Bolinder (56) Director of FKLA and FLA since January 1996. Director of
Director since January 1996. ZLICA and ZD since March 1995. Chairman of the Board of
FKLA, FLA and KILICO from January 1996 to June 1999.
Chairman of the Board of ZLICA and ZD from March 1995 to
June 1999. Chairman of the Board and Director of Kemper
since January 1996. Director of SKI since January 1996. Vice
Chairman of SKI from January 1996 to 1998. Member of the
Group Executive Board of Zurich Financial Services Group
since 1998. Member of the Corporate Executive Board of
Zurich Insurance Group from October 1994 to 1998. Chairman
of Zurich American Insurance Company since 1998. Chairman of
the Board of American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of Illinois,
American Zurich Insurance Company and Steadfast Insurance
Company since 1995. Chief Executive Officer of American
Guarantee and Liability Insurance Company, Zurich American
Insurance Company of Illinois and American Zurich Insurance
Company from 1986 to June 1995. President of Zurich Holding
Company of America ("ZHCA") since 1995. Vice Chairman of
ZHCA since 1996. Underwriter for Zurich American Lloyds
since 1986.
David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
Gunther Gose (55) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</TABLE>
45
<PAGE> 47
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN ALL OTHER
NAME AND COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) ($)(4)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gale K. Caruso........................... 1999 $ 91,636 $ -- $23,088 $117,600 $--
Chief Executive Officer(1)
John B. Scott............................ 1999 225,960 -- -- 270,720 --
Chairman of the Board(1)(5) 1998 171,000 134,140 -- 213,750 38,326
1997 171,000 112,100 -- 239,400 64,089
Frederick L. Blackmon.................... 1999 113,420 62,805 20,545 90,630 --
Senior Vice President and Chief 1998 94,160 63,800 -- 78,540 8,977
Financial Officer(1) 1997 96,300 54,225 -- 112,500 19,543
George Vlaisavljevich.................... 1999 260,000 152,500 -- 208,000 --
Senior Vice President(1) 1998 260,000 146,000 -- 216,600 23,236
1997 252,500 146,000 39,922 243,000 9,165
James E. Hohmann......................... 1999 237,650 141,620 -- 190,120 --
Senior Vice President(1) 1998 88,400 71,175 -- 79,560 7,823
1997 79,333 45,500 -- 80,150 1,063
</TABLE>
- ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1999 for Ms. Caruso and Mr. Scott were not available
as of the date of this filing.
(3) The amounts disclosed in this column include:
(a) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(b) Relocation expense reimbursements of $18,574 in 1999 for Ms. Caruso and
$24,498 for Mr. Vlaisavljevich in 1997.
(4) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
The amounts of the contributions for the 1999 Plan year were not available
as of the date of this filing.
(b) Distributions from the Kemper and FKLA supplemental plans.
(5) Served as Chief Executive Officer until June 15, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) AS OF MARCH 1, 2000, 100% OF THE OUTSTANDING SHARES OF KILICO WERE OWNED BY
KEMPER CORPORATION, 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049.
(B) NOT APPLICABLE.
(C) NOT APPLICABLE.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS--none.
(B) CERTAIN BUSINESS RELATIONSHIPS--not applicable.
(C) INDEBTEDNESS OF MANAGEMENT--not applicable.
(D) TRANSACTIONS WITH PROMOTERS--not applicable.
46
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
A listing of all financial statements filed as part of this Annual Report on
Form 10-K is included on page 20 in ITEM 8.
(A)(2) SCHEDULES.
The following schedules are supplemental to the financial statements of KILICO
and its subsidiaries for 1999 and are included in this Form 10-K on the pages
indicated below. All other schedules are omitted because the information
required to be stated therein is included in the financial statements or notes
thereto or because they are not applicable.
<TABLE>
<CAPTION>
SCHEDULE TITLE PAGE
- -------- ----- ----
<C> <S> <C>
III Supplementary insurance information at December 31, 1999 and
1998........................................................ 49
IV Reinsurance, for the year ended December 31, 1999*.......... 50
V Valuation and qualifying accounts, for the year ended
December 31, 1999*.......................................... 51
</TABLE>
- ---------------
* This schedule for the years ended December 31, 1998 and 1997 is incorporated
by reference to KILICO's Form 10-K filed on March 26, 1999 and on March 25,
1998, respectively.
(A)(3) EXHIBITS.
The exhibits listed on the accompanying Index to Exhibits on page 52 are filed
as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1999.
47
<PAGE> 49
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Frederick L. Blackmon,
Senior Vice President and Chief Financial Officer, and David S. Jorgensen,
Controller and Treasurer, his true and lawful attorney-in-fact with authority
together or individually to execute in the name of each such signatory, and with
authority to file with the Securities and Exchange Commission, any and all
amendments to this Annual Report on Form 10-K, together with any exhibits
thereto and other documents therewith, necessary or advisable to enable Kemper
Investors Life Insurance Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, which amendments may make such other
changes in the Annual Report on Form 10-K as the aforesaid attorney-in-fact
executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Kemper Investors Life Insurance Company has duly caused this Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Long Grove,
State of Illinois, on the 29th day of March, 2000.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ GALE K. CARUSO*
-----------------------------------------
Gale K. Caruso
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KEMPER INVESTORS LIFE
INSURANCE COMPANY IN THE CAPACITIES INDICATED ON THE 29TH DAY OF MARCH, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT* Chairman of the Board
- -----------------------------------------------------------
John B. Scott
/s/ GALE K. CARUSO* President, Chief Executive Officer and Director
- -----------------------------------------------------------
Gale K. Caruso
/s/ FREDERICK L. BLACKMON* Senior Vice President and Chief Financial Officer
- -----------------------------------------------------------
Frederick L. Blackmon
/s/ ELIANE C. FRYE* Director
- -----------------------------------------------------------
Eliane C. Frye
* By: /s/ DAVID S. JORGENSEN Controller and Treasurer
- ----------------------------------------------------------
David S. Jorgensen,
Pursuant to a Power of Attorney
</TABLE>
48
<PAGE> 50
SCHEDULE III
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1999
(in thousands)
<TABLE>
<CAPTION>
OTHER
POLICYHOLDER
DEFERRED POLICY FUTURE POLICY BENEFITS AND
SEGMENT ACQUISITION COST BENEFITS FUNDS PAYABLE
------- ---------------- ------------- -------------
<S> <C> <C> <C>
Life Brokerage.............................................. $245,605 $2,099,940 $347,207
Financial................................................... 75,324 2,620,132 158,607
RSG......................................................... 78,709 1,577,944 92,787
Direct...................................................... 74,312 34,957 81,657
-------- ---------- --------
Subtotal.................................................... 473,950 6,332,973 680,258
Deduct:
ZLICA....................................................... 108,610 314,357 12,370
FKLA........................................................ 205,673 2,299,783 210,560
Zurich Direct............................................... -- -- --
-------- ---------- --------
314,283 2,614,140 222,930
-------- ---------- --------
Net KILICO.................................................. $159,667 $3,718,833 $457,328
======== ========== ========
</TABLE>
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
OTHER
POLICYHOLDER
DEFERRED POLICY FUTURE POLICY BENEFITS AND
SEGMENT ACQUISITION COST BENEFITS FUNDS PAYABLE
------- ---------------- ------------- -------------
<S> <C> <C> <C>
Life Brokerage.............................................. $192,302 $2,225,727 $156,030
Financial................................................... 39,912 2,372,144 343,345
RSG......................................................... 45,216 1,648,393 (24,082)
Direct...................................................... 34,147 15,069 1,741
-------- ---------- --------
Subtotal.................................................... 311,577 6,261,333 477,034
Deduct:
ZLICA....................................................... 59,212 317,259 465
FKLA........................................................ 160,822 2,037,683 158,200
Zurich Direct............................................... -- -- --
-------- ---------- --------
220,034 2,354,942 158,665
-------- ---------- --------
Net KILICO.................................................. $ 91,543 $3,906,391 $318,369
======== ========== ========
</TABLE>
49
<PAGE> 51
SCHEDULE IV
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
YEAR ENDED DECEMBER 31, 1999
(in thousands)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE OF
GROSS CEDED TO FROM OTHER NET AMOUNT
DESCRIPTION AMOUNT(1) OTHER(2) COMPANIES(3) AMOUNT ASSUMED TO NET
----------- ----------- ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force......... $85,398,435 $(77,034,465) $10,400,296 $18,764,266 55.4%
=========== ============ =========== =========== =====
Life insurance premiums......... $ 893 $ (165) $ 21,262 $ 21,990 96.7%
=========== ============ =========== =========== =====
</TABLE>
- ---------------
(1) The significant increase in life insurance in force reflects $15.9 billion
of face amount issued related to group variable bank-owned life insurance
contracts sold in 1999.
(2) Life insurance in force ceded to other companies was primarily ceded to an
affiliated company, Zurich Insurance Company, Bermuda Branch.
(3) Premiums assumed during 1999 were from an affiliated company, Federal Kemper
Life Assurance Company.
50
<PAGE> 52
SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1999
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Asset valuation reserves:
Joint venture mortgage loans............... $16,433 $ -- $-- $16,433
Third-party mortgage loans................. -- -- -- -- --
Other real estate-related investments...... 6,414 -- -- 2,991 3,423
------- ------- --- ------ -------
Total $22,847 $ -- -- $2,991(1) $19,856
======= ======= === ====== =======
</TABLE>
- ---------------
(1) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.
51
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C> <C> <C>
3(a) Articles of Incorporation are incorporated herein by
reference to Exhibits filed with Registration Statement on
Form S-1 (File No. 333-02491) filed on or about April 12,
1996.
3(b) Bylaws are incorporated herein by reference to Exhibits
filed with Registration Statement on Form S-1 (File No.
333-02491) filed on or about April 12, 1996.
4(a) Form of Variable and Market Value Adjusted Deferred Annuity
Contract is incorporated herein by reference to Exhibits
filed with Registration Statement on Form S-1 (File No.
33-43462) filed October 23, 1991.
4(b) Form of Certificate to Variable and Market Value Adjusted
Deferred Annuity Contract and Enrollment Application is
incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-43462) filed
October 23, 1991.
4(c) Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application is incorporated
herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4
for KILICO Variable Annuity Separate Account (File No.
33-43501) filed November 19, 1993.
4(d) Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract is incorporated herein by
reference to Exhibits filed with Post-Effective Amendment
No. 4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed
November 19, 1993.
4(e) Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract is incorporated
herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4
for KILICO Variable Annuity Separate Account (File No.
33-43501) filed November 19, 1993.
4(f) Form of Revised Variable and Market Value Adjusted Deferred
Annuity Contract is incorporated herein by reference to
Exhibits filed with Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 for KILICO Variable
Annuity Separate Account (File No. 33-43501) filed November
19, 1993.
4(g) Form of Revised Certificate to Variable and Market Value
Adjusted Deferred Annuity Contract is incorporated herein by
reference to Exhibits filed with Post-Effective Amendment
No. 4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed
November 19, 1993.
10(a) Distribution Agreement between Kemper Investors Life
Insurance Company and Investors Brokerage Services, Inc. is
incorporated herein by reference to Exhibits filed with
Amendment No. 4 to Registration Statement on Form S-1 (File
No. 33-43462) filed on April 14, 1995.
</TABLE>
52
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YEAR END
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 3,276,017
<DEBT-CARRYING-VALUE> 3,276,017
<DEBT-MARKET-VALUE> 3,276,017
<EQUITIES> 61,592
<MORTGAGE> 131,117
<REAL-ESTATE> 20,506
<TOTAL-INVEST> 3,819,032
<CASH> 12,015
<RECOVER-REINSURE> 309,696
<DEFERRED-ACQUISITION> 159,667
<TOTAL-ASSETS> 14,655,716
<POLICY-LOSSES> 3,409,137
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 457,328
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 627,505
<TOTAL-LIABILITY-AND-EQUITY> 14,655,716
21,990
<INVESTMENT-INCOME> 264,640
<INVESTMENT-GAINS> (9,549)
<OTHER-INCOME> 86,338
<BENEFITS> 180,428
<UNDERWRITING-AMORTIZATION> 5,524
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 77,804
<INCOME-TAX> 32,864
<INCOME-CONTINUING> 44,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,940
<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
</TABLE>
