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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, 1995.
/ / 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 33-46881*.
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, 1996, 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 and 33-43462.
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PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of Illinois. KILICO is licensed in the
District of Columbia and all states except New York. KILICO is a wholly owned
subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding company.
CORPORATE CONTROL EVENTS
On January 4, 1996, an investor group comprised of Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the
issued and outstanding common stock of Kemper. As a result of the change in
control, Zurich and Insurance Partners indirectly and directly own 80 percent
and 20 percent, respectively, of Kemper and therefore KILICO.
STRATEGIC INITIATIVES
During 1992 and 1993, in order to streamline management, control costs and
improve profitability, the management, operations and strategic directions of
KILICO were integrated with those of another Kemper subsidiary, Federal Kemper
Life Assurance Company ("FKLA"). 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.
The integration encompassed virtually all aspects of operations, distribution
channels and product development and was designed to promote increased
efficiencies and productivity and to expand both companies' distribution
capabilities. As described below, KILICO has emphasized different products and
distribution methods.
Since late 1991, KILICO intensified its management of real estate-related
investments due to adverse market conditions. KILICO also successfully
implemented strategies over the last several years to reduce both its joint
venture operating losses and the level of its real estate-related investments.
These strategies included individual property sales, cash sales of real
estate-related investments amounting to $646.0 million since 1991 to affiliated
non-life realty companies, refinancings and restructurings as well as bulk sale
transactions completed in December 1995 in anticipation of the 1996 change in
control. As a result of these strategies, KILICO reduced its holdings of real
estate-related investments from 36.2 percent of its total invested assets and
cash at year-end 1991 to 6.3 percent at year-end 1995.
Further addressing the quality of its investment portfolio, KILICO reduced its
holdings of below investment-grade securities (excluding real estate-related
investments) from 20.0 percent of its total invested assets and cash at year-end
1990 to 1.8 percent at year-end 1995.
Since 1991, KILICO has also received $342.5 million in capital contributions
from Kemper. KILICO also ceded approximately $932 million of fixed-rate annuity
liabilities in reinsurance transactions in 1991 and 1992.
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
universal life and variable life insurance products through various distribution
channels. KILICO's broad product selection is designed for diverse economic
environments. KILICO structures its products to offer 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. In 1995, INVEST Financial
Corporation, an affiliated company, and EVEREN Securities, Inc., ("EVEREN"), an
affiliated company until September 13, 1995, accounted for approximately 37
percent and 21 percent, respectively, of KILICO's first-year sales, compared
with 36 percent and 20 percent, respectively, in 1994. KILICO's sales mainly
consist of deposits received on certain long duration annuity contracts. (See
the table captioned "Sales" on page 8.)
Annuities accounted for approximately 99 percent of KILICO's sales in recent
years. KILICO's 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.
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Over the last several years, in part reflecting the current interest rate
environment, and to reduce its exposure to investment risk, KILICO's strategy
has been to place more emphasis on marketing its separate account products.
Unlike the fixed-rate annuity business where KILICO manages spread revenue,
variable annuities pose minimal investment risk for KILICO, as policyholders
invest in one or more of several underlying investment funds. KILICO in turn
receives administrative fee revenue. KILICO's separate account assets totaled
$1.76 billion at December 31, 1995 and $1.50 billion at December 31, 1994 and
1993. KILICO's sales of its separate account annuities were $151.3 million in
1995, $250.7 million in 1994 and $263.7 million in 1993. Despite KILICO's
strategy to emphasize the sale of variable annuities, such sales have declined
in each of the last two years due to competitive conditions in certain
distribution channels, in part reflecting KILICO's financial strength and
performance ratings and uncertainty concerning KILICO's ownership. Rating
improvements in 1996 (see "Rankings and ratings" on page 4) and the 1996 change
in control are expected to increase KILICO's future sales.
In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit, tax-
free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995, KILICO also added seven new
subaccounts as investment portfolio choices for certain purchasers of the Kemper
Advantage III variable annuity product.
Reductions in crediting rates and investment portfolio issues have also lowered
general account annuity sales for KILICO over the last several years. Beginning
in the second half of 1994 and in early 1995, KILICO began raising crediting
rates on certain of its existing and new general account products, reflecting
both competitive conditions and a rising interest rate environment during 1994
and early 1995. As a result of these actions, sales of general account annuities
increased and represented 62.0 percent of KILICO's total sales in 1995, compared
with 46.0 percent in 1994, and 47.9 percent in 1993.
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. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
Based on statutory financial data as of December 31, 1995, KILICO had three
ratios outside the usual ranges. KILICO's net income to total income was
adversely affected by realized investment losses, primarily from dispositions of
real estate-related investments. (See the discussion captioned "INVESTMENTS"
beginning on page 9.) KILICO's change in premium and change in reserving ratios
reflected declines in variable annuity sales and interest-sensitive life sales,
respectively. 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 1995 or earlier
years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed to cover losses
to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.
In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1995, 1994 and 1993 amounted to $5.8 million, $0.0 million and $5.8
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $5.0 million, $4.0 million and $8.9 million at December 31, 1995, 1994 and
1993, respectively. No assessments were charged to expense during 1994 as KILICO
had established adequate accruals for all known insolvencies where an estimate
of the cost to cover losses to policyholders was available as of December 31,
1994. Additional assessments
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charged to expense in 1995 reflect accruals for the life insurance industry's
revised loss estimates for certain insolvent insurance companies.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law, are
being considered for future implementation by the NAIC, it is not presently
possible to predict the future impact of potential regulatory changes on KILICO.
Under asset adequacy and risk-based capital rules adopted in 1993 in Illinois
(the domiciliary state of KILICO), state regulators may mandate remedial action
for inadequately reserved or inadequately capitalized companies. The new asset
adequacy rules are designed to assure that reserves and assets are adequate to
cover liabilities under a variety of economic scenarios. The focus of the new
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 which would
mandate action under the risk-based capital rules and is in compliance with
applicable asset adequacy rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type at December 31, 1995, 1994 and 1993 (in millions):
1995 1994 1993
------- ------- -------
General account annuities..................................................... $ 3,794 $ 4,010 $ 4,180
Interest-sensitive life insurance............................................. 779 833 860
Ceded future policy benefits.................................................. 503 643 746
------ ------ ------
Total............................................................... $ 5,076 $ 5,486 $ 5,786
====== ====== ======
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO reinsured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares management,
operations and employees with FKLA and KILICO pursuant to an administrative and
management services agreement. FLA produces whole life policies not produced by
FKLA or KILICO as well as other policies similar to certain FKLA policies. At
December 31, 1995, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled approximately $502.8 million. KILICO remains
primarily liable to its policyholders for this amount. Utilizing FKLA's
employees, KILICO is the servicing company for this coinsured business and is
reimbursed by FLA for the related servicing expenses. Excluding this
coinsurance, KILICO, because it is primarily an annuity company, reinsures only
a very limited portion of its business. KILICO has immaterial exposure to
mortality losses. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.)
COMPETITION
KILICO is in a highly competitive business and 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 principal 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. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1993, 1994 and 1995 than in earlier years, and they were
under review in 1994 and 1995 due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets;
however, increases in KILICO's financial strength ratings and
claims-paying/performance ratings in January 1996 should favorably impact future
sales.
To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity 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.
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RANKINGS AND RATINGS
According to BEST'S AGENTS GUIDE TO LIFE INSURANCE COMPANIES, 1995, as of
December 31, 1994, KILICO ranked 61 of 1,315 life insurers by admitted assets;
440 of 1,137 by insurance in force; and 143 of 1,219 by net premiums written.
Following the January 1996 change in control, certain of KILICO's financial
strength ratings and claims-paying ability ratings were upgraded. KILICO's
ratings are as follows:
CURRENT RATING PRIOR RATING
-------------- ---------------
A.M. Best Company............................................ A (Excellent) A- (Excellent)
Moody's Investors Service.................................... Aa3 (Excellent) Baa1 (Adequate)
Duff & Phelps Credit Rating Co............................... AA (Very High) A+ (High)
Standard & Poor's............................................ Aq (Good) Aq (Good)
EMPLOYEES
At December 31, 1995, KILICO utilized the services of approximately 380
employees of FKLA which are also shared with FLA. On January 1, 1996,
approximately 160 employees of Zurich Life Insurance Company of America ("Zurich
Life"), an affiliated company, became employees of FKLA in connection with the
integration of Zurich Life's operations with those of FKLA's. Beginning on
January 5, 1996, KILICO, FKLA, FLA and Zurich Life operate under the trade name
the Zurich Kemper Life Insurance Companies.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which 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,
forms of policies 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, variable life insurance and annuities offered by KILICO, 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
Changing marketplace dynamics have affected the life insurance industry in
recent years. To accommodate customers' increased preference for safety over
higher yields, KILICO has systematically reduced its investment risk, as
investments are an integral part of KILICO's business, 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. Portfolio management is handled by an
affiliated company, Zurich Kemper Investments, Inc. ("ZKI"), and its
subsidiaries and affiliates, with KILICO's real estate-related investments being
handled by a Kemper 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. See "INVESTMENTS" in ITEM 7.
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ITEM 2. PROPERTIES
KILICO primarily shares the office space leased by FKLA from Lumbermens Mutual
Casualty Company, a former affiliate, ("Lumbermens"), 78,000 sq. ft. in Long
Grove, Illinois. FKLA anticipates increasing its Long Grove office space by up
to 43,000 sq. ft. in 1996. KILICO also has utilized 12,000 sq. ft. of office
space presently leased by ZKI in Chicago, although virtually all of this space
is expected to be eliminated by the end of 1996.
ITEM 3. LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. KILICO's management, based on the advice of legal counsel,
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
During the fourth quarter of 1995, pursuant to a written consent of the sole
shareholder of KILICO effective October 1, 1995, Jerome J. Cwiok was elected to
serve as a member of the board of directors. The remaining directors whose terms
continued after October 1, 1995 were John H. Fitzpatrick, David B. Mathis, John
B. Scott and Stephen B. Timbers. Effective January 4, 1996, KILICO's board of
directors changed reflecting the acquisition of Kemper and therefore KILICO by
Zurich and Insurance Partners. See ITEM 10 below.
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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) KILICO has declared no cash dividends on its common stock in 1994, 1995 or
1996 through the date of filing of 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 and 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.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1995. 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.
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
TOTAL REVENUE......................................... $ 68.1 (1) $ 330.5 $ 337.4 $ 353.6 $ 404.6
======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED INVESTMENT LOSSES....... $ 74.2 $ 61.9 $ 33.7 $ 10.3 $ 32.3
======== ======== ======== ======== ========
NET INCOME (LOSS)..................................... $ (133.0)(1) $ 26.4 $ 14.0 $ (51.9) $ (29.2)
======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets......................... $1,761.1 $1,508.0 $1,499.5 $1,140.3 $ 831.2
======== ======== ======== ======== ========
Total assets.......................................... $7,581.7 $7,537.1 $8,113.7 $6,845.9 $6,989.3
======== ======== ======== ======== ========
Future policy benefits................................ $4,573.2 $4,843.7 $5,040.0 $5,040.7 $5,268.2
======== ======== ======== ======== ========
Stockholder's equity.................................. $ 605.9 $ 434.0 $ 654.6 $ 488.7 $ 469.8
======== ======== ======== ======== ========
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(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in ITEM 7.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
KILICO recorded a net loss of $133.0 million in 1995, compared with net income
of $26.4 million in 1994 and $14.0 million in 1993. The net loss in 1995 was
primarily due to an increase in the level of real estate-related realized
investment losses. In connection with the Zurich-led investor group's
acquisition of Kemper in early January 1996, KILICO's strategy with respect to
its real estate-related investments changed dramatically as of year-end 1995.
This change, as further discussed below, resulted in significant reductions in
real estate-related investments and significant realized capital losses in the
second half of 1995.
The improvement in 1994 net income, compared with 1993, was primarily the result
of increases in spread income, an increase in fees and other income and a
decrease in commissions, taxes, licenses and fees. These improvements in 1994
were partially offset by higher realized investment losses in 1994, compared
with 1993.
The following table reflects the major components of realized investment results
included in net income (loss). (See "INVESTMENTS" beginning on page 9, and the
note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
YEAR ENDED DECEMBER 31
-----------------------------
1995 1994 1993
------- ------ ------
Real estate-related losses................. $(211.6) $(27.1) $(51.7)
Fixed maturity write-downs................. (4.7) -- (12.3)
Other gains (losses), net.................. 9.1 (8.4) 44.3
------ ------ ------
Total............................ $(207.2) $(35.5) $(19.7)
====== ====== ======
Real estate-related losses increased in 1995, compared with 1994 and 1993,
reflecting realized capital losses predominately from real estate-related bulk
sale transactions in December 1995 and a higher level of write-downs on real
estate-related investments. These sales and write-downs reflect Zurich's and
Insurance Partners' strategies, now adopted by KILICO, with respect to the
disposition of real estate-related investments. Other realized investment gains
and losses for 1995, 1994 and 1993 relate primarily to the sale of fixed
maturity investments. The fixed maturity losses generated in 1994 arose
primarily from the sale of $330.7 million of fixed maturity investments,
consisting of lower yielding investment-grade corporate securities and
collateralized mortgage obligations, related to a repositioning of KILICO's
fixed maturity investment portfolio in September 1994. The $306.9 million of
proceeds from the repositioning, together with $275.0 million of cash and
short-term investments, were reinvested into higher yielding U.S. government and
agency guaranteed mortgage pass-through securities issued by the Government
National Mortgage Association and the Federal National Mortgage Association.
(See "INVESTMENTS" beginning on page 9.)
Operating earnings (net income excluding realized investment results) improved
to $74.2 million in 1995, compared with $61.9 million and $33.7 million in 1994
and 1993, respectively, primarily due to an increase in fees and other income,
reductions in operating expenses and an increase in the net deferral of
insurance acquisition costs, offset by an increase in commissions, taxes,
licenses and fees. Operating earnings also improved in 1994, compared with 1993,
as a result of improvements in spread income.
KILICO improved spread income by increasing investment income in 1993 and 1994
and by also reducing crediting rates on certain existing blocks of fixed annuity
and interest-sensitive life insurance products in 1993 and through most of 1994.
Such reductions in crediting rates occurred as overall interest rates also
declined. Operating earnings then began to improve as crediting rates declined
at a faster rate than KILICO's investment income. Beginning in late 1994,
however, as a result of rising interest rates and other competitive market
factors, KILICO began to increase crediting rates on such interest-sensitive
products which actions adversely impacted spread income. The recent declines in
interest rates during the last three quarters of 1995, however, have mitigated
at present competitive pressures to increase existing renewal crediting rates
further.
Investment income was positively impacted in 1995, 1994 and 1993 from the
benefits of capital contributions to KILICO and from reductions in the level of
nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty companies.
These sales totaled $3.5 million in 1995, $154.0 million in 1994, $343.7 million
in 1993 and $144.8 million in 1992 and resulted in no realized gain or loss to
KILICO. Investment income in 1995 and 1994 also benefitted from the
above-mentioned repositioning of KILICO's investment portfolio and
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a $5.0 million pre-tax adjustment in 1994 related to the amortization of the
discount or premium on mortgage-backed securities. Investment income for 1995,
1994 and 1993 has also been impacted by a shift over the last few years to
higher-quality, lower yielding investments and foregone income on nonperforming
investments.
SALES
(in millions)
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
------ ------ ------
Annuities:
General account................................. $247.4 $214.2 $244.2
Separate account................................ 151.3 250.8 263.7
------ ------ ------
Total annuities....................... 398.7 465.0 507.9
Interest-sensitive life insurance and other....... .4 .8 2.0
------ ------ ------
Total sales........................ $399.1 $465.8 $509.9
====== ====== ======
Sales of annuity products consist of total deposits received. The increase in
1995 general account (fixed annuity) sales reflected KILICO's strategy to
increase sales of fixed annuities. KILICO's longer-term strategy is to direct
its sales efforts toward separate account (variable annuity) products, which
increase administrative fees earned and pose minimal investment risk for KILICO
as policyholders invest in one or more of several underlying investment funds.
Despite this strategy, separate account sales declined in 1995 and 1994,
compared with 1993, due to competitive conditions in certain distribution
channels, in part reflecting KILICO's financial strength and performance ratings
and uncertainty concerning KILICO's ownership. KILICO believes that the increase
in its financial strength and performance ratings in January 1996 together with
KILICO's association with Zurich, will assist in KILICO's future sales efforts.
Included in fees and other income are administrative fees received from KILICO's
separate account products of $21.9 million in 1995, compared with $20.8 million
and $18.1 million in 1994 and 1993, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Also included in other income in 1995 is a ceding commission
experience adjustment which resulted in income of $4.4 million related to
certain reinsurance transactions entered into by the Company during 1992. (See
the note captioned "Reinsurance" in the notes to the consolidated financial
statements.) Other income also included surrender charge revenue of $7.7 million
in 1995, compared with $7.4 million and $6.3 million in 1994 and 1993,
respectively, as total general account and separate account policyholder
surrenders and withdrawals increased in each of the last three years.
POLICYHOLDER SURRENDERS AND WITHDRAWALS
(in millions)
1995 1994 1993
------ ------ ------
General account................................ $755.9 $652.5 $516.3
Separate account............................... 205.6 150.3 104.4
------ ------ ------
Total..................................... $961.5 $802.8 $620.7
====== ====== ======
Policyholder withdrawals increased during each of the last three years due to
planned reductions in fixed annuity crediting rates, a rising interest rate
environment during the last half of 1994 and early 1995, uncertainty regarding
KILICO's ownership until 1996 and KILICO's financial strength ratings and
claims-paying/performance ratings which were lower in 1993, 1994, and 1995 than
in earlier years and in 1996. KILICO's crediting rate increases in late 1994 and
in early 1995 were designed to reduce the level of future withdrawals. As a
result of increases in renewal crediting rates and declining interest rates in
the last three quarters of 1995, together with the benefits of the planned
association with Zurich, policyholder surrenders and withdrawals for the last
half of 1995 declined substantially from the level of surrenders and withdrawals
in the first half of 1995. KILICO expects that the level of surrender and
withdrawal activity experienced should remain relatively stable for 1996 as a
result of projected stable interest rates, the majority ownership of KILICO by
Zurich and the upgrades in KILICO's ratings in January 1996.
Commissions, taxes, licenses and fees were higher in 1995, compared with 1994,
primarily reflecting an increased level of guaranty fund assessments. Expenses
for such assessments totaled $5.8 million, $0.0, and $5.8 million in 1995, 1994
and 1993, respectively. (See "Guaranty association assessments" in ITEM 1 on
page 2.) Commissions, taxes, licenses and fees were lower in 1994, compared with
1993, primarily reflecting lower annuity sales and reduced guaranty fund
assessments.
8
10
The higher level of deferral of policy acquisition costs in 1995, compared with
1994, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted during 1995 due
to real estate-related capital losses and in 1994 due to the repositioning of
KILICO's investment portfolio. These repositionings in 1995 and 1994 favorably
impacted the amortization of policy acquisition costs because they resulted in
current realized investment losses as well as an increase in projected future
net investment income, which together are expected to increase KILICO's
projected future estimated gross profits in later years. Excluding the effects
of the repositionings, the amortization of policy acquisition costs increased in
both 1995 and 1994, compared with 1993, primarily as a result of improved net
operating earnings during 1995 and 1994.
Operating expenses in 1995, compared with 1994 and 1993, declined as a result of
expense control efforts and the integration of the two life insurance
subsidiaries' operations and management beginning in 1992. Operating expenses in
1995 declined by approximately 18 percent, compared with the 1994 level.
Since year-end 1990, KILICO has taken many steps to improve its earnings,
financial strength and competitive marketing position. These steps included
adjustments in crediting rates, reductions of operating expenses, reductions of
below investment-grade securities, a strategy not to embark on new real estate
projects, additional provisions for real estate-related losses, sales of $646.0
million of certain real estate-related investments to affiliated non-life realty
companies through December 31, 1995, third-party sales and refinancings of
certain mortgage and other real estate loans, approximately $932 million in
annuity reinsurance transactions with an affiliated mutual life insurance
company, and capital contributions of $342.5 million through December 31, 1995.
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, the
interest rate environment, liability durations and changes in market and
business conditions. In addition, as previously discussed, KILICO's strategy
with respect to its real estate-related investments changed dramatically by
year-end 1995.
INVESTED ASSETS AND CASH
(in millions)
DECEMBER 31
-------------------------------------
1995 1994
---------------- ----------------
Cash and short-term investments......................................... $ 398 8.3% $ 227 4.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1.................................................... 3,096 64.9 2,569 52.2
NAIC(1) Class 2.................................................... 570 12.0 760 15.5
Below investment grade:
Performing(2)...................................................... 79 1.7 135 2.8
Nonperforming...................................................... 7 .1 -- --
Equity securities....................................................... 4 .1 15 .3
Joint venture mortgage loans(3)......................................... 120 2.5 351 7.1
Third-party mortgage loans(3)........................................... 144 3.0 319 6.5
Other real estate-related investments................................... 36 .8 237 4.8
Policy loans............................................................ 289 6.1 278 5.7
Other................................................................... 26 .5 26 .5
------ ----- ------ -----
Total(4)...................................................... $4,769 100.0% $4,917 100.0%
====== ===== ====== =====
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) Excludes $49.9 million, or 1.0 percent, at December 31, 1994 of bonds
carried in other real estate-related investments. All such bonds were sold
during 1995.
(3) A joint venture mortgage loan is recharacterized in the current period as a
third-party mortgage loan when KILICO and its affiliates have disposed of
their related equity interest in that venture.
(4) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
9
11
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized appreciation, net of tax, on fixed maturities at December 31, 1995
was $70.4 million, compared with unrealized depreciation of $243.6 million, at
December 31, 1994. KILICO does not record a net deferred tax benefit for the
aggregate unrealized depreciation on investments. Fair values are sensitive to
movements in interest rates and other economic developments and can be expected
to fluctuate, at times significantly, from period to period.
At December 31, 1995, investment-grade fixed maturities and cash and short-term
investments accounted for 85.2 percent of KILICO's invested assets and cash,
compared with 72.3 percent at December 31, 1994. Approximately 66 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1995,
compared with 70 percent at December 31, 1994.
Approximately 45.7 percent of KILICO's investment-grade fixed maturities at
December 31, 1995 were mortgage-backed securities, down from 49.2 percent at
December 31, 1994. These investments consist primarily of marketable mortgage
pass-through securities issued by the Government National Mortgage Association,
the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation and other investment-grade securities collateralized by mortgage
pass-through securities issued by these entities. KILICO has not made any
investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. KILICO's mortgage-backed investments are generally
of AAA credit quality, and the markets for these investments have been and are
expected to remain liquid. KILICO plans to continue to reduce its holding of
such investments over time.
Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the fact that KILICO's
investments in mortgage-backed securities were predominately made since 1992,
the current interest rate environment is not expected to cause any material
extension of the average maturities of these investments. With the exception of
many of KILICO's September 1994 purchases of such investments, most of these
investments were purchased by KILICO at discounts. Prepayment activity on
securities purchased at a discount is not expected to result in any material
losses to KILICO because prepayments would generally accelerate the reporting of
the discounts as investment income. Prepayment activity resulting from a decline
in interest rates on such securities purchased at a premium would accelerate the
amortization of the premiums which would result in reductions of investment
income related to such securities. At December 31, 1995, KILICO had unamortized
discounts and premiums of $17.0 million and $11.0 million, respectively, related
to mortgage-backed securities. Given the credit quality, liquidity and
anticipated payment characteristics of KILICO's investments in mortgage-backed
securities, KILICO believes that the associated risk can be managed without
material adverse consequences on its consolidated financial statements.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 11 issuers at December 31, 1995, totaled 1.8 percent
of cash and invested assets at December 31, 1995, compared with 2.8 percent at
December 31, 1994. See the note captioned "Invested Assets and Related Income"
in the notes to the consolidated financial statements. 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 has significantly reduced its exposure to below investment-grade
securities since 1990. This strategy 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.
10
12
REAL ESTATE-RELATED INVESTMENTS
The $300 million real estate portfolio held by KILICO, consisting of joint
venture and third-party mortgage loans and other real estate-related
investments, constituted 6.3 percent of cash and invested assets at December 31,
1995, compared with $907 million, or 18.4 percent, at December 31, 1994. The
decrease in real estate-related investments was primarily due to bulk sale
transactions in December 1995, write-downs reflecting Kemper's and therefore
KILICO's new owners' future plans for real estate-related investments and other
sales during 1995.
SUMMARY OF GROSS AND NET REAL ESTATE INVESTMENTS
(in millions)
DECEMBER 31
--------------
1995 1994
---- ------
Investments before reserves, write-downs and net joint venture
operating losses:
Joint venture mortgage loans..................................... $120 $ 358
Third-party mortgage loans....................................... 159 353
Other real estate-related investments............................ 124 350
------ ------
Subtotal.................................................... 403 1,061
Reserves........................................................... (15) (43)
Write-downs........................................................ (18) (97)
Cumulative net operating losses of joint ventures owned............ (70) (14)
------ ------
Net real estate investments........................................ $300 $ 907
====== ======
As reflected in the "Real estate portfolio" table on the following page, KILICO
has continued to fund both existing projects and legal commitments. The future
legal commitments were $248.2 million at December 31, 1995. This amount
represented a net decrease of $127.9 million since December 31, 1994, primarily
due to sales and fundings in 1995. As of December 31, 1995, KILICO expects to
fund approximately $56.4 million of these legal commitments, along with
providing capital to existing projects. The disparity between total legal
commitments and the amount expected to be funded relates principally to standby
financing arrangements that provide credit enhancements to certain tax-exempt
bonds, which KILICO does not presently expect to fund. The total legal
commitments, along with estimated working capital requirements, are considered
in KILICO's evaluation of reserves and write-downs. (See the note captioned
"Financial Instruments--Off-Balance-Sheet Risk" in the notes to the consolidated
financial statements.)
Generally, at the inception of a real estate loan, KILICO anticipated that it
would roll over the loan and reset the interest rate at least one time in the
future, although KILICO is not legally committed to do so. As a result of the
continued weakness in real estate markets and fairly restrictive lending
practices by other lenders in this environment, KILICO expects that all or most
loans maturing in 1996 will be rolled over, restructured or foreclosed if not
earlier disposed of.
Excluding the $0.5 million of real estate owned and $17.1 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $282.0 million
at December 31, 1995, after reserves and write-downs. Of this amount, $278.5
million are on accrual status with a weighted average interest rate of
approximately 8.2 percent. Of these accrual loans, 33.0 percent have terms
requiring current periodic payments of their full contractual interest, 46.0
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 21.0 percent defer all interest to maturity.
11
13
The equity investments in real estate at December 31, 1995 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 thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
----------------- -------------------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY BONDS(2) LOANS(3) OWNED INVESTMENTS TOTAL
------- ------ -------- -------- ----------- ----------- -------
Balance at December 31, 1994........... $ 351.4 $318.7 $ 49.9 $ 84.6 $ 57.3 $ 45.4 $ 907.3(1)
Additions (deductions):
Fundings............................... 36.2 3.7 -- 1.6 3.8 21.2 66.5
Interest added to principal............ 23.1 9.1 -- .4 -- -- 32.6
Sales/paydowns/distributions........... (147.5) (97.9) (25.1) (27.3) (76.1) (2.2) (376.1)
Sales to KFC Portfolio Corp. .......... (1.7) (1.0) -- (.8) -- -- (3.5)
Operating loss......................... -- -- -- -- -- (.4) (.4)
Transfers to real estate owned......... (3.6) (15.9) (2.8) -- 22.3 -- --
Realized investments losses............ (127.3) (61.2) (13.2) (47.5) (2.8) (73.6) (325.6)
Other transfers, net................... 24.8 (25.4) (11.2) 13.1 -- (1.3) --
Other transactions, net................ (35.0) 14.4 2.4 (7.0) (4.0) 28.0 (1.2)
------ ------ ----- ----- ----- ------ ------
Balance at December 31, 1995........... $ 120.4 $144.5 $ -- $ 17.1 $ .5 $ 17.1 $ 299.6(4)
====== ====== ===== ===== ===== ====== ======
- ---------------
(1) Net of $139.6 million reserve and write-downs. Excludes $29.8 million of
real estate-related accrued interest.
(2) KILICO's real estate-related bonds, all of which were rated below
investment-grade, were generally unsecured and were issued to KILICO by real
estate finance or development companies generally to provide financing for
Kemper's or KILICO's joint ventures for various purposes. All such bonds
were disposed of during 1995.
(3) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures, for purposes similar to those funded by real
estate-related bonds.
(4) Net of $33.2 million reserve and write-downs. Excludes $5.6 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See the notes
captioned "Unconsolidated Investors" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)
PROVISIONS FOR REAL ESTATE-RELATED LOSSES
KILICO evaluates its real estate-related investments (including accrued
interest) by estimating the probabilities of loss. (See the discussion of SFAS
114, "Accounting by Creditors for Impairment of a Loan" in the note captioned
"Summary of Significant Accounting Policies" in the notes to the consolidated
financial statements.) Because KILICO's real estate review process includes
estimates, there can be no assurance that current estimates will prove accurate
over time due to changing economic conditions and other factors.
KILICO's real estate reserve was allocated as follows:
REAL ESTATE RESERVE
(in millions)
JOINT VENTURE THIRD-PARTY OTHER REAL
MORTGAGE MORTGAGE ESTATE-RELATED
LOANS LOANS INVESTMENTS TOTAL
------------- ----------- -------------- ------
Balance at 12/31/93.............. $ 35.1 $ -- $ 26.0 $ 61.1
1994 change in reserve........... (28.0) 10.4 (.5) (18.1)
------ ------ ------ ------
Balance at 12/31/94.............. 7.1 10.4 25.5 43.0
1995 change in reserve........... (7.0) (3.9) (16.7) (27.6)
------ ------ ------ ------
Balance at 12/31/95.............. $ .1 $ 6.5 $ 8.8 $ 15.4
====== ====== ====== ======
The substantial reductions in reserves and write-downs by year-end 1995 reflect
the sales of real estate-related investments primarily in the fourth quarter of
1995.
12
14
REAL ESTATE OUTLOOK
KILICO's $300 million investment in real estate-related investments is expected
to decline further through future sales. KILICO's net income could be materially
reduced in future periods if real estate market conditions worsen in areas where
KILICO's portfolio is located or if Kemper's and KILICO's plans with respect to
certain projects change.
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
DECEMBER 31
--------------------
1995 1994
----- ------
Potential problem loans(1)................................... $17.9 $ 57.9
Past due loans(2)............................................ -- --
Nonaccrual loans(3).......................................... 3.5 274.6
Restructured loans (currently performing)(4)................. .2 50.5
Real estate owned............................................ .5 57.3
------ ------
Total.............................................. $22.1 $440.3
====== ======
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful.
(4) KILICO defines a "restructuring" of debt as an event whereby KILICO, for
economic or legal reasons related to the debtor's financial difficulties,
grants a concession to the debtor it would not otherwise consider. Such
concessions either stem from an agreement between KILICO and the debtor or
are imposed by law or a court. By this definition, restructured loans do not
include any loan that, upon the expiration of its term, both repays its
principal and pays interest then due from the proceeds of a new loan that
KILICO, at its option, may extend (roll over).
KILICO continues to devote significant attention to its real estate portfolio,
enhancing monitoring of the portfolio and formulating specific action plans
addressing nonperforming and potential problem loans. KILICO is continuing to
analyze various potential transactions designed to further reduce both its joint
venture operating losses and the amount of its real estate-related investments.
Specific types of transactions under consideration (and previously utilized)
include loan sales, property sales, mortgage refinancings and real estate
investment trusts. However, there can be no assurance that such efforts will
result in continued improvements in the performance of KILICO's real estate
portfolio.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $348.4 million in 1995, compared
with $353.1 million in 1994 and $339.3 million in 1993. Included in pre-tax net
investment income is 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 by KILICO which are on nonaccrual status.
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)
YEAR ENDED DECEMBER 31
---------------------------
1995 1994 1993
----- ----- -----
Fixed maturities....................................... $ .4 $ -- $ 8.6
Real estate-related investments........................ 20.5 28.4 32.2
----- ----- -----
Total........................................... $20.9 $28.4 $40.8
===== ===== =====
Basis points........................................... 43 55 78
===== ===== =====
13
15
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. Based on the level of
nonaccrual real estate-related investments at December 31, 1995, KILICO
estimates foregone investment income in 1996 will decrease compared with the
1995 level. 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.
Future net investment income, results of operations and cash flow will reflect
KILICO's current levels of investments in investment-grade securities, real
estate fundings treated as equity investments, nonaccrual real estate loans and
joint venture operating losses. KILICO expects, however, that any adverse
effects should be offset to some extent by certain advantages that it expects to
realize over time from its other investment strategies, its product mix and its
continuing cost-control measures. Other mitigating factors include marketing
advantages that could result from KILICO having lower levels of investment risk,
higher financial strength and claims-paying ability ratings and earnings
improvements from KILICO's ability to adjust crediting rates on annuities and
interest-sensitive life products over time.
REALIZED INVESTMENT RESULTS
Reflected in net income are after-tax realized investment losses of $207.2
million, $35.5 million and $19.7 million for 1995, 1994 and 1993, respectively.
(See the note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.)
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income. These changes in unrealized value are included within a
separate component of stockholder's equity, net of any applicable income taxes.
If and to the extent a fixed maturity investment suffers an other-than-temporary
decline in value, however, such security is written down to net realizable
value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance was established upon adoption of SFAS 109 "Accounting for
Income Taxes" at January 1, 1993 (and is evaluated as of each reported period
end) to reduce the deferred tax asset for investment losses to the amount that,
based upon available evidence, is in management's judgment more likely than not
to be realized. (See the note captioned "Income Taxes" in the notes to the
consolidated financial statements.)
INTEREST RATES
In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995.
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,
which can result in narrower spreads.
The rising interest rate environment in 1994 contributed to an increase in net
investment income as well as to both realized and unrealized fixed maturity
investment losses in 1994. Also, lower renewal crediting rates on annuities,
compared with competitors' higher new money crediting rates 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 one-half of KILICO's fixed annuity liabilities as of December 31,
1995, however, were no longer subject to significant surrender fees.
As interest rates rose during 1994 and early 1995, KILICO's capital resources
were adversely impacted by unrealized loss positions from its fixed maturity
investments. As interest rates declined during the remainder of 1995, KILICO's
capital resources were positively impacted by the elimination of the 1994
year-end unrealized loss position on its fixed maturity investments.
14
16
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, investment income, other operating
revenue and cash provided from maturing or sold investments. (See the
Policyholder surrenders and withdrawals table and related discussion on page 8
and "INVESTMENTS" beginning on page 9.)
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. (See
"Ranking and ratings" on page 4.)
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $605.9 million at December 31, 1995, compared with
$434.0 million and $654.6 million at December 31, 1994 and 1993, respectively.
The 1995 increase in stockholder's equity was primarily due to a $304.9 million
benefit related to the change in the unrealized gain position of KILICO's fixed
maturity investment portfolio due to declining interest rates, offset by a net
loss of $133.0 million. The 1994 decrease in stockholder's equity was primarily
due to a $329.5 million unrealized loss related to the change in the unrealized
loss position of KILICO's fixed maturity investment portfolio due to rising
interest rates, offset by a capital contribution of $82.5 million and net income
of $26.4 million.
15
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE(S)
------
Report of Independent Public Accountants............................................................. 16
Consolidated Balance Sheet, December 31, 1995 and 1994............................................... 17
Consolidated Statement of Operations, three years ended December 31, 1995............................ 18
Consolidated Statement of Stockholder's Equity, three years ended December 31, 1995.................. 19
Consolidated Statement of Cash Flows, three years ended December 31, 1995............................ 20
Notes to Consolidated Financial Statements........................................................... 21-32
Supplementary Schedule--Valuation and Qualifying Accounts............................................ 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Kemper Investors Life Insurance Company:
We have audited the consolidated balance sheet of Kemper Investors Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the supplementary schedule as listed in the accompanying index.
These consolidated financial statements and the supplementary schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the supplementary
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kemper Investors
Life Insurance Company and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related supplementary schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as discussed in the notes,
effective January 1, 1993, the Company changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 15, 1996
16
18
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
DECEMBER 31
-----------------------------
1995 1994
----------- -----------
ASSETS
Fixed maturities, available for sale, at fair value (cost: 1995, $3,643,985;
1994, $3,707,356)............................................................ $ 3,752,325 $ 3,463,732
Short-term investments......................................................... 372,515 204,164
Joint venture mortgage loans................................................... 120,359 351,359
Third-party mortgage loans..................................................... 144,450 318,682
Other real estate-related investments.......................................... 34,780 237,242
Policy loans................................................................... 289,390 277,743
Other invested assets.......................................................... 29,809 40,527
---------- ----------
Total investments.................................................... 4,743,628 4,893,449
Cash........................................................................... 25,811 23,189
Accrued investment income...................................................... 104,402 125,543
Deferred insurance acquisition costs........................................... 318,636 310,465
Federal income tax receivable.................................................. 112,646 25,656
Reinsurance recoverable........................................................ 502,836 642,801
Other assets and receivables................................................... 12,617 7,993
Assets held in separate accounts............................................... 1,761,110 1,507,984
---------- ----------
Total assets......................................................... $ 7,581,686 $ 7,537,080
========== ==========
LIABILITIES
Future policy benefits......................................................... $ 4,573,212 $ 4,843,690
Ceded future policy benefits................................................... 502,836 642,801
Other accounts payable and liabilities......................................... 25,943 67,261
Deferred income taxes.......................................................... 112,709 41,364
Liabilities related to separate accounts....................................... 1,761,110 1,507,984
---------- ----------
Total liabilities.................................................... 6,975,810 7,103,100
---------- ----------
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..................................................... 491,994 491,994
Unrealized gain (loss) on investments.......................................... 68,502 (236,443)
Retained earnings.............................................................. 42,880 175,929
---------- ----------
Total stockholder's equity........................................... 605,876 433,980
---------- ----------
Total liabilities and stockholder's equity........................... $ 7,581,686 $ 7,537,080
========== ==========
See accompanying notes to consolidated financial statements.
17
19
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
---------- --------- ---------
REVENUE
Net investment income................................................ $ 348,448 $ 353,084 $ 339,274
Realized investment losses........................................... (318,700) (54,557) (27,584)
Fees and other income................................................ 38,337 31,950 25,687
--------- -------- --------
Total revenue.............................................. 68,085 330,477 337,377
--------- -------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders...................... 245,615 248,494 275,689
Commissions, taxes, licenses and fees................................ 31,793 26,910 33,875
Operating expenses................................................... 20,837 25,324 24,383
Deferral of insurance acquisition costs.............................. (36,870) (31,852) (31,781)
Amortization of insurance acquisition costs.......................... 14,423 20,809 12,376
--------- -------- --------
Total benefits and expenses................................ 275,798 289,685 314,542
--------- -------- --------
Income (loss) before income tax expense (benefit) and cumulative
effect of change in accounting principle........................... (207,713) 40,792 22,835
Income tax expense (benefit)......................................... (74,664) 14,431 11,142
--------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle..................................... (133,049) 26,361 11,693
Cumulative effect of change in accounting principle.................. -- -- 2,350
--------- -------- --------
Net income (loss).......................................... $ (133,049) $ 26,361 $ 14,043
========= ======== ========
See accompanying notes to consolidated financial statements.
18
20
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
1995 1994 1993
---------- --------- ---------
CAPITAL STOCK, beginning and end of year........................... $ 2,500 $ 2,500 $ 2,500
---------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of year...................... 491,994 409,423 310,237
Capital contributions from parent.................................. -- 82,500 90,000
Transfer of limited partnership interest to parent................. -- 71 9,186
---------- --------- ---------
End of year.............................................. 491,994 491,994 409,423
---------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of year........... (236,443) 93,096 39,872
Unrealized gain (loss) on revaluation of investments, net.......... 304,945 (329,539) 53,224
---------- --------- ---------
End of year.............................................. 68,502 (236,443) 93,096
---------- --------- ---------
RETAINED EARNINGS, beginning of year............................... 175,929 149,568 136,055
Net income (loss).................................................. (133,049) 26,361 14,043
Dividend of limited partnership interest to parent................. -- -- (530)
---------- --------- ---------
End of year.............................................. 42,880 175,929 149,568
---------- --------- ---------
Total stockholder's equity............................... $ 605,876 $ 433,980 $ 654,587
========== ========= =========
See accompanying notes to consolidated financial statements.
19
21
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
--------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................. $(133,049) $ 26,361 $ 14,043
Reconcilement of net income (loss) to net cash provided:
Realized investment losses................................. 318,700 54,557 27,584
Interest credited and other charges........................ 237,984 242,591 269,766
Deferred insurance acquisition costs....................... (22,447) (11,043) (19,405)
Amortization of discount and premium on investments........ 4,586 (1,383) (203)
Deferred income taxes...................................... 38,423 20,809 14,596
Federal income tax receivable.............................. (86,990) 809 (10,110)
Other, net................................................. (29,905) (14,161) 40,258
----------- ----------- -----------
Net cash provided from operating activities........... 327,302 318,540 336,529
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity.......................... 320,143 144,717 187,949
Fixed maturities sold prior to maturity.................... 297,637 910,913 1,652,119
Mortgage loans, policy loans and other invested assets..... 450,573 536,668 881,505
Cost of investments purchased or loans originated:
Fixed maturities........................................... (549,867) (1,447,393) (2,322,085)
Mortgage loans, policy loans and other invested assets..... (131,966) (281,059) (443,445)
Short-term investments, net................................... (168,351) 198,299 (214,999)
Net change in receivable and payable for securities
transactions............................................... (1,397) (16,553) 39,078
Net reductions in other assets................................ 1,996 2,678 8,062
----------- ----------- -----------
Net cash provided by (used in) investing activities... 218,768 48,270 (211,816)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................... 247,778 215,034 246,219
Withdrawals................................................ (755,917) (652,513) (516,340)
Capital contributions from parent............................. -- 82,500 90,000
Other......................................................... (35,309) 3,871 16,776
----------- ----------- -----------
Net cash used in financing activities................. (543,448) (351,108) (163,345)
----------- ----------- -----------
Net increase (decrease) in cash.................. 2,622 15,702 (38,632)
CASH, beginning of period....................................... 23,189 7,487 46,119
----------- ----------- -----------
CASH, end of period............................................. $ 25,811 $ 23,189 $ 7,487
=========== =========== ===========
See accompanying notes to consolidated financial statements.
20
22
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 and interest-sensitive life insurance
products marketed primarily through a network of financial institutions,
nonaffiliated and affiliated 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"). On January 4, 1996, an investors group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners indirectly and
directly own 80 percent and 20 percent, respectively, of Kemper and therefore
the Company. The consolidated financial statements of the Company as of December
31, 1995 have been prepared on a historical cost basis and have not been
adjusted to reflect the fair values of the Company's assets and liabilities as
of the date of the acquisition by Zurich and Insurance Partners.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The statements include the accounts of
the Company on a consolidated basis. All significant intercompany balances and
transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 deferred insurance
acquisition costs, 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.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities and interest-sensitive life insurance products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income is a ceding commission experience adjustment
received in 1995 as a result of certain reinsurance transactions entered into by
the Company during 1992. (See the note captioned "Reinsurance".)
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. Beginning in 1994, deferred insurance acquisition costs
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 stockholder's equity, net of income tax.
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 4 percent to 8.35 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.35 percent for
periods ranging from a portion of 1996 up to a portion of 1998 and are generally
3 percent to 4.5 percent thereafter. For contracts that have annuitized,
interest rates used in determining the present value of future payments range
principally from 3 percent to 11.25 percent.
21
23
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See the note
captioned "Fair Value of Financial Instruments".)
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 reserve and write-downs include certain bonds
issued by real estate finance or development companies; notes receivable from
real estate ventures; investments in real estate ventures carried at cost,
adjusted for the equity in the operating income or loss of such ventures; and
real estate owned carried primarily at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. Prior to
year-end 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was based upon the excess of the loan amount over the estimated future cash
flows from the loan discounted at the loan's contractual rate of interest taking
into consideration the effects of recourse to, and subordination of loans held
by, affiliated non-life realty companies. At year-end 1995, reflecting the
Company's change in strategy with respect to its real estate portfolio, and the
disposition thereof, real estate-related investments were valued using an
estimate of the investments observable market price, net of estimated costs to
sell.
SFAS 114 defines "impaired loans" as loans in which it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. In the fourth quarter of 1994, the Company adopted
SFAS 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME RECOGNITION
AND DISCLOSURES. SFAS 118 amends SFAS 114, providing clarification of income
recognition issues and requiring additional disclosures relating to impaired
loans. The adoption of SFAS 118 had no effect on the Company's financial
position or results of operations at or for the year ended December 31, 1994.
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. Unrealized gains or losses on
revaluation of investments are credited or charged to stockholder's equity. Such
unrealized gains are recorded net of deferred income tax expense, while
unrealized losses are not tax benefitted.
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
securities, over the estimated life of the security. Such amortization is
included in net interest income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage 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 mortgage-backed
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, real estate-related bonds and other real estate
loans where the likelihood of collection of interest is doubtful.
Policy loans are carried at their unpaid balance. Other invested assets consist
primarily of venture capital investments and a leveraged lease and are carried
at cost. Other invested assets also included equity securities which are carried
at fair value.
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
22
24
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 operations of the Company have been included in the consolidated Federal
income tax return of Kemper. Income taxes receivable or payable have been
determined on a separate return basis, and payments have been received from or
remitted to Kemper pursuant to a tax allocation arrangement between Kemper and
its subsidiaries, including the Company. The Company generally had received a
tax benefit for losses to the extent such losses can be utilized in Kemper's
Federal consolidated tax return.
Under SFAS 109, ACCOUNTING FOR INCOME TAXES, 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. Federal
income tax paid to (refunded by) Kemper under the tax allocation arrangement for
the years ended December 31, 1995, 1994 and 1993 amounted to $(25.2 million),
$(10.7 million) and $4.2 million, respectively.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million and $146.0
million in 1994 and 1993, respectively.
The Company also transferred its equity ownership interests in two limited
partnerships during 1994 and 1993. (See the note captioned "Related-Party
Transactions".)
(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, depending upon
certain economic and business conditions. The carrying value (estimated fair
value) of fixed maturities compared with amortized cost, adjusted for
other-than-temporary declines in value, at December 31, 1995 and 1994, were as
follows:
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
1995
U.S. treasury securities and obligations of U.S. government
agencies and authorities................................... $ 215,637 $ 212,494 $ 3,163 $ (20)
Obligations of states and political subdivisions, special
revenue and nonguaranteed.................................. 24,241 22,469 1,772 --
Debt securities issued by foreign governments................ 139,361 134,715 5,120 (474)
Corporate securities......................................... 1,698,270 1,638,178 65,075 (4,983)
Mortgage-backed securities................................... 1,674,816 1,636,129 40,278 (1,591)
---------- ---------- -------- ---------
Total fixed maturities................................ $3,752,325 $3,643,985 $115,408 $ (7,068)
========== ========== ======== =========
1994
U.S. treasury securities and obligations of U.S. government
agencies and authorities................................... $ 10,682 $ 10,998 $ 24 $ (340)
Obligations of states and political subdivisions, special
revenue and nonguaranteed.................................. 25,021 25,691 -- (670)
Debt securities issued by foreign governments................ 109,624 120,950 50 (11,376)
Corporate securities......................................... 1,679,428 1,805,933 7,027 (133,532)
Mortgage-backed securities................................... 1,638,977 1,743,784 -- (104,807)
---------- ---------- -------- ---------
Total fixed maturities................................ $3,463,732 $3,707,356 $7,101 $(250,725)
========== ========== ======== =========
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in fair value would no longer be
considered by the
23
25
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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 $300 million real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments.
At December 31, 1995 and 1994, total impaired loans amounted to $21.9 million
and $75.9 million, respectively. Impaired loans with reserves were $21.9 million
and $67.6 million with corresponding reserves of $6.5 million and $18.8 million
at December 31, 1995 and 1994, respectively. The Company had an average balance
of $124.2 million and $93.9 million in impaired loans for 1995 and 1994,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance. At December 31, 1995 and 1994, loans on
nonaccrual status amounted to $3.5 million and $274.6 million, respectively.
Impaired loans are generally included in the Company's nonaccrual loans.
At December 31, 1995, securities carried at approximately $5.9 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$297.6 million, $910.9 billion and $1.7 billion during 1995, 1994 and 1993,
respectively. Gross gains of $21.2 million, $6.0 million and $80.4 million and
gross losses of $4.7 million, $55.9 million and $37.8 million were realized on
sales of fixed maturities in 1995, 1994 and 1993, respectively.
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1995:
CARRYING AMORTIZED
(in thousands) VALUE COST VALUE
---------- ----------
One year or less.................................................................... $ 25,617 $ 25,202
Over one year through five.......................................................... 576,138 562,374
Over five years through ten......................................................... 1,248,675 1,200,157
Over ten years...................................................................... 227,079 220,123
Securities not due at a single maturity date(1)..................................... 1,674,816 1,636,129
---------- ----------
Total fixed maturities....................................................... $3,752,325 $3,643,985
========== ==========
- ---------------
(1) Weighted average maturity of 5.4 years.
The sources of net investment income were as follows:
(in thousands) 1995 1994 1993
-------- -------- --------
Interest and dividends on fixed maturities............................. $269,934 $274,231 $221,144
Dividends on equity securities......................................... 681 1,751 3,084
Income from short-term investments..................................... 13,159 10,668 12,155
Income from mortgage loans............................................. 40,494 41,713 82,028
Income from policy loans............................................... 19,658 18,517 16,826
Income from other real estate-related investments...................... 15,565 21,239 11,755
Income from other loans and investments................................ 1,555 3,533 8,008
-------- -------- --------
Total investment income......................................... 361,046 371,652 355,000
Investment expense..................................................... (12,598) (18,568) (15,726)
-------- -------- --------
Net investment income........................................... $348,448 $353,084 $339,274
======== ======== ========
24
26
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1995, 1994 and 1993,
were as follows:
REALIZED GAINS (LOSSES)
-------------------------------------------
(in thousands) 1995 1994 1993
--------- -------- --------
Real estate-related............................................. $(325,611) $(41,720) $(79,652)
Fixed maturities................................................ 9,336 (49,857) 36,234
Equity securities............................................... (346) 28,243 17,086
Other........................................................... (2,079) 8,777 (1,252)
--------- -------- --------
Realized investment losses before income tax benefit.......... (318,700) (54,557) (27,584)
Income tax benefit.............................................. (111,545) (19,095) (7,917)
--------- -------- --------
Net realized investment losses................................ $(207,155) $(35,462) $(19,667)
========= ======== ========
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 securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1995,
1994 and 1993 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES)
-------------------------------------------
(in thousands) 1995 1994 1993
-------- --------- --------
Fixed maturities............................................... $351,964 $(351,646) $ 60,258
Equity securities.............................................. 180 (32,710) 19,882
Adjustment to deferred insurance acquisition costs............. (14,277) 11,325 --
-------- --------- --------
Unrealized gain (loss) before income tax expense (benefit)... 337,867 (373,031) 80,140
Income tax expense (benefit)................................... 32,922 (43,492) 26,916
-------- --------- --------
Net unrealized gain (loss) on investments............... $304,945 $(329,539) $ 53,224
======== ========= ========
(4) UNCONSOLIDATED INVESTEES
At December 31, 1995, the Company, along with other Kemper subsidiaries,
directly held partnership interests or options to acquire equity interests (or
has made loans with additional interest features) 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, 1995 and 1994, the Company's net equity investment in
unconsolidated investees amounted to $17.1 million and $45.4 million,
respectively. The Company's share of net losses related to such unconsolidated
investees amounted to $453 thousand and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.
Also at December 31, 1995, the Company had joint venture-related loans totaling
$21.8 million before reserves to partnerships in which Lumbermens Mutual
Casualty Company, an affiliate until August 1993 ("Lumbermens"), and Fidelity
Life Association ("FLA"), an affiliated mutual insurance company, had equity
interests. These joint venture-related loans totaled $37.5 million before
reserves at December 31, 1994. (See the note captioned "Financial
Instruments--Off-Balance-Sheet Risk".)
(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-backed securities (see "INVESTMENTS" beginning on page 9) and real
estate.
25
27
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1995
California........................... 28.7%
Illinois............................. 24.4
Texas................................ 10.2
Oregon............................... 7.4
Colorado............................. 6.5
Hawaii............................... 6.2
Washington........................... 5.7
Florida.............................. 4.8
Ohio................................. 2.9
Other(1)............................. 3.2
-----
Total...................... 100.0%
=====
- ---------------
(1) No other single location exceeded 2.0 percent.
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1995
Hotel................................ 34.3%
Office............................... 30.2
Land................................. 17.2
Residential.......................... 4.8
Retail............................... 4.5
Industrial........................... 3.0
Other................................ 6.0
-----
Total...................... 100.0%
=====
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. California real estate market
conditions have continued to be worse than in many other areas of the country.
Real estate markets in northern California and Illinois show some stabilization
and improvement.
Undeveloped land represented approximately 17.2 percent of the Company's real
estate portfolio at December 31, 1995. 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 permits and
market demand for the permitted use of the property. The values of certain
development projects have been written down as of December 31, 1995, reflecting
changes in plans in connection with the Zurich-led acquisition of Kemper. 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.
The majority of the Company's real estate 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. (See the note captioned
"Unconsolidated Investees".)
At December 31, 1995, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted
approximately $99.7 million, or 33.3 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1995, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1995, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $66.0 million, or 22.0 percent, of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest, and Kemper's interest is 75 percent at December
31, 1995. Prior to 1995, Kemper's interest was 50 percent. At December 31, 1995,
MLP-related commitments accounted for approximately $29.8 million of the
Company's off-balance-sheet legal commitments, of which the Company expects to
fund $17.0 million.
At December 31, 1995, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $24.8 million, or
8.3 percent, of the Company's real estate portfolio. Prime Group-related
commitments accounted for $165.6 million of the off-balance-sheet legal
commitments at December 31, 1995, of which the Company expects to fund $15.0
million.
26
28
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1995, 1994 and 1993:
(in thousands) 1995 1994 1993
---------- -------- --------
Current.............................................................. $ (113,087) $ (6,898) $ (5,773)
Deferred............................................................. 38,423 21,329 16,915
---------- -------- --------
Total...................................................... $ (74,664) $ 14,431 $ 11,142
========== ======== ========
Included in the current tax benefit is the recognition of a net operating loss
carryover at December 31, 1995 which will be utilized against taxable income on
Kemper's consolidated short period Federal income tax return for the January 1
through January 4, 1996 tax year. Beginning January 5, 1996, the Company will
file a stand alone Federal income tax return. Previously, the Company had filed
a consolidated Federal income tax return with Kemper. In the first quarter of
1996, the Company and Kemper settled the outstanding balances for the short
period under the tax allocation agreement with Kemper making a payment to the
Company of approximately $30 million. The Company's receivable from Kemper for
all remaining balances under the tax allocation agreement, after adjusting for
the $30 million payment, totaled approximately $82.6 million at December 31,
1995. Such remaining amounts are expected to be settled in the fourth quarter of
1996.
The actual income tax expense (benefit) for 1995, 1994 and 1993 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. Federal
corporate tax rate of 35 percent in 1995, 1994, and 1993 to income (loss) before
income tax expense (benefit) and cumulative effect of change in accounting
principle.
(in thousands) 1995 1994 1993
--------- -------- --------
Computed expected tax expense (benefit)................................ $ (72,700) $ 14,277 $ 7,992
Difference between "expected" and actual tax expense (benefit):
State taxes.......................................................... (1,370) 645 332
Foreign tax credit................................................... (183) (155) 358
Change in tax rate................................................... -- -- 1,441
Change in valuation allowance........................................ -- -- 701
Other, net........................................................... (411) (336) 318
--------- -------- --------
Total actual tax expense (benefit)........................... $ (74,664) $ 14,431 $ 11,142
========= ======== ========
Under SFAS 109 ACCOUNTING FOR INCOME TAXES, deferred tax assets and liabilities
are generally determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. SFAS 109
allows recognition of deferred tax assets if future realization of the tax
benefit is more likely than not, with a valuation allowance for the portion that
is not likely to be realized.
The implementation of SFAS 109 in 1993 resulted in a one-time increase to
earnings of $2.4 million.
Under SFAS 109, a valuation allowance is established to reduce the deferred
Federal tax asset related to real estate and other investments to the amount
that, based upon available evidence, is, in management's judgment, more likely
than not to be realized. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in Kemper's Federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. During 1995 and 1994, the change in the
valuation allowance related solely to the change in the net deferred Federal tax
asset or liability from unrealized gains or losses on investments.
27
29
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax liability were as follows:
DECEMBER 31,
----------------------------------------
(in thousands) 1995 1994 1993
--------- --------- --------
Deferred Federal tax assets:
Unrealized losses on investments................................. $ -- $ 85,331 $ --
Life policy reserves............................................. 42,512 51,519 60,446
Real estate-related.............................................. 21,920 39,360 45,851
Other investment-related......................................... 1,725 7,435 12,498
Other............................................................ 6,864 6,415 5,804
-------- -------- --------
Total deferred Federal tax assets............................. 73,021 190,060 124,599
Valuation allowance.............................................. (15,201) (100,532) (15,201)
-------- -------- --------
Total deferred Federal tax assets after valuation allowance... 57,820 89,528 109,398
-------- -------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs............................. 111,523 108,663 100,834
Unrealized gains on investments.................................. 37,919 -- 49,193
Depreciation and amortization.................................... 18,767 18,878 21,367
Other............................................................ 2,320 3,351 2,049
-------- -------- --------
Total deferred Federal tax liabilities........................ 170,529 130,892 173,443
-------- -------- --------
Net deferred Federal tax liabilities............................... $(112,709) $ (41,364) $(64,045)
======== ======== ========
The valuation allowance is subject to future adjustments based on, among other
items, Kemper's estimates of future operating earnings and capital gains.
The tax returns through the year 1986 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 1987 through 1990 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $82.5 million and $90.0
million during 1994 and 1993, respectively.
In 1994 and 1993, the Company transferred the majority of its deficit equity
ownership interest in two limited partnerships to another Kemper subsidiary
resulting in an increase of the Company's additional paid-in capital of $71
thousand and $9.2 million, respectively. The Company also paid a non-cash
dividend of $530 thousand in December 1993, which represented the positive
equity ownership interests of the majority of one of its limited partnerships.
Net losses associated with the Company's ownership interests in these limited
partnerships amounted to $0.4 million, $1.4 million and $5.4 million in 1995,
1994 and 1993, respectively, and are included in the Company's consolidated
statement of operations.
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, 1995 and 1994, joint venture mortgage loans
totaled $120 million and $351 million, respectively, and during 1995, 1994 and
1993, the Company earned interest income on these joint venture loans of $19.6
million, $22.0 million and $63.1 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 Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1995,
1994 and 1993, expenses allocated to the Company from ZKI and KSvC amounted to
$4.4 million, $6.5 million and $3.1 million, respectively. The Company also paid
to ZKI investment management fees of $3.4 million, $6.0 million and $6.7 million
28
30
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
during 1995, 1994 and 1993, respectively. In addition, expenses allocated to the
Company from FKLA during 1995, 1994 and 1993 amounted to $14.3 million, $11.1
million and $13.1 million, respectively.
During 1995, 1994 and 1993, the Company sold certain mortgages and real
estate-related investments, net of reserves, amounting to approximately $3.5
million, $154.0 million and $343.7 million respectively, to KFC Portfolio Corp.,
an affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on these sales. The Company also paid KFC Portfolio Corp. $1.8
million in 1995 related to the management of the Company's real estate
portfolio.
(8) 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. 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.
In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management with the Company and FKLA and common board members with
the Company, FKLA and Kemper. As of December 31, 1995, the reinsurance
recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted
to approximately $503 million. During 1995 the Company recorded income of $4.4
million related to a ceding commission experience adjustment from the 1992
reinsurance agreement.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and FKLA sponsor a welfare plan that provides medical and life
insurance benefits to their retired and active employees and 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 discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 8 percent for 1995 and 1994, respectively. The
assumed health care trend rate used was based on projected experience for 1995
and 1996, 10 percent in 1997, gradually declining to 6 percent by the year 2000
and remaining at that level thereafter.
29
31
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The status of the plan as of December 31, 1995 and 1994, was as follows:
Accumulated postretirement benefit obligation:
(in thousands) 1995 1994
---- ----
Retirees...................................................................................... $234 $206
Fully eligible active plan participants....................................................... 111 58
Other active plan participants................................................................ 427 101
Unrecognized gain (loss) from actuarial experience............................................ (85) 314
----
Accrued liability................................................................... $687 $679
====
Components of the net periodic postretirement benefit cost:
(in thousands) 1995 1994
---- ----
Service cost-benefits attributed to service during the period................................. $ 58 $ 31
Interest cost on accumulated postretirement benefit obligations............................... 41 43
Amortization of unrecognized actuarial gain................................................... (19) (35)
---- ----
Total............................................................................... $ 80 $ 39
===== =====
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, 1995 and 1994 by $146 thousand and $48 thousand, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1995 and 1994 by $24 thousand and $14 thousand, respectively.
During 1994, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
(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 none of the Company or 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 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.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1995 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. The Company is
also contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
30
32
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1995.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1995, the Company had loan commitments and stand-by financing
agreements totaling $248.2 million to support the financing needs of various
real estate investments. To the extent these arrangements are called upon,
amounts loaned would be secured 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. The Company presently expects to fund approximately $56.4 million
of these arrangements. 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) DERIVATIVE FINANCIAL INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of
business for other than trading purposes to hedge exposures in foreign currency
fluctuations related to certain foreign fixed maturity securities held by the
Company. The following table summarizes various information regarding these
derivative financial instruments as of December 31, 1995 and 1994:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REPRICING
(in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
1995 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
- ----------------------------------------------------------------- -------- -------- ---------- ---------- ---------
Non-trading foreign exchange forward options..................... $ 43,754 $112 $112 .32 30
1994
- -----------------------------------------------------------------
Non-trading foreign exchange forward options..................... 34,541 18 18 .25 30
The Company's hedges relating to foreign currency exposure are implemented using
forward contracts on foreign currencies. These are generally short duration
contracts with U.S. money-center banks. The Company records realized and
unrealized gains and losses on such investments in net income on a current
basis. The amounts of gain (loss) included in net income during 1995, 1994 and
1993 totaled $(1.0 million), $6.4 million and $(2.8 million), respectively.
(13) 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. (See the note captioned "Invested Assets and Related
Income".) 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 for fixed maturity
securities and for equity securities were determined by using market quotations,
or independent pricing services that use prices provided by market makers or
estimates of
31
33
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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, ZKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments for year-end 1994 were
estimated on a project-by-project basis. Generally, the projected cash flows of
the collateral were discounted using a discount rate of 10 to 12 percent. The
resulting collateral estimates were then used to determine the value of the
Company's real estate-related investments. Fair values for mortgage loans and
other real estate-related investments for year-end 1995 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 of 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 sheet 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 1995 and 1994 to be 4.5 percent and 5.5 percent,
respectively, while the assumed average market crediting rate was 5.5 percent in
1995 and 6.5 percent in 1994.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
DECEMBER 31
-----------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Financial instruments recorded as assets:
Fixed maturities(1).................................... $3,752,325 $3,752,325 $3,463,732 $3,463,732
Cash and short-term investments........................ 398,326 398,326 227,353 227,353
Mortgage loans and other real estate-related assets.... 299,589 299,589 907,283 804,867
Policy loans........................................... 289,390 289,390 277,743 277,743
Other invested assets.................................. 29,809 21,043 40,527 40,527
Financial instruments recorded as liabilities:
Life policy benefits................................... 4,573,212 4,488,297 4,843,690 4,709,561
- ---------------
(1) Includes $112 and $18 carrying value and fair value for 1995 and 1994,
respectively, of derivative securities used to hedge the foreign currency
exposure on certain specific foreign fixed maturity investments.
(14) 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. (See "Restrictions on dividends" on page
6.) The maximum amount of dividends which can be paid by the Company without
prior approval in 1996, assuming that there is sufficient statutory earned
surplus, is $38.3 million. The Company paid no cash dividends in 1995, 1994 or
1993.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles were as follows:
(in thousands) 1995 1994 1993
-------- -------- --------
Net income (loss)......................................................... $(64,707) $ 44,491 $(36,178)
======== ======== ========
Statutory surplus......................................................... $383,374 $416,243 $329,430
======== ======== ========
32
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
- ------------------------------ ------------------------- ----------------------------------------------------
John B. Scott (51)............ Chief Executive Officer Chief Executive Officer and President of Federal
since February 1992. Kemper Life Assurance Company and Fidelity Life
President since November Association since 1988. Chief Executive Officer and
1993. Director since President of Zurich Life Insurance Company of
1992. America since January 1996. Chairman of the Board of
Federal Kemper Life Assurance Company from April
1988 to January 1996. Chairman of the Board of
KILICO from February 1992 to January 1996. Executive
Vice President and director of Kemper Corporation
from 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.
Jerome J. Cwiok (48).......... Executive Vice President Executive Vice President of Federal Kemper Life
since 1995. Assurance Company and Fidelity Life Association
since 1995. Executive Vice President of Zurich Life
Insurance Company of America since March 1996.
Senior Vice President of KILICO, Federal Kemper Life
Assurance Company and Fidelity Life Association from
1993 to 1995. Vice President of Federal Kemper Life
Assurance Company and Fidelity Life Association
since 1993. Executive Vice President of Academy
Insurance Group from 1986 to 1993.
Eliane C. Frye (47)........... Executive Vice President Executive Vice President of Federal Kemper Life
since 1995. Assurance Company and Fidelity Life Association
since 1995. Executive Vice President of Zurich Life
Insurance Company of America since March 1996.
Senior Vice President of KILICO from 1992 to 1995.
Senior Vice President of Federal Kemper Life
Assurance Company and Fidelity Life Association from
1993 to 1995. Vice President of Federal Kemper Life
Assurance Company and Fidelity Life Association from
1988 to 1993.
Frederick L. Blackmon (43).... Senior Vice President and Senior Vice President and Chief Financial Officer of
Chief Financial Officer Federal Kemper Life Assurance Company and Fidelity
since November 1995. Life Association since November 1995. Treasurer and
Chief Financial Officer of Kemper Corporation since
January 1996. Senior Vice President and Chief
Financial Officer of Zurich Life Insurance Company
of America since March 1996. Chief Financial Officer
of Alexander Hamilton Life Insurance Company from
April 1989 to November 1995.
33
35
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
- ------------------------------ ------------------------- ----------------------------------------------------
James E. Hohmann (39)......... Senior Vice President and Senior Vice President and Chief Actuary of Federal
Chief Actuary since Kemper Life Assurance Company and Fidelity Life
December 1995. Association since December 1995. Senior Vice
President and Chief Actuary of Zurich Life Insurance
Company of America since March 1996. Managing
Principal (Partner) of Tillinghast--Towers Perrin
from January 1991 to December 1995.
Consultant/Principal (Partner) of
Tillinghast--Towers Perrin from November 1986 to
January 1991.
Debra P. Rezabek (40)......... Vice President since Vice President of Federal Kemper Life Assurance
1995. General Counsel and Company and Fidelity Life Association since 1995.
Director of Government General Counsel, Director of Government Affairs of
Affairs since 1992. Federal Kemper Life Assurance Company and Fidelity
Corporate Secretary since Life Association since 1992. Corporate Secretary of
January 1996. Federal Kemper Life Assurance Company and Fidelity
Life Association since January 1996. Vice President,
General Counsel and Director of Government Affairs
of Zurich Life Insurance Company of America since
March 1996. Assistant General Counsel of Federal
Kemper Life Assurance Company and Fidelity Life
Association from 1988 to 1992. Assistant Secretary
of KILICO, Federal Kemper Life Assurance Company and
Fidelity Life Association from 1992 to 1996.
Assistant Secretary of Kemper Corporation since
January 1996.
Loren J. Alter (57)........... Director since January Director of Federal Kemper Life Assurance Company,
1996. Fidelity Life Association and Zurich Kemper
Investments, Inc. since January 1996. Director of
Zurich Life Insurance Company of America since May
1979. Executive Vice President of Zurich Insurance
Company since 1979. President, Chief Executive
Officer and Director of Kemper Corporation since
January 1996.
William H. Bolinder (52)...... Chairman of the Board and Chairman of the Board and Director of Federal Kemper
Director since January Life Assurance Company and Fidelity Life Association
1996. since January 1996. Chairman of the Board and
Director of Zurich Life Insurance Company of America
since March 1995. Chairman of the Board of Kemper
Corporation since January 1996. Vice Chairman and
Director of Zurich Kemper Investments, Inc. since
January 1996. 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 1986. Chief Executive Officer of
American Guarantee and Liability Company, Zurich
American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance
Company from 1986 to June 1995. President of Zurich
Holding Company of America since 1986. U.S. Manager
of Zurich Insurance Company, U.S. Branch since 1986.
Underwriter for Zurich American Lloyds since 1986.
34
36
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
- ------------------------------ ------------------------- ----------------------------------------------------
Daniel L. Doctoroff (37)...... Director since January Director of Kemper Corporation, Federal Kemper Life
1996. Assurance Company and Fidelity Life Association
since January 1996. Managing Partner of Insurance
Partners Advisors, L.P. since February 1994. Vice
President of Keystone, Inc. since October 1992.
Managing Director of Rosecliff Inc./Oak Hill
Partners, Inc. since August 1987. Director of Bell &
Howell Company since 1989; National Re Corporation
since 1990; Specialty Foods Corporation since 1993;
and Transport Holdings Inc. since 1995.
Steven M. Gluckstern (45)..... Director since January Director of Kemper Corporation, Federal Kemper Life
1996. Assurance Company and Fidelity Life Association
since January 1996. Chairman of the Board and
Director of Zurich Kemper Investments, Inc. since
January 1996. Chairman of the Board and Chief
Executive Officer of Zurich Reinsurance Centre, Inc.
since May 1993. President of Centre Re, Bermuda from
December 1986 to May 1993.
Michael P. Stramaglia (36).... Director since January Director of Federal Kemper Life Assurance Company
1996. and Fidelity Life Association since January 1996.
Chief Executive Officer and President of Zurich Life
Insurance Company of Canada since June 1994.
Executive Vice-President and Chief Operating Officer
of Zurich Life Insurance Company of Canada from June
1993 to June 1994. Senior Vice-President of the
Corporate Division of Zurich Life Insurance Company
of Canada from November 1990 to January 1993.
Director of Zurich Life Insurance Company of Canada,
Zurich Life of Canada Holdings Limited, Zurich
Indemnity Company of Canada, Zurich Canadian
Holdings Limited, and Zurmex Canada Holdings
Limited.
Paul H. Warren (40)........... Director since January Director of Kemper Corporation, Federal Kemper Life
1996. Assurance Company and Fidelity Life Association
since January 1996. Partner of Insurance Partners
Advisors, L.P. since March 1994. Managing Director
of International Insurance Advisors since March
1992. Vice President of J.P. Morgan from June 1986
to March 1992. Director of Unionamerica Holdings plc
since 1993; Unionamerica Insurance Company since
1993; Tarquin plc since 1994; and Chairman
Underwriting Agencies Ltd. since 1994.
35
37
ITEM 11. EXECUTIVE COMPENSATION
TABLE I
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ ALL OTHER
NAME AND COMPENSATION AWARD(S) SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(2) ($)(3) (#)(4) ($)(5)(6)(7)
- ---------------------------------------------------------------------------------------------------------------------------------
John B. Scott..................... 1995 $172,800 $129,600 $ 20,035 $ -- $15,360 $260,106
Chief Executive Officer(1) 1994 163,200 160,800 396,801 125,280 16,080 256,915
1993 153,600 129,600 11,492 80,730 6,720 21,204
Jerome J. Cwiok................... 1995 95,000 67,500 23,381 -- 9,000 28,357
Executive Vice President(1) 1994 84,896 59,000 113,926 40,600 2,000 9,922
Eliane C. Frye.................... 1995 91,200 67,200 9,261 -- 10,560 41,546
Executive Vice President(1) 1994 73,800 58,560 57,525 38,976 1,920 57,913
- ---------------
(1) Also served in same positions for FKLA 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) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $109,760 in 1994 and $15,474 in
1995 for Mr. Cwiok.
(e) Compensation income reported in 1994 of $384,822 for Mr. Scott and
$55,974 for Ms. Frye, based on the market value on the vesting date of
restricted stock awarded under Kemper's long-term incentive plans.
(3) Due to the June 1994 vesting of all outstanding shares of restricted stock
granted in 1992 or earlier and the cancellation of shares awarded in 1993
and 1994, no shares of restricted stock were held by any of the named
executive officers at December 31, 1995.
(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.
(5) 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.
(b) Distributions from the Kemper and FKLA supplemental plans.
(c) Amounts representing a portion of the executives' income tax payments
arising from the June 1994 vesting of shares of restricted stock due to the
approval of a merger agreement among Kemper, Conseco, Inc. ("Conseco") and a
wholly owned subsidiary of Conseco (the "Conseco Merger Agreement.") The
Committee on Compensation and Organization of the Kemper board of directors
(the "Committee") authorized such payments to 16 senior executives who were
either precluded under pertinent securities law limitations or discouraged
as a matter of appearance from subsequently selling their vested shares of
restricted stock prior to the closing of the then-planned Conseco merger
transaction. The executives' tax liabilities were based on the $61.375 fair
market value of the restricted stock on the vesting date. Kemper's payments
to the executives were derived from a formula based on certain relative
stock values but approximated one-third of the executives' total income tax
liabilities from the imputed income on vesting. Mr. Scott and Ms. Frye
received $96,318 and $17,103, respectively, reported for 1994, under this
tax liability payment arrangement.
(d) Income related to the distribution of shares of the preferred stock of
EVEREN to holders of Kemper employee stock options and/or phantom stock
units as a result of the spin-off of EVEREN by Kemper.
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38
(6) Pursuant to the Conseco Merger Agreement, the restricted stock awards for
1993 and 1994 were cancelled. To replace these awards, on June 30, 1994, the
Committee, under the Kemper Bonus Restoration Plan and in its sole
discretion, granted cash awards to the named executive officers and other
affected executives entitling each of them to receive an amount in cash
immediately prior to the effective time of the then-planned Conseco merger
equal to the product of the number of shares of restricted stock previously
granted to such individual under the 1993 Senior Executive Long-Term
Incentive Plan multiplied by the consideration payable in the merger. As a
result of the termination of the Conseco Merger Agreement, no cash awards
were paid pursuant to the Kemper Bonus Restoration Plan.
In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).
By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.
Phantom units awarded to the named executive officers subject to vesting on
December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and 12,600
phantom units, respectively, Ms. Frye 1,680 and 1,680 phantom units,
respectively, and Mr. Cwiok 0 and 1,680 phantom units, respectively. All
phantom stock units vested and were paid immediately prior to the
effectiveness of the January 4, 1996 acquisition of Kemper by Zurich and
Insurance Partners. Messrs. Scott and Cwiok and Ms. Frye received allocated
cash out payments of $430,272, $41,832 and $80,317, respectively, in 1996.
(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
TABLE II
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
- ----------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
% OF TOTAL
OPTIONS/
SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#)(1) YEAR(2) ($/SH)(3) DATE(4) 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------------------
John B. Scott...................................... 15,360 2.3 $45.125 -- -- --
Jerome J. Cwiok.................................... 9,000 1.4 $45.125 -- -- --
Eliane C. Frye..................................... 10,560 1.6 $45.125 -- -- --
- ---------------
(1) Each of the options reflected in the table, when granted, were subject to
installment vesting provisions whereby only a portion of the underlying
stock would become eligible for exercise on successive anniversaries of the
date of grant. Such options became exercisable in full, however, in
connection with the approval of the merger agreement with Zurich and
Insurance Partners in May, 1995.
(2) Based on 654,750 shares, the total number of shares under options granted in
1995 for all eligible employees of KILICO, Kemper and eligible affiliates.
37
39
(3) The option exercise price assigned was the last sale price for Kemper common
stock on the date of the respective grants.
(4) All unexercised Kemper stock options were cancelled immediately prior to the
January 4, 1996 effectiveness of the acquisition of Kemper by Zurich and
Insurance Partners. Optionees were paid the spread between their option
exercise price and $49.80 per share. Mr. Cwiok and Ms. Frye received $84,150
and $112,370, respectively, in 1996 as a result of such payments. Mr. Scott
exercised 133,325 options in 1996 prior to the acquisition for a total
realized income of $1,525,185.
TABLE III
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(A) (B) (C) (D) (E)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/
FY-END (#)(1) SARS AT FY-END ($)(1)
SHARES ACQUIRED ON
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
John B. Scott(2)............ -- -- -- --
Jerome J. Cwiok(2).......... -- -- -- --
Eliane C. Frye(2)........... 11,278 $125,948 -- --
- ---------------
(1) See footnote (4) under Table II above.
(2) Includes options granted related to service for FKLA.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) AS OF MARCH 1, 1996, 100% OF THE OUTSTANDING SHARES OF KILICO WERE OWNED BY
KEMPER CORPORATION, 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049.
(B) NOT APPLICABLE.
(C) CHANGES IN CONTROL.
There are no arrangements known to KILICO, which may at a subsequent date result
in a change in control of KILICO.
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.
38
40
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 16 in ITEM 8.
(A)(2) SCHEDULES.
The following schedule is supplemental to the financial statements of KILICO and
its subsidiaries for 1995 and is included in this Form 10-K at the page
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 inapplicable.
SCHEDULE TITLE PAGE
- --------- ----------------------------------------------------------------------------------------- -----
V Valuation and qualifying accounts, for the year ended December 31, 1995*................. 41
- ---------------
* This schedule for the years ended December 31, 1994 and 1993 is incorporated
by reference to KILICO's Form 10-K filed on March 28, 1995 and Form S-1 filed
on March 29, 1994, respectively.
(A)(3) EXHIBITS.
The exhibits listed on the accompanying Index to Exhibits on page 42 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 1995.
39
41
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Frederick L. Blackmon,
Senior Vice President and Chief Financial Officer, and Robert A. Daniel, Vice
President, Treasurer and Controller, 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, 1995 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Long Grove,
State of Illinois, on the 25th day of March, 1996.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ JOHN B. SCOTT
-----------------------------------
John B. Scott
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, 1995 HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KEMPER INVESTORS LIFE
INSURANCE COMPANY IN THE CAPACITIES INDICATED ON THE 25TH DAY OF MARCH, 1996.
SIGNATURE TITLE
- ------------------------------------------------- --------------------------------------------------------
/s/ WILLIAM H. BOLINDER Chairman of the Board
- -------------------------------------------------
William H. Bolinder
/s/ JOHN B. SCOTT President, Chief Executive Officer and Director
- -------------------------------------------------
John B. Scott
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial Officer
- -------------------------------------------------
Frederick L. Blackmon
/s/ LOREN J. ALTER Director
- -------------------------------------------------
Loren J. Alter
/s/ DANIEL L. DOCTOROFF Director
- -------------------------------------------------
Daniel L. Doctoroff
40
42
SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
(in thousands)
ADDITIONS
---------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- -------------------------------- ---------- ---------- --------------- ----------- ----------
Asset valuation reserves:
Joint venture mortgage
loans...................... $ 7,077 $ -- $ -- $ 7,006 $ 71
Third-party mortgage loans.... 10,373 -- -- 3,840 6,533
Other real estate-related
investments................ 25,505 -- -- 16,676 8,829
--------- --------- ------ --------- ---------
Total $ 42,955 $ -- $ -- $27,522(1) $ 15,433
========= ========= ====== ========= ========
- ---------------
(1) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.
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43
INDEX TO EXHIBITS
EXHIBIT NO.
3(a) Articles of Incorporation are incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-33547) filed February 20, 1990.
3(b) Bylaws are incorporated herein by reference to Exhibits filed with Pre-Effective Amendment
No. 1 to the Registration Statement on Form S-1 (File No. 33-33547) filed October 11,
1990.
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.
42