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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X]
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[_]
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________ to __________.
Commission file number 333-02491*.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in charter)
ILLINOIS 36-3050975
(State of Incorporation) (I.R.S. Employer
Identification Number)
1600 McCONNOR PARKWAY
SCHAUMBURG, ILLINOIS 60196-6801
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (847) 874-4000
1 KEMPER DRIVE
LONG GROVE, ILLINOIS
60049-0001
(Former Address of Principal Executive Offices)
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 _(check mark) No ___.
As of March 1, 2002, 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 333-22389, 333-32632 and 333-54252.
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PART I
Item 1. Business
Corporate structure
Kemper Investors Life Insurance Company, founded in 1947, is incorporated
under the insurance laws of the State of Illinois and is licensed in the
District of Columbia and all states except New York. Zurich Kemper Life
Insurance Company of New York ("ZKLICONY"), a newly formed, wholly-owned
subsidiary, received its license from the state of New York early in 2001 and
began writing business in May of 2001. Kemper Investors Life Insurance Company
and its subsidiaries (collectively, "KILICO", "the Company", "we", "our" or
"us") is a wholly-owned subsidiary of Kemper Corporation ("Kemper"), a
non-operating holding company. Kemper is a wholly-owned subsidiary of Zurich
Group Holding ("ZGH" or "Zurich"), a Swiss holding company. ZGH is wholly-owned
by Zurich Financial Services ("ZFS"), a Swiss holding company.
Strategic initiatives
Our management, operations and strategic directions are integrated with
those of several other Kemper subsidiaries:
. Federal Kemper Life Assurance Company ("FKLA")
. Zurich Life Insurance Company of America ("ZLICA"), and
. Zurich Direct, Inc. ("ZD").
This integration streamlines management, controls costs, improves
profitability, increases operating efficiencies and productivity, and helps to
expand the companies' distribution capabilities. Headquartered in Schaumburg,
Illinois, FKLA markets term and interest-sensitive life insurance, as well as
certain annuity products, primarily through brokerage general agents and other
independent distributors. ZLICA markets term life insurance products primarily
through ZD. ZD is an affiliated direct marketing life insurance agency
currently marketing basic, low-cost term life insurance through various
marketing media. The Company, FKLA, ZLICA and Fidelity Life Association, A
Mutual Legal Reserve Company ("FLA"), collectively operate under the trade name
Zurich Life, formerly Zurich Kemper Life.
Over the last several years, we have increased the competitiveness of our
variable annuity portfolio by adding new products with additional benefit
options, adding multiple variable subaccount investment options and adding
investment managers to existing variable annuity products. In 1997, we
introduced a non-registered individual and group variable business-owned life
insurance contract ("BOLI") and a series of individual variable life insurance
contracts. In 1998, we introduced a new registered individual variable annuity
product with thirty-seven variable subaccount investment options and various
investment managers.
Throughout 2000 and 2001, we introduced a number of new annuity and life
insurance products, all designed to meet the demands of our customers in an
ever-changing marketplace.
In 2000, as part of our plan to sharpen our focus on the group retirement
market, we purchased PMG Securities Corporation, PMG Asset Management, Inc.,
PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively ''PMG''). The
total cost was $8.2 million, resulting in the recording of intangible assets in
the amount of $7.6 million. PMG is a well-respected broker-dealer in the
eastern part of the country. We own 100 percent of the stock of PMG.
Also in 2000, we transferred $63.3 million in fixed maturity securities and
cash to fund the operations of ZKLICONY.
1
Narrative description of business
We offer both individual and group fixed-rate (general account) and variable
(separate account) annuity contracts, as well as individual and group term
life, universal life and individual and group variable (separate account) life
insurance products through various distribution channels. We 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 our products. Our sales mainly
consist of deposits received on certain long duration fixed and variable
annuities and variable life insurance contracts.
Our fixed and variable annuities generally have surrender charges that are a
specified percentage of policy values or premiums and decline as the policy
ages. General account annuity and interest-sensitive life policies are
guaranteed to accumulate at specified interest rates but allow for periodic
crediting rate changes.
Over the last several years, in part reflecting the current interest rate
environment, we have increased our emphasis on marketing our existing and new
separate account products. Unlike the fixed-rate annuity business where we
manage spread revenue, we receive administrative fee revenue on variable
products, which compensates us for providing death benefits potentially in
excess of cash surrender values. In addition, on variable life insurance
contracts, cost of insurance charges compensate us for providing death benefit
coverage substantially in excess of surrender values.
As a result of this strategy, our separate account assets and related sales
of our variable annuity products have increased over the last few years. Our
separate account assets and variable product sales were as follows (in
millions):
December 31,
----------------------------
2001 2000 1999
--------- --------- --------
Separate account assets..... $13,108.8 $11,179.6 $9,778.1
========= ========= ========
Year Ended December 31,
----------------------------
2001 2000 1999
--------- --------- --------
Variable annuity sales (1).. $ 2,547.5 $ 1,160.5 $ 758.6
Variable life sales......... 544.9 856.1 1,661.1
--------- --------- --------
Total variable product sales $ 3,092.4 $ 2,016.6 $2,419.7
========= ========= ========
- --------
(1) Includes the fixed account option of the variable contracts totaling $536.8
million, $339.6 million and $289.7 million in 2001, 2000 and 1999,
respectively. The fixed account option has been primarily used for dollar
cost averaging into the separate account investment options. This allows
contractholders the option to allocate amounts to the fixed account option
and authorize pro-rated amounts to be automatically transferred into the
separate account investment options over a specified period of time.
Theoretically, this reduces the effects of significant market fluctuations.
However, this result is not guaranteed.
In 2001, several new products were introduced. We partnered with Discover
Financial Services to create the Discover Bonus Annuity, an individual tax
deferred, fixed annuity product, that offers a one percent cash bonus on all
contributions. We distribute the Discover Bonus Annuity to Discover Card
customers. Zurich Classic II, an individual and group fixed annuity, offers
contractholders a number of guaranteed interest periods from which to choose.
Zurich Preferred Plus, an individual and group variable annuity and market
value adjusted deferred annuity, offers contractholders twenty-seven different
variable subaccount investment options with various investment managers and
offers a four percent bonus on all premiums paid. Also in 2001, our newly
formed subsidiary ZKLICONY introduced two new term life insurance products in
the state of New York.
In 2000, several new products were also introduced. Zurich Preferred, a
registered individual and group variable and market value adjusted deferred
annuity, offers contractholders twenty-seven different variable subaccount
investment options with various investment managers. Zurich Kemper
Lifeinvestor, a registered
2
flexible premium variable universal life product, permits policyholders to
allocate premiums among forty-one different subaccount investment options with
various investment managers. We also introduced a new individual and group
fixed annuity, Zurich Classic.
During mid-1998, we introduced DESTINATIONS/SM, a registered individual and
group variable, fixed and market value adjusted deferred annuity product.
DESTINATIONSSM currently offers forty-two variable subaccount investment
options with various investment managers, ten guarantee periods, a fixed
account option, dollar cost averaging and a guaranteed retirement income
benefit ("GRIB") option. The GRIB is an optional benefit to the DESTINATIONSSM
variable annuity, for an additional asset-based fee. It allows for a proxy
account value, called the GRIB Base, to be applied to the guaranteed annuity
factors (settlement option purchase rates) in the contract. The GRIB Base prior
to attained age 80 is the greatest of: /
. the contract value (account value)
. the greatest anniversary value before the exercise (annuitization) date, or
. purchase payments minus previous withdrawals, accumulated at 5 percent
interest per year to the annuitization date.
In the fourth quarter of 2001, we discontinued offering the GRIB option with
the DESTINATIONS/SM product due to the continued decline in the stock market,
particularly in the wake of the tragedy of September 11th. Future sales of the
DESTINATIONSSM product are expected to be substantially lower because of this
decision. /
During mid-1997, we introduced variable BOLI, a group variable life
insurance contract that is primarily marketed to banks and other large
corporate entities. Also in 1997, we issued a series of non-registered variable
individual universal life insurance contracts that are marketed primarily to
high net worth individuals. Significant fluctuations in our sales of the
variable life products are due mainly to the nature of the BOLI product--high
dollar volume per sale, low frequency of sales--and any potential changes to
BOLI's tax advantaged status as proposed in the release of the federal
government's fiscal budgets.
Investors Brokerage Services, Inc., (''IBS''), our wholly-owned subsidiary,
and our affiliated broker-dealer, BFP Securities, LLC, are the principal
underwriters of our registered variable annuity and variable life products. BFP
Securities, LLC, is also the primary wholesaling distributor of our BOLI and
high net worth products.
Our fixed annuity sales were as follows (in millions):
Year Ended December 31,
-----------------------
2001 2000 1999
------ ------ -----
Fixed annuity sales $142.0 $168.6 $96.3
====== ====== =====
KILICO's fixed annuity sales decreased $26.6 million in 2001, compared with
2000. This decrease is primarily the result of investors seeking a more
competitive return on their investments during a time of declining interest
rates.
NAIC ratios
The National Association of Insurance Commissioners (the ''NAIC'') annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System (''IRIS'') ratios. Currently, thirteen IRIS ratios are
calculated. The primary purpose of the ratios is to provide an ''early
warning'' of potential negative developments. The NAIC reports a company's
ratios to state regulators who may then contact the company if three or more
ratios fall outside the NAIC's ''usual ranges''.
Based on statutory financial data as of December 31, 2001, Kemper Investors
Life Insurance Company had five ratios outside the usual ranges; the net change
in capital and surplus ratio, the gross change in capital and surplus ratio,
the net income to total income (including realized capital and losses) ratio,
the change in product mix ratio and the change in reserving ratio.
3
The results for the net change in capital and surplus ratio, the gross
change in capital and surplus ratio and the net income to total income ratio
was primarily caused by the $71.9 million statutory net loss reported that was
caused by the significant downturn in the stock market during 2001. The result
for the change in the product mix ratio was primarily caused by certain
reclassifications and presentation differences related to variable annuities
and deposit-type funds in the 2001 annual statement, compared to 2000. The
result for the change in the reserving ratio was primarily caused by the
recapture in 2000 of term business assumed from FKLA.
Based on statutory financial data as of December 31, 2001, ZKLICONY had two
ratios outside the usual ranges: adequacy of investment income ratio and the
change in reserving ratio. The result for the adequacy of investment income
ratio was due to ZKLICONY's small amount of reserves relative to its total
invested assets. The result for the change in reserving ratio reflects the fact
that ZKLICONY began writing business in 2001 and had no single premiums for the
year.
Other than certain states requesting routine quarterly financial reporting
and/or explanations of the underlying causes for certain ratios, no state
regulators have taken any action due to our IRIS ratios for 2001 or earlier
years.
Risk-based capital, asset adequacy and codification
Under Illinois' and New York's asset adequacy and risk-based capital rules,
state regulators may mandate remedial action for inadequately reserved or
inadequately capitalized companies. The asset adequacy rules are designed to
assure that assets supporting reserves are adequate to cover liabilities under
a variety of economic scenarios. The focus of risk-based capital rules is a
risk-based formula that applies prescribed factors to various risk elements in
an insurer's business and investments to develop a minimum capital requirement
designed to be proportional to the amount of risk assumed by the insurer. We
have capital levels substantially exceeding any that would mandate action under
the risk-based capital rules and are in compliance with applicable asset
adequacy rules.
As of January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (''Codification'') guidance. The NAIC Accounting
Practices and Procedures Manual--version effective January 1, 2001--is the
National Association of Insurance Commissioners' primary guidance on statutory
accounting. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas. The Illinois Insurance Department adopted the Codification guidance,
effective January 1, 2001. The Company's statutory surplus was positively
impacted by $16.7 million upon adoption as a result of the net effect of
recording a deferred tax asset, of non-admitting non-operating system software,
of non-admitting net affiliated receivables and other changes caused by the
Codification.
Codification has been adopted as a component of prescribed or permitted
practices by the New York Insurance Department. The state has adopted certain
prescribed accounting practices that are at variance from those found in
Codification. Specifically, deferred tax assets and deferred tax liabilities
are not recognized. The New York Commissioner of Insurance has the right to
permit other specific practices that deviate from prescribed practices.
4
Reserves and reinsurance
The following table provides a breakdown of our reserves for future policy
benefits by product type (in millions):
December 31, December 31,
2001 2000
------------ ------------
General account annuities.................. $2,767 $2,635
Interest-sensitive life insurance and other 627 643
Ceded future policy benefits............... 240 310
------ ------
Total............................... $3,634 $3,588
====== ======
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where we insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with FLA. FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative
and management services agreement. FLA issues policies not issued by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 2001 and 2000, our reinsurance reserve credit from FLA relating to these
coinsurance transactions totaled approximately $230.1 million and $262.1
million, respectively. Utilizing FKLA's employees, we are the servicing company
for this coinsured business and we are reimbursed by FLA for the related
servicing expenses.
In 1996, we assumed, on a yearly renewable term basis, approximately $14.4
billion (face amount) of term life insurance from FKLA. Effective September 30,
2000, this reinsurance agreement with FKLA was terminated. Upon termination, we
returned $7.7 million of premiums to FKLA, representing consideration for the
recaptured reserves. Due to the difference in the generally accepted accounting
principles basis and the statutory accounting basis of the reserves related to
this recaptured business, we recorded a deemed dividend distribution to Kemper
of $16.3 million in 2000. (See the note captioned ''Reinsurance'' in the Notes
to Consolidated Financial Statements.)
In the fourth quarter of 2000, we assumed from FKLA $100.0 million in
premium deposits related to a Funding Agreement. Funding Agreements are
insurance contracts similar to structured settlements, immediate annuities and
guaranteed investment contracts (''GICs''). The contracts qualify as insurance
under state laws and are sold as non-surrenderable immediate annuities to
trusts established by a securities firm. The securities firm sold interests in
these trusts to institutional investors. This Funding Agreement has a variable
rate of interest, is an obligation of our general account and is recorded as
future policy benefits. (See the note captioned ''Reinsurance'' in the Notes to
Consolidated Financial Statements.)
We are party to a funds withheld reinsurance agreement with a ZFS affiliated
company, Zurich Insurance Company, Bermuda Branch (''ZICBB''). Under the terms
of this agreement, we cede, on a yearly renewable term basis, 100 percent of
the net amount at risk (death benefit payable to the insured less the insured's
separate account cash surrender value) related to BOLI. As consideration for
this reinsurance coverage, we cede separate account fees (cost of insurance
charges) to ZICBB and retain a portion of such funds under the terms of the
reinsurance agreement in a funds withheld account ("FWA") which is included as
a component of benefits and funds payable in the accompanying consolidated
balance sheets.
5
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement with ZICBB (in millions):
Business Owned Life Insurance (BOLI)
(in millions)
Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
Face amount in force........... $ 85,564 $ 85,358 $ 82,021
======== ======== ========
Net amount at risk ceded....... $(76,283) $(78,169) $(75,979)
======== ======== ========
Cost of insurance charges ceded $ 168.1 $ 173.8 $ 166.4
======== ======== ========
Funds withheld account......... $ 236.1 $ 228.8 $ 263.4
======== ======== ========
Our FWA supports reserve credits on reinsurance ceded on the BOLI product.
In 1998, to properly match revenue and expenses, we placed assets supporting
the FWA in a segmented portion of our General Account. This portfolio was
classified as ''trading'' under Statement of Financial Accounting Standards No.
115 (''SFAS 115'') at December 31, 1998 and through November 30, 1999. SFAS 115
mandates that assets held in a trading account be valued at fair value, with
changes in fair value flowing through the income statement as realized capital
gains and losses. We recorded realized capital losses of $7.3 million related
to the changes in fair value of this portfolio during 1999.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, we no longer marked-to-market a portion of the FWA
liability and therefore no longer designated the related portion of assets as
''trading''. As a result, changes in fair value to the FWA and the assets
supporting the FWA no longer flow through our operating results.
Effective December 31, 2001, we entered into a quota share reinsurance
agreement with ZICBB. Under the terms of this agreement, we cede 100 percent of
the net amount at risk of the guaranteed minimum death benefit and GRIB
portions of a small number of specific variable annuity contracts. As
consideration for this reinsurance coverage, we cede 100 percent of all charges
to policyholders and all revenue sharing income received from fund managers
related to such reinsured policies. The account values related to these
policies are held in our separate account during the accumulation period of the
contracts. The reserve credits under this treaty are secured by a trust
agreement that requires the fair market value of assets therein to at least
equal 102 percent of such reserve credits.
Competition
We are in a highly competitive business. We compete 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.
Our 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.
6
To address our competition, we have adopted certain business strategies.
These include:
. customer segmentation and focus
. continued focus on existing and new variable and fixed annuities and
variable life insurance products
. distribution through diversified channels
. systematic review of investment risk and our capital position, and
. ongoing efforts to continue as a low-cost provider of insurance products
and high-quality services to agents and policyholders through the use of
technology.
Rankings and ratings
According to Best's Insurance Reports, 2001, as of December 31, 2000, we
ranked 54th of 1,436 life insurers by admitted assets; 68th of 905 by insurance
in force; and 72nd of 1,336 by net premiums written.
Our December 31, 2001 ratings and their status were as follows:
Rating Status
---------------- --------
A.M. Best Company........ A+ (Superior) Affirmed
Moody's Investors Service Aa3 (Excellent) Affirmed
Standard & Poor's........ AA (Very Strong) Affirmed
Our Standard & Poor's ("S&P") rating was coupled with ZFS through December
31, 2001 due to the perceived financial strength of ZFS and Zurich Life and the
designation of Zurich Life as one of ZFS's core businesses. In September 2001,
S&P announced that it was downgrading several insurance groups based on the
potential catastrophic losses from the September 11, 2001 terrorist attacks on
the United States of America, and the subsequent fall in equity markets. At
that time, ZFS was placed on CreditWatch with negative implications and its
rating, and therefore ours, was downgraded from "AA+" to "AA", S&P's third
highest rating. In February 2002, ZFS received another downgrade to "AA-" and
remained on CreditWatch with negative implications. During 2001, ZFS considered
the divestiture of Zurich Life. Although ZFS made the decision to retain Zurich
Life in December 2001, S&P decided to uncouple Zurich Life's ratings from ZFS
in March 2002, primarily due to ZFS's consideration of the Zurich Life
divestiture and we received a rating of "A+", reflecting the non-supported
strength of Zurich Life and were taken off CreditWatch.
We share our A.M. Best rating with ZFS. In the fall of 2001, A.M. Best
placed ZFS under review with developing implications but did not change its
ratings. In March 2002, ZFS's A.M. Best A+ (Superior) financial strength rating
was affirmed, removed from under review and assigned a negative outlook. Our
non-supported Moody's Investors Service rating remains at Aa3, its fourth
highest rating. In March 2002, Moody's Investors Service placed our rating
under review for possible downgrade.
Employees
At December 31, 2001, we used the services of approximately 1,188 employees
of FKLA, which are also shared with FLA and ZLICA.
Regulation
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where we are 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
7
the financial condition of each company operating within their respective
jurisdictions. Regulations, which often vary from state to state, cover most
aspects of the life insurance business, including market practices, policy
forms and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional
powers to state insurance commissioners to regulate acquisition of and by
domestic insurance companies, to require periodic disclosure of relevant
information and to regulate certain transactions with related companies. These
laws also impose prior approval requirements for certain transactions with
affiliates and generally regulate dividend distributions by an insurance
subsidiary to its holding company parent.
In addition, certain of our variable life insurance and variable annuity
products, and the related separate accounts, are subject to regulation by the
Securities and Exchange Commission (the ''SEC'').
We believe we are in compliance in all known material respects with all
applicable regulations. For information on regulatory and other dividend
restrictions, see ITEM 5(c).
Investments
A changing marketplace has affected the life insurance industry. To
accommodate customers' increased preference for safety over higher yields, we
have systematically reduced our investment risk and strengthened our capital
position.
Our cash flow is carefully monitored and our investment program is regularly
and systematically planned to provide funds to meet all obligations and to
optimize investment return. For investment securities, portfolio management is
handled by an affiliated company, Zurich Scudder Investments, Inc. (''ZSI''),
and its subsidiaries and affiliates. On December 4, 2001, Deutsche Bank and ZFS
announced that they had signed a definitive agreement under which Deutsche Bank
will acquire 100 percent of ZSI, with the exception of ZSI's UK operations,
Threadneedle Investments. The transaction is expected to be completed, subject
to regulatory approval and satisfaction of other conditions, in the first half
of 2002. Our real estate-related investments are handled by a minority-owned
Kemper real estate subsidiary. Investment policy is directed by our board of
directors. Our investment strategies take into account the nature of each
annuity and life insurance product, the respective crediting rates and the
estimated future policy benefit maturities.
Forward-looking statements
All statements, trend analyses and other information contained in this
report and elsewhere (such as in other filings by KILICO with the SEC, press
releases, presentations by KILICO or its management or oral statements) about
markets for our products and trends in our operations or financial results, as
well as other statements including words such as ''anticipate,'' ''believe,''
''plan,'' ''estimate,'' ''expect,'' ''intend,'' and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause actual results
to be materially different from those contemplated by the forward-looking
statements. These factors include, among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the
ability of KILICO to sell its products, the market value of our investments
and the lapse rate and profitability of our contracts
(ii) our ability to achieve anticipated levels of operational
efficiencies through certain cost-saving initiatives
(iii) customer response to new products, distribution channels and
marketing initiatives
(iv) mortality, morbidity, and other factors which may affect the
profitability of our insurance products
8
(v) changes in the federal income tax laws and regulations which may
affect the relative tax advantages of some of our products
(vi) increasing competition which could affect the sale of our products
(vii) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales
and underwriting of insurance products, and regulations relating to the sale
and underwriting and pricing of insurance products, and
(viii) the risk factors or uncertainties listed from time to time in our
other filings with the SEC.
Item 2. Properties
We share 307,804 square feet of office space leased by FKLA from Wells Real
Estate Funds, located in Schaumburg, Illinois.
Item 3. Legal Proceedings
We have been named as defendant in certain lawsuits incidental to our
insurance business. Based upon the advice of legal counsel, our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on our consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) There is no established public trading market for KILICO's common stock.
(b) Kemper owns all of the common stock of KILICO as of the date of this filing.
(c) Cash dividends of $20.0 million, $25.0 million and $70.0 million were
declared and paid to Kemper on June 29, 1999, September 29, 1999 and
December 29, 1999, respectively. A cash dividend of $20.0 million was
declared and paid to Kemper on June 29, 2000. During 2000, we also reported
a deemed dividend distribution of $16.3 million to Kemper. Cash dividends
of $10.0 million and $3.0 million were declared and paid to Kemper on June
28, 2001 and September 27, 2001, respectively. No additional dividends have
been declared or paid through the date of filing this Form 10-K.
Restrictions on dividends
Dividend distributions from us to our stockholder are restricted by state
insurance laws. In Illinois, where we are domiciled, if such dividend, together
with other distributions during the 12 preceding months would exceed the
greater of (a) ten percent of the insurer's statutory surplus as regards
policyholders as of the preceding December 31, or (b) the statutorily adjusted
net income for the preceding calendar year, then such proposed dividend must be
reported to the director of insurance at least 30 days prior to the proposed
payment date. The dividend then may be paid only if not disapproved. The
Illinois insurance laws also permit payment of dividends only out of earned
surplus, exclusive of most unrealized capital gains. During 2001, the Company
paid dividends to Kemper in the amount of $13.0 million, which were approved by
the Illinois Department of Insurance. In 2002, the Company cannot pay dividends.
Item 6. Selected Financial Data
The following table sets forth selected financial information for KILICO for
the five years ended December 31, 2001. Such information should be read in
conjunction with our consolidated financial statements and notes thereto
included in ITEM 8 of this Annual Report on Form 10-K. All amounts are shown in
millions.
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Total revenue............................. $ 398.3 $ 360.9 $ 363.4 $ 419.7 $ 425.5
========= ========= ========= ========= =========
Net income excluding realized
investment results...................... $ 38.2 $ 53.7 $ 51.1 $ 31.4 $ 31.9
========= ========= ========= ========= =========
Net income................................ $ 51.6 $ 48.3 $ 44.9 $ 65.1 $ 38.7
========= ========= ========= ========= =========
Financial summary
Total separate account assets............. $13,108.8 $11,179.6 $ 9,778.1 $ 7,099.2 $ 5,122.0
========= ========= ========= ========= =========
Total assets.............................. $18,089.8 $16,006.6 $14,655.7 $12,239.7 $10,589.7
========= ========= ========= ========= =========
Future policy benefits, net of reinsurance $ 3,393.6 $ 3,278.0 $ 3,409.1 $ 3,561.6 $ 3,856.9
========= ========= ========= ========= =========
Stockholder's equity...................... $ 818.0 $ 730.1 $ 630.0 $ 853.9 $ 865.6
========= ========= ========= ========= =========
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
We recorded net income of $51.6 million in 2001, compared with net income of
$48.3 million in 2000 and $44.9 million in 1999. The increase in net income in
2001, compared with 2000, was due to an increase in net realized investment
gains somewhat offset by a decrease in operating earnings before amortization
of goodwill and other intangibles.
The following table reflects the components of net income:
Net income
(in millions)
Year Ended December 31,
----------------------
2001 2000 1999
------ ------ ------
Operating earnings before amortization of goodwill and other
intangibles............................................... $ 51.9 $ 66.8 $ 63.8
Amortization of goodwill and other intangibles.............. (13.7) (13.1) (12.7)
Net realized investment gains (losses)...................... 13.4 (5.4) (6.2)
------ ------ ------
Net income........................................... $ 51.6 $ 48.3 $ 44.9
====== ====== ======
Net realized investment results, after tax
(in millions)
Year Ended December 31,
----------------------
2001 2000 1999
------ ------ ------
Real estate-related gains................................... $ 10.4 $ 1.1 $ 2.7
Fixed maturity securities, including write-downs............ 2.8 (7.9) (6.3)
Trading account securities.................................. -- -- (4.7)
Other gains, net............................................ .2 1.4 2.1
------ ------ ------
Total................................................ $ 13.4 $ (5.4) $ (6.2)
====== ====== ======
The real estate-related gains in 2001 are primarily due to the release of
reserve allowances originally recorded against certain mortgage loans. (See
INVESTMENTS section.) The real estate-related gains in 2000 and 1999 reflect
ZFS's strategy to dispose of real estate-related investments. This strategy to
reduce exposure to real estate-related investments, as well as improving real
estate market conditions in most areas of the country, generated the real
estate-related gains during 2000 and 1999.
Net realized investment gains on fixed maturity securities in 2001 were
primarily due to decreasing interest rates that resulted in higher market
values in fixed maturity investments. Significantly offsetting these realized
gains were other-than-temporary declines in value of certain securities due to
credit-related concerns about a small number of issuers and collateralized bond
obligation impairment losses related to Emerging Issues Task Force 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets. (See INVESTMENTS
section.) These pre-tax writedowns totaled $15.5 million in 2001. Net realized
investment losses on fixed maturity securities in 2000 were primarily related
to pre-tax writedowns that totaled $11.4 million. Net realized investment
losses on fixed maturity securities in 1999 were primarily the result of rising
interest rates throughout the year, leading to lower market values in fixed
maturity investments.
Trading account securities were used to manage the reinsurance strategy on
the BOLI product. Effective November 1, 1998, the methodology used to determine
the increase to the FWA was changed and a substantial
11
portion of this liability was marked-to-market based predominately upon the
total return of the Government Bond Division of the KILICO Variable Series I
Separate Account. We also placed assets supporting the FWA in a segmented
portfolio and classified this asset segment as ''trading'' under Statement of
Financial Standards No. 115 (''SFAS 115'') at December 31, 1998 and through
November 30, 1999. We recorded realized capital losses of $7.3 million related
to the changes in fair values of this portfolio during 1999. Due to a change in
the reinsurance strategy related to the BOLI product, effective December 1,
1999, we no longer marked-to-market a portion of the FWA liability and
therefore no longer designated the related portion of assets as ''trading''. As
a result, changes in fair value to the FWA and the assets supporting the FWA no
longer flow through operating results.
Operating earnings before the amortization of goodwill and other intangibles
decreased to $51.9 million in 2001, compared with $66.8 million in 2000,
primarily due to:
. a decrease in premium income
. an increase in claims incurred and other policyholder benefits
. an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs, and
. an increase in income tax expense, offset by
. an increase in separate account fees
. an increase in other income
. an increase in spread revenue (net investment income less interest
credited to policyholders)
. a decrease in taxes, licenses and fees, and
. a decrease in the amortization of insurance acquisition costs and value of
business acquired.
Operating earnings before the amortization of goodwill and other intangibles
increased to $66.8 million in 2000, compared with $63.8 million in 1999,
primarily due to:
. an increase in spread revenue (net investment income less interest
credited to policyholders)
. an increase in other income
. a decrease in claims incurred and other policyholder benefits
. a decrease in taxes, licenses and fees, and
. a decrease in income tax expense, offset by
. a decrease in premium income
. a decrease in separate account fees
. an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs, and
. an increase in the amortization of insurance acquisition costs and value
of business acquired.
12
The following table reflects our sales and reinsurance assumed:
Sales and reinsurance assumed
(in millions)
Year Ended December 31,
---------------------------
2001 2000 1999
-------- -------- --------
Annuities:
Variable................................. $2,547.4 $1,160.5 $ 758.6
Fixed.................................... 142.0 168.6 96.3
Funding Agreements assumed............... -- 100.0 --
-------- -------- --------
Total annuities...................... 2,689.4 1,429.1 854.9
-------- -------- --------
Life Insurance:
Separate account business-owned variable
universal life (''BOLI'').............. 515.3 819.6 1,622.0
Separate account variable universal life. 29.6 36.5 39.1
Term life................................ 1.6 (8.2) 21.9
Interest-sensitive life.................. 1.3 1.4 1.3
-------- -------- --------
Total life........................... 547.8 849.3 1,684.3
-------- -------- --------
Total sales....................... $3,237.2 $2,278.4 $2,539.2
======== ======== ========
Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. Variable
annuity deposits, including deposits under the fixed account option, increased
$1.4 billion in 2001, compared with 2000. The increase in the variable annuity
deposits is primarily due to continued strong sales of our DESTINATIONS/SM
product that offers both a variable and a fixed option, including dollar cost
averaging and a guaranteed retirement income benefit ("GRIB") option. Dollar
cost averaging allows contractholders the option to allocate amounts to the
fixed account option and authorize pro-rated amounts to be automatically
transferred into the separate account investment options over a specified
period of time in order to reduce the effects of significant market
fluctuations. The GRIB is an optional benefit to the DESTINATIONSSM variable
annuity, for an additional asset-based fee. It allows for a proxy account
value, called the GRIB Base, to be applied to the guaranteed annuity factors
(settlement option purchase rates) in the contract. The GRIB Base prior to
attained age 80 is the greatest of: /
. the contract value (account value)
. the greatest anniversary value before the exercise (annuitization) date, or
. purchase payments minus previous withdrawals, accumulated at 5 percent
interest per year to the annuitization date.
In the fourth quarter of 2001, we discontinued offering the GRIB option with
the DESTINATIONS/SM product due to the continued decline in the stock market,
particularly in the wake of the tragedy of September 11th. Future sales of the
DESTINATIONSSM product are expected to be substantially lower because of this
decision. /
Fixed annuity deposits decreased $26.6 million in 2001 when compared with
2000, as investors seek out a more competitive return on their investments
during a time of declining interest rates.
The $100.0 million Funding Agreement assumed in 2000 resulted from a new
reinsurance agreement with FKLA. (See the note captioned ''Reinsurance'' in the
Notes to Consolidated Financial Statements.)
Sales of variable annuities increase administrative fees earned. In
addition, they pose less investment risk to us, to the extent that
policyholders allocate net premium to one or more subaccounts that invest in
underlying investment funds that invest in stocks or bonds. The customer bears
the investment risk on these stocks or bonds unless the GRIB option is elected.
Additional fees are charged to cover specific benefit options elected by the
policyholders, such as the GRIB option.
13
Sales of BOLI decreased $304.3 million to $515.3 million in 2001, compared
with $819.6 million in 2000. Sales of individual variable universal life
insurance decreased $6.9 million to $29.6 million in 2001, compared with $36.5
million in 2000. BOLI sales decreased primarily due to the nature of the
product--high dollar volume per sale, low frequency of sales and due to the
uncertainty surrounding the potential sale of Zurich Life. Sales of these
separate account variable products pose minimal investment risk as
policyholders also direct their premium to one or more subaccounts that invest
in underlying investment funds which invest in stocks and bonds. We receive
premium tax and DAC tax expense loads from certain contractholders, as well as
administrative fees and cost of insurance charges. These fees and charges are
compensation for providing life insurance coverage to the contractholders
potentially in excess of their cash surrender values. Face amount of new
variable universal life insurance business issued amounted to $2.2 billion in
2001, compared with $3.8 billion in 2000 and $16.6 billion in 1999. The
decrease in face amount issued in 2001, compared with 2000, is primarily due to
the decrease in BOLI sales.
The following table reflects our assets under management:
Assets under management
(in millions)
2001 2000 1999
--------- --------- ---------
General account........... $ 3,815.8 $ 3,689.5 $ 3,831.0
Separate account--BOLI.... 7,598.9 6,905.9 5,750.5
Separate account--non-BOLI 5,509.8 4,273.7 4,027.6
--------- --------- ---------
Total.............. $16,924.5 $14,869.1 $13,609.1
========= ========= =========
Total assets under management have increased over the last few years
primarily reflecting the volume of sales. The level of policyholder surrenders,
withdrawals and death benefits also directly impacts the level of assets under
management from year to year. Total assets under management were also affected
by equity market and interest rate fluctuations.
Net term life premium, including new and renewal premiums, totaled $486
thousand in 2001 and $371 thousand in 2000. The 2000 amount excludes premiums
assumed under a reinsurance agreement with FKLA. Effective September 30, 2000,
the reinsurance agreement with FKLA was terminated. Prior to the termination,
we assumed $15.4 million of term life insurance premiums from FKLA in 2000.
Upon termination, we returned $7.7 million of premiums to FKLA as consideration
for the recaptured reserves. In the fourth quarter of 2000, the reinsurance
agreement was recaptured by FKLA and resulted in a decrease in premiums of
$13.6 million in 2000, compared with 1999. In 1999 we assumed $21.3 million of
term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, total term life sales, including new and renewal premiums, amounted to
$677 thousand in 1999.
Spread revenue increased in 2001, compared with 2000, due to a larger
increase in investment income than in interest credited to policyholders. The
increase in investment income in 2001, compared with 2000, was primarily due to
placing certain mortgage loans on accrual status in the fourth quarter of 2001.
(See INVESTMENTS--Real estate-related investments for further discussion.) This
increase was somewhat offset by the reinvestment of 2000 and 2001 sales
proceeds, maturities and prepayments in lower yielding securities due to the
lower interest rate environment.
The increase in interest credited in 2001, compared with 2000, was due to
higher average policyholder account balances and a slight increase in average
interest crediting rates, primarily due to new business issued.
Spread revenue increased in 2000, compared with 1999, due to a smaller
decrease in investment income than in interest credited to policyholders. The
decrease in investment income in 2000, compared with 1999, was primarily due to
a decrease in cash and invested assets from the 1999 levels, reflecting the
surrender and withdrawal activity during prior years and the dividends paid to
Kemper during 2000 and 1999. Also contributing to this decrease in cash and
invested assets are the ongoing exchanges from the fixed to the variable option
of in
14
force annuity policies, primarily reflecting the dollar cost averaging option
mentioned previously. Net investment income was also negatively impacted in
2000 and 1999 by the placement of a real estate-related investment on
non-accrual status effective January 1, 1999. Somewhat mitigating these factors
was the reinvestment of 1999 and 2000 sales proceeds, maturities and
prepayments at higher yields due to funds being directed to higher yielding
securities, and an overall increasing interest rate environment during 1999 and
the first half of 2000.
The decrease in interest credited in 2000, compared with 1999, was primarily
due to a decrease in policyholder liabilities due to surrender, withdrawal and
exchange activity in 2000 and 1999 and an overall decrease in crediting rates
over the same period.
Investment income was also reduced over the last three years reflecting
purchase accounting adjustments related to the amortization of premiums on
fixed maturity investments. Under purchase accounting, the fair value of the
fixed maturity investments as of January 4, 1996, the date Kemper was acquired
by ZFS, became the new cost basis in the investments. The difference between
the new cost basis and original par is then amortized against investment income
over the remaining effective lives of the fixed maturity investments. As a
result of the interest rate environment as of January 4, 1996, the market value
of the fixed maturity investments was approximately $133.9 million greater than
original par. Premium amortization decreased investment income by approximately
$2.8 million in 2001, compared with $3.5 million in 2000 and $7.8 million in
1999.
Separate account fees and charges
(in millions)
2001 2000 1999
------- ------- -------
Separate account fees on non-BOLI variable life and
annuities........................................ $ 67.6 $ 62.1 $ 47.0
BOLI cost of insurance charges and fees--direct.... 163.5 164.4 168.1
BOLI cost of insurance charges and fees--ceded..... (168.4) (173.8) (166.7)
BOLI premium tax expense loads..................... 8.3 15.6 26.3
------- ------- -------
Total....................................... $ 71.0 $ 68.3 $ 74.7
======= ======= =======
Included in separate account fees and charges are administrative and other
fees received from the separate account products of $66.7 million in 2001,
compared with $61.4 million and $46.1 million in 2000 and 1999, respectively.
Administrative and other fee revenue increased in each of the last three years
due to growth in average separate account assets. Also included in separate
account fees and charges are cost of insurance (''COI'') charges related to
variable universal life insurance, primarily BOLI, of $162.1 million, $164.4
million and $167.9 million in 2001, 2000 and 1999, respectively. Of these COI
charges, $168.1 million, $173.8 million and $166.4 million were ceded,
respectively, to a ZFS affiliated company, Zurich Insurance Company, Bermuda
Branch (''ZICBB''). In 2001 and 2000, COI charges ceded were in excess of 100
percent of the COI charges received due to appreciation of the BOLI funds
withheld account. Separate account fees and charges in 2001, 2000 and 1999 also
include BOLI-related premium tax expense loads of $8.3 million, $15.6 million
and $26.3 million, respectively.
Net BOLI cost of insurance charges and fees increased $4.5 million in 2001,
compared with 2000, primarily reflecting $2.5 million in fees related to a
group variable life policy sold to FKLA in February 2001, covering all current
FKLA employees as of February 14, 2001. The transaction, as business-owned life
insurance, will permit FKLA to indirectly fund certain of its employee benefit
obligations.
Other income increased $1.7 million in 2001, compared with 2000. The
increase is primarily due to an increase in commission revenue from
broker-dealer operations. The increase was substantially offset by an increase
in broker-dealer commission expense in 2001. Other income increased $23.4
million in 2000, compared with 1999. The increase is primarily due to an
increase in commission revenue from broker-dealer operations of approximately
$20.6 million. This increase was mainly due to the inclusion of PMG's operating
results effective April 1, 2000. (See discussion of the PMG acquisition in the
note captioned ''Related-Party Transactions'' in the Notes to Consolidated
Financial Statements.) The increase in broker-dealer commission revenue was
substantially offset by an increase in broker-dealer commission expense.
15
Other income also includes surrender charge revenue of $6.5 million in 2001,
compared with $6.0 million and $5.0 million in 2000 and 1999, respectively. The
increase in surrender charge revenue over the past three years reflects the
increased policyholder surrender and withdrawal activity during the same period.
Policyholder surrenders, withdrawals and death benefits
(in millions)
2001 2000 1999
------ ------ ------
General account.. $450.9 $579.1 $564.2
Separate account. 523.8 393.3 399.8
------ ------ ------
Total..... $974.7 $972.4 $964.0
====== ====== ======
Reflecting the current interest rate environment and other competitive
market factors, we adjust crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and
withdrawal activity. Spread revenue can also be improved over time by
increasing investment income.
General account surrenders, withdrawals and death benefits decreased $128.2
million in 2001, compared with 2000, reflecting a decrease in death benefits as
well as a decrease in overall surrenders and withdrawals as equity markets
remained volatile.
Separate account surrenders, withdrawals and death benefits increased $130.5
million in 2001, compared with 2000. Excluding surrenders of $92.4 million on
BOLI contracts in 2001, separate account surrenders, withdrawals and death
benefits increased $38.1 million in 2001, compared with 2000. The increase is
primarily due to investors' seeking alternative investments during a period of
market uncertainty.
Claims incurred and other policyholder benefits increased $8.2 million in
2001, compared with 2000, primarily due to an increase in policyholder reserves
for guaranteed minimum death benefits ("GMDB") and GRIB on certain of our
variable annuity contracts. The GMDB reserves increased due to the significant
downturn in the stock market during 2001. GRIB reserves have been established
for policies that have withdrawn a substantial portion of their contract
values, exposing a proportionately large GRIB benefit in relation to the
account value. These policies were deemed to have elected annuitization and a
reserve has been established to cover the present value of future benefits. The
termination of the assumed term life reinsurance agreement with FKLA decreased
claims incurred and other policyholder benefits year over year for 2001, 2000
and 1999.
Taxes, licenses and fees primarily reflect premium taxes on BOLI. Excluding
the taxes due on BOLI, for which we received a corresponding expense load in
separate account fees and other charges, taxes, licenses and fees amounted to
$2.4 million in 2001, compared with $2.3 million in 2000 and $3.4 million in
1999.
Commission expense and the deferral of insurance acquisition costs increased
in 2001, compared with 2000 and 1999, due to the higher level of sales,
excluding BOLI. Commission expense related to broker-dealer operations
increased approximately $17.2 million in 2000, compared with 1999. The increase
is primarily due to the inclusion of PMG's operating results in 2000. The
commission expense related to broker-dealer operations totaled $25.2 million in
2001.
Operating expenses increased in 2001, to $66.0 million, compared with $61.7
million and $45.9 million in 2000 and 1999, respectively. The increase in 2001,
compared with 2000, was primarily due to the inclusion of $3.0 million of
operating expenses of the newly formed New York company. Also contributing to
the increase was an increase in PMG's operating expenses of approximately $1.7
million in 2001, compared to 2000.
The increase in operating expenses in 2000, compared with 1999, was
primarily due to an increase in salaries and related benefits, and data
processing expenses in the continued development of infrastructure to support
various new business initiatives. Also contributing to the increase was the
inclusion of PMG's operating expenses of approximately $2.2 million.
16
Amortization of insurance acquisition costs decreased $5.2 million in 2001,
compared with 2000. This net decrease was attributable to several factors.
During 2000, the amortization of insurance acquisition costs was increased by
$10.5 million due to loss recognition as discussed below. During 2001, realized
capital losses on investments purchased subsequent to the ZFS acquisition
decreased the amortization of insurance acquisition costs by $6.4 million.
These amounts were partially offset by an increase in amortization due to the
higher volume of annuity business in force.
The increase in the amortization of deferred insurance acquisition costs in
2000, compared with 1999, is primarily due to loss recognition resulting from
management's periodic review of the estimated future gross profits on annuity
contracts. The loss recognition increased the amortization by $10.5 million in
2000. The remaining increase in amortization of deferred insurance acquisition
costs is primarily due to the higher volume of variable annuity business.
Deferred insurance acquisition costs, and their related amortization, for
policies sold prior to January 4, 1996 have been replaced under purchase
accounting by the value of business acquired. The value of business acquired
reflects the present value of the right to receive future cash flows from
insurance contracts existing at the date of acquisition. The amortization of
the value of business acquired is calculated assuming an interest rate equal to
the liability or contract rate on the value of the business acquired. Deferred
insurance acquisition costs are established on all new policies sold after
January 4, 1996.
Movements in the stock markets have impacted the amortization of the value
of business acquired in 2001, 2000 and 1999. The percentage changes in the S&P
500 for the years ended December 31, 2001, 2000 and 1999 were -13.0 percent,
- -10.1 percent, and +19.5 percent, respectively. During 2001 and 2000,
depreciation in the stock market resulted in depreciation in the separate
account assets, which decreased future gross profits and accelerated
amortization. During 1999, appreciation in the stock market resulted in
appreciation in the separate account assets, which increased future gross
profits and shifted amortization to later years.
The difference between ZFS's cost of acquiring us and the net fair value of
the assets and liabilities as of January 4, 1996 was recorded as goodwill.
Goodwill is amortized on a straight-line basis over a twenty-year period. Other
intangible assets in the amount of $2.7 million and $4.9 million were recorded
in 2001 and 2000, respectively, in connection with the purchase of PMG. These
intangible assets are being amortized on a straight-line basis over a ten-year
period.
Tax expense increased in 2001, compared with 2000, primarily due to the
release of a $15.2 million valuation allowance in 2000. The valuation allowance
was related to the ultimate realization of losses on real estate assets
disposed of before December 31, 1995. In 2000, an additional $4.6 million
benefit was realized on the termination of the reinsurance agreement with FKLA.
Operations by Business Segment
We, along with FKLA, ZLICA and FLA, operate under the trade name Zurich
Life, formerly Zurich Kemper Life. Zurich Life is segregated by Strategic
Business Unit (''SBU''). The SBU concept employed by ZFS has each SBU
concentrate on a specific customer market. The SBU is the focal point of Zurich
Life, because it is at the SBU level that Zurich Life can clearly identify
customer segments and then work to understand and satisfy the needs of each
customer. For purposes of operating segment disclosure, Zurich Life includes
the operations of Zurich Direct, Inc., an affiliated direct marketing life
insurance agency and excludes FLA, as it is owned by its policyholders.
Zurich Life is segregated into the Life Brokerage, Financial Institutions
(''Financial''), Retirement Solutions Group (''RSG'') and Direct SBUs. The SBUs
are not managed at the legal entity level, but rather at the Zurich Life level.
Since Zurich Life's SBUs cross legal entity lines, as certain similar products
are sold by more than one legal entity, discussion regarding results of
operations in this Form 10-K relate solely to KILICO. The vast majority of our
business is derived from the Financial and RSG SBUs. The contributions of
Zurich Life's SBUs to combined revenues, operating results and certain balance
sheet data pertaining thereto, are shown in the Notes to Consolidated Financial
Statements.
17
The principal products and markets of the Financial and RSG SBUs are as
follows:
Financial: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and
primarily includes variable and fixed annuities, variable universal life and
business-owned life insurance. These products are distributed to consumers
through financial intermediaries such as banks, brokerage firms and
independent financial planners. Institutional business includes BOLI and
funding agreements (primarily included in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU
markets fixed and variable annuities to K-12 schoolteachers, administrators,
and healthcare workers, along with college professors and certain employees
of selected non-profit organizations. This target market is eligible for
what the IRS designates as retirement-oriented savings or investment plans
that qualify for special tax treatment.
18
INVESTMENTS
Our principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. We make
shifts in our investment portfolio depending on, among other factors:
. our evaluation of risk and return in various markets
. consistency with our business strategy and investment guidelines approved
by the board of directors
. the interest rate environment
. liability durations, and
. changes in market and business conditions.
Invested assets and cash
(in millions)
December 31, December 31,
2001 2000
------------ ------------
Cash and short-term investments....................... $ 216 5.7% $ 50 1.4%
Fixed maturity securities:
Investment-grade:
NAIC(1) Class 1................................ 1,846 48.4 2,080 56.4
NAIC(1) Class 2................................ 1,121 29.4 960 26.1
Below investment-grade (NAIC classes 3 through 6):
Performing..................................... 123 3.2 116 3.2
Non-performing................................. 5 0.1 1 --
Equity securities..................................... 68 1.8 64 1.7
Joint venture mortgage loans.......................... 104 2.7 67 1.8
Third-party mortgage loans............................ 64 1.7 64 1.7
Other real estate-related investments................. 8 0.2 9 0.2
Policy loans.......................................... 240 6.3 256 6.9
Other................................................. 21 0.5 22 0.6
------ ----- ------ -----
Total(2).................................... $3,816 100.0% $3,689 100.0%
====== ===== ====== =====
- --------
(1) National Association of Insurance Commissioners (''NAIC'').
--Class 1 = A- and above
--Class 2 = BBB- through BBB+
(2) See the note captioned ''Financial Instruments--Off-Balance-Sheet Risk'' in
the Notes to Consolidated Financial Statements.
Fixed maturity securities
We carry our fixed maturity investment portfolio, which is considered
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense on unrealized
appreciation. The aggregate unrealized appreciation on fixed maturity
securities at December 31, 2001 was $24.3 million. The aggregate unrealized
depreciation on fixed maturity securities at December 31, 2000 was $32.6
million. We do not record tax benefits related to aggregate unrealized
depreciation on investments. Fair values are sensitive to movements in interest
rates and other economic developments and can be expected to fluctuate, at
times significantly, from period to period.
19
At December 31, 2001, investment-grade fixed maturity securities, cash and
short-term investments accounted for 83.5 percent of invested assets and cash,
compared with 83.9 percent at December 31, 2000. Approximately 53.3 percent of
our NAIC Class 1 bonds were rated AAA or equivalent at year-end 2001, compared
with 43.4 percent at December 31, 2000.
Approximately 22.0 percent of the investment-grade fixed maturity securities
at December 31, 2001 were mortgage-backed securities, up from 18.9 percent at
December 31, 2000. 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. We have not made any
investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. Our mortgage-backed investments are generally of
AAA credit quality, and the markets for these investments have been and are
expected to remain liquid.
Approximately 15.3 percent and 15.1 percent of the investment-grade fixed
maturity securities at December 31, 2001 and 2000, respectively, consisted of
corporate asset-backed securities. The majority of investments in asset-backed
securities were backed by commercial mortgage-backed securities (36.5%), home
equity loans (22.9%), collateralized loan and bond obligations (12.1%),
manufactured housing loans (11.7%), and other commercial assets (5.5%).
Future investment income from mortgage-backed securities and other
asset-backed securities may be affected by the timing of principal payments and
the yields on reinvestment alternatives available at the time of such payments.
Prepayment activity resulting from a decline in interest rates on such
securities purchased at a premium would accelerate the amortization of the
premiums. Accelerated amortization would result in reductions of investment
income related to such securities.
At December 31, 2001 and 2000, unamortized premiums and discounts related to
mortgage-backed and asset-backed securities were as follows (in millions):
December 31,
------------
2001 2000
----- ----
Unamortized premiums. $12.2 $9.0
===== ====
Unamortized discounts $ 9.0 $5.2
===== ====
Amortization of the discount or premium from mortgage-backed and
asset-backed securities is recognized using a level effective yield method.
This method considers the estimated timing and amount of prepayments of the
underlying loans and is adjusted to reflect differences between the prepayments
originally anticipated and the actual prepayments received and currently
anticipated. To the extent that the estimated lives of these securities change
as a result of changes in prepayment rates, the adjustment is also included in
net investment income.
The table below provides information about the mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
20
Expected Maturity Date
----------------------------------------------
Carrying
Value at Fair Value at
December 31, December 31,
(in millions) 2001 2002 2003 2004 2005 2006 Thereafter 2001
------------- ------------ ----- ----- ------ ------ ----- ---------- -------------
Fixed Maturity Securities:
Mortgage-backed bonds.. $ 726.5 $62.9 $87.8 $ 72.8 $ 85.6 $86.4 $331.0 $ 726.5
Average yield....... 6.39% 6.39% 6.36% 6.36% 6.47% 6.29% 6.27% 6.39%
Asset-backed bonds..... $ 291.3 $31.4 $44.7 $ 45.8 $ 37.5 $18.5 $113.4 $ 291.3
Average yield....... 7.12% 7.12% 7.10% 7.34% 7.47% 7.57% 7.54% 7.12%
CMBs................... $ 92.4 $ 8.8 $ 7.4 $ 3.9 $ 17.4 $11.9 $ 43.0 $ 92.4
Average yield....... 6.52% 6.52% 6.52% 6.52% 6.45% 6.45% 6.67% 6.52%
-------- --------
$1,110.2 $1,110.2
======== ========
Expected Maturity Date
----------------------------------------------
Carrying
Value at Fair Value at
December 31, December 31,
(in millions) 2000 2001 2002 2003 2004 2005 Thereafter 2000
------------- ------------ ----- ----- ------ ------ ----- ---------- -------------
Fixed Maturity Securities:
Mortgage-backed bonds.. $ 575.7 $ 6.5 $39.5 $152.0 $131.9 $77.1 $168.7 $ 575.7
Average yield....... 6.61% 6.61% 6.60% 6.62% 7.18% 7.60% 8.15% 6.61%
Asset-backed bonds..... $ 339.3 $22.5 $37.6 $ 34.2 $ 39.9 $48.0 $157.1 $ 339.3
Average yield....... 7.27% 7.32% 7.30% 7.21% 7.35% 7.57% 7.83% 7.27%
CMBs................... $ 123.9 $ -- $ -- $ -- $ -- $ 5.4 $118.5 $ 123.9
Average yield....... 6.84% 6.84% 6.84% 6.84% 6.84% 6.82% 6.82% 6.84%
-------- --------
$1,038.9 $1,038.9
======== ========
The current weighted average maturity of the mortgage-backed and
asset-backed securities at December 31, 2001, is 4.55 years. A 200 basis point
increase in interest rates would extend the weighted average maturity by
approximately .55 of a year, while a 200 basis point decrease in interest rates
would decrease the weighted average maturity by approximately 2.27 of a year.
The weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 2000, was 3.95 years. A 200 basis point increase in
interest rates would have extended the weighted average maturity by
approximately .26 of a year, while a 200 basis point decrease in interest rates
would have decreased the weighted average maturity by approximately 1.15 of a
year.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 46 issuers at December 31, 2001, totaled 3.3 percent
of cash and invested assets at December 31, 2001 and 3.2 percent at December
31, 2000. 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. Our strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for
higher-quality investments in the life insurance and annuity marketplace.
Real estate-related investments
The $176.4 million real estate-related portfolio consists of joint venture
and third-party mortgage loans and other real estate-related investments. The
real estate-related portfolio constituted 4.6 percent of cash and invested
assets at December 31, 2001, compared with $140.4 million, or 3.7 percent, at
December 31, 2000.
During 2001, a change in circumstances surrounding a water development
project located in California's Sacramento River Valley led to a decision to
reclassify the related mortgage loans to accrual status and release the general
reserve allowance originally set up for these loans. These changes included the
State of California's State Water Resources Control Board ("SWRCB") approval of
the project's water right permit as well as the completion of a third-party
appraisal of the project, subsequent to the SWRCB's approval of the permit.
21
Taken together, these facts support, in our best judgment, not only the
level of existing debt on the project but also the accrual of interest as
specified in the terms of the loans. As a result, interest income was recorded
in the fourth quarter of 2001 in the amount of $24.9 million, representing
interest earned in 2001 as well as recaptured interest from 2000 and 1999, the
years in which these loans were on non-accrual status. The release of the
general reserve allowance generated a realized gain of $16.4 million in 2001.
As reflected in the ''Real estate portfolio'' table below, we have continued
to fund both existing projects and legal commitments. The future legal
commitments were $29.9 million and $29.8 million at December 31, 2001 and
December 31, 2000, respectively. As of December 31, 2001, we expect to fund
approximately $0.2 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. We
do not currently expect to fund these commitments. The total legal commitments,
along with estimated working capital requirements, are considered in
management's evaluation of reserves and write-downs.
Excluding the $0.9 million of net equity investments in joint ventures, real
estate loans totaled $175.5 million at December 31, 2001, after reserves and
write-downs. Of this amount, $168.1 million are on accrual status with a
weighted average interest rate of approximately 9.04 percent. Of these accrual
loans:
. 7.0 percent have terms requiring current periodic payments of their full
contractual interest
. 38.0 percent require only partial payments or payments to the extent of
borrowers' cash flow, and
. 55.0 percent require that payments are deferred until maturity.
The equity investments in real estate at December 31, 2001 consisted of
other equity investments in joint ventures. These equity investments include
our share of periodic operating results. As an equity owner or affiliate of an
equity owner, we have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
Real estate portfolio
(in millions)
Other Real Estate-
Mortgage Loans Related Investments
------------- -------------------
Joint Third- Other Equity
Venture Party Loans(2) Investments Total
------- ------ -------- ----------- ------
Balance at December 31, 2000........... $ 67.5 $63.5 $ 8.4 $ 1.0 $140.4(1)
Additions (deductions):
Fundings............................... 0.3 -- -- -- 0.3
Interest added to principal............ 20.1 2.1 -- -- 22.2
Sales/paydowns/distributions........... -- (1.1) (1.1) (0.1) (2.3)
Net realized investments gains (losses) 16.4 (0.6) 0.2 -- 16.0
Other transactions, net................ -- -- (0.2) -- (0.2)
------ ----- ----- ----- ------
Balance at December 31, 2001........... $104.3 $63.9 $ 7.3 $ 0.9 $176.4(3)
====== ===== ===== ===== ======
- --------
(1) Net of $22.4 million reserve and write-downs. Excludes $0.6 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued generally to provide
financing for Kemper's or our joint ventures for various purposes.
(3) Net of $6.6 million reserve and write-downs. Excludes $5.4 million of real
estate-related accrued interest.
22
Real estate concentrations and outlook
The real estate portfolio is distributed by geographic location and property
type. However, concentration exposures in certain states and in certain types
of properties do exist. In addition to these exposures, exposures also exist as
to certain real estate developers and partnerships.
As a result of our ongoing strategy to reduce exposure to real
estate-related investments, we had investments in four projects that accounted
for approximately 99.5 percent of the $176.4 million real estate-related
portfolio as of December 31, 2001.
The largest of these investments were loans to a master limited partnership
(the ''MLP'') between subsidiaries of Kemper and subsidiaries of Lumbermens
Mutual Casualty Company, which amounted to $92.5 million at December 31, 2001.
The MLP's underlying investment primarily consists of the water development
project, as discussed earlier. Although the SWRCB has approved the water right
permit, additional permits must be obtained before development on this project
can proceed. These additional permits are expected to be received during 2002.
The final resolution of this permit process will impact the long-term economic
viability of the project. Loans to the MLP were placed on non-accrual status at
the beginning of 1999 to ensure that book value of the MLP did not increase
over net realizable value. In 2001, these loans were placed on accrual status,
as previously discussed.
The second largest of these investments at December 31, 2001 amounted to
$63.9 million and consisted of second mortgages on nine hotel properties, one
office building, and one retail property. Patrick M. Nesbitt or his affiliates,
a third-party real estate developer, have ownership interests in these
properties. These properties are geographically dispersed and the current
market values of the underlying properties substantially exceed the balances
due on all but one of the mortgages. These loans are on accrual status. In the
fourth quarter of 2001, a valuation reserve of $600 thousand was recorded for
one of these properties as its estimated fair value decreased below the debt
supported by the property.
At December 31, 2001, a loan to a joint venture amounted to $11.8 million.
This affiliated mortgage loan was on an office property located in Illinois.
The remaining real estate-related investment amounted to $7.4 million at
December 31, 2001 and consisted of various unzoned residential and commercial
lots located in Hawaii. Due to certain negative zoning restriction developments
in January 1997 and a continuing economic slump in Hawaii, these real
estate-related investments were placed on nonaccrual status. All zoned
properties were sold by March of 2001. We are currently pursuing an out of
court settlement against the city of Honolulu for the downzoning of certain
unzoned properties. If a settlement is not reached, trial will begin this year.
We are holding the unzoned properties for future zoning and sales. However, due
to the state of Hawaii's economy, which has lagged behind the economic
expansion of most of the rest of the United States, it is anticipated that it
could be several additional years until we completely dispose of all
investments in Hawaii.
We evaluate our real estate-related investments (including accrued interest)
using an estimate of the investments' observable market price, net of estimated
selling costs. Because the real estate review process includes estimates
involving changing economic conditions and other factors, there can be no
assurance that current estimates will prove accurate over time. Real
estate-related investments are expected to continue to decline further through
future sales and paydowns. Net income could be reduced in future periods if:
. real estate market conditions worsen in areas where our portfolio is
located
. Kemper's and our plans with respect to certain projects change, or
. necessary construction or zoning permits are not obtained.
Troubled real estate-related investments consisted of loans on nonaccrual
status, before reserves and write-downs, totaling $13.0 million and $86.3
million at December 31, 2001 and 2000, respectively. Interest does not
23
accrue on real estate-related investments when it is judged that the likelihood
of interest collection is doubtful. Loans on nonaccrual status after reserves
and write-downs amounted to $7.4 million and $64.3 million at December 31, 2001
and 2000, respectively. The decrease in nonaccrual loans in 2001, compared with
2000, is due primarily to the reclassification of certain mortgage loans to
accrual status, as previously discussed.
Net investment income
Pre-tax net investment income totaled $269.4 million in 2001, compared with
$257.5 million in 2000 and $264.6 million in 1999. This includes our share of
the operating results from equity investments in real estate consisting of
other income less other expenses. Investment income was positively impacted in
2001 by the inclusion of three years of interest on loans previously carried on
non-accrual status and negatively impacted in 2001, 2000 and 1999 by purchase
accounting adjustments, as previously discussed.
Total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
Foregone investment income
(in millions)
Year Ended
December 31,
--------------
2001 2000 1999
---- ---- ----
Real estate-related investments $1.1 $9.1 $9.9
Fixed maturity securities...... 1.3 -- --
---- ---- ----
Total................... $2.4 $9.1 $9.9
==== ==== ====
Foregone investment income is the result of bonds that are in default and
certain real estate-related investments that have been placed on nonaccrual
status. Any increase in nonperforming securities, and either worsening or
stagnant real estate conditions, would increase the expected adverse effect on
future investment income and realized investment results. During 2001, $15.7
million of foregone investment income was recaptured from prior years due to
the previously mentioned reclassification of certain mortgage loans to accrual
status.
Realized investment results
Net income reflects after-tax realized investment gains of $13.4 million in
2001 and after-tax realized investment losses of $5.4 million and $6.2 million
in 2000 and 1999, respectively. Included in the 1999 after-tax realized
investment losses are trading account security losses of $4.7 million. As
previously discussed, we segregated a portion of the General Account investment
portfolio in the first eleven months of 1999 into a ''trading'' account under
SFAS 115. SFAS 115 mandates that assets held in a trading account be valued at
fair value, with changes in fair value flowing through the income statement as
realized capital gains and losses. Also, as previously discussed, effective
December 1, 1999, we no longer designated a portion of the General Account
investment portfolio as ''trading''. As a result, all investments previously
designated as ''trading'' are currently classified as available for sale and
changes in fair value to the FWA and the assets supporting the FWA no longer
flow through operating results.
Unrealized gains and losses on fixed maturity investments that are available
for sale are not reflected in net income. These changes in unrealized value are
recorded as a component of accumulated other comprehensive income, net of any
applicable income taxes. If, and to the extent, a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income. Pre-tax write-downs due to other-than-temporary decline in value
amounted to $15.5 million, $11.4 million and $0.1 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
24
We regularly monitor our investment portfolio and as part of this process
review the assets for possible impairments of carrying value. Because the
review process includes estimates involving changing economic conditions and
other factors, there can be no assurance that current estimates will prove
accurate over time.
See Note 1, ''Summary of Significant Accounting Policies'', in the Notes to
Consolidated Financial Statements for information regarding derivative
investments.
Interest rates
During 2000 and 1999 the Federal Open Market Committee (''FOMC'') raised
interest rates six times in total, resulting in a flatter yield curve due to
higher short-term interest rates. With signs of economic weakness becoming more
prevalent, the FOMC began lowering interest rates in January 2001 after raising
them 100 basis points and 75 basis points in 2000 and 1999, respectively. The
FOMC lowered rates 11 times in 2001, totaling 475 basis points, in an attempt
to stimulate the economy. The yield curve steepening that had begun at the end
of 2000 accelerated during 2001, leaving the treasury yield curve at its
steepest levels since 1993. The events of September 11 led to further interest
rate declines by the FOMC to help mitigate economic weakness and liquidity
concerns. The steepening curve and lower rates resulted in a decrease in
unrealized fixed maturity investment losses during 2000 and unrealized fixed
maturity investment gains during 2001.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, we can adjust crediting rates on fixed annuities and
other interest-bearing liabilities. However, competitive conditions and
contractual commitments do not always permit the reduction in crediting rates
to fully or immediately reflect reductions in investment yield. This can result
in narrower spreads.
A rising interest rate environment can increase net investment income as
well as contribute to both realized and unrealized fixed maturity investment
losses. A declining interest rate environment can decrease net investment
income as well as contribute to both realized and unrealized fixed maturity
investment gains. Also, lower renewal crediting rates on annuities, compared
with competitors' higher new money crediting rates, have influenced certain
annuity holders to seek alternative products. We mitigate this risk somewhat by
charging surrender fees, which decrease over time, when annuity holders
withdraw funds prior to maturity on certain annuity products. Approximately 23
percent of the fixed and variable annuity liabilities as of December 31, 2001,
however, were no longer subject to significant surrender fees.
25
LIQUIDITY AND CAPITAL RESOURCES
We carefully monitor 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 liquidity
are deposits for fixed annuities, premium income, investment income, separate
account fees, other operating revenue and cash provided from maturing or sold
investments.
Ratings
Ratings are an important factor in establishing the competitive position of
life insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios. Any
reductions in our claims-paying ability or financial strength ratings could
result in our products being less attractive to consumers. Any reductions in
our parent's ratings could also adversely impact our 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.
Our Standard & Poor's ("S&P") rating was coupled with ZFS through December
31, 2001 due to the perceived financial strength of ZFS and Zurich Life and the
designation of Zurich Life as one of ZFS's core businesses. In September 2001,
S&P announced that it was downgrading several insurance groups based on the
potential catastrophic losses from the September 11, 2001 terrorist attacks on
the United States of America, and the subsequent fall in equity markets. At
that time, ZFS was placed on CreditWatch with negative implications and its
rating, and therefore ours, was downgraded from "AA+" to "AA", S&P's third
highest rating. In February 2002, ZFS received another downgrade to "AA-" and
remained on CreditWatch with negative implications. During 2001, ZFS considered
the divestiture of Zurich Life. Although ZFS made the decision to retain Zurich
Life in December 2001, S&P decided to uncouple Zurich Life's ratings from ZFS
in March 2002, primarily due to ZFS's consideration of the Zurich Life
divestiture and we received a rating of "A+", reflecting the non-supported
strength of Zurich Life and were taken off CreditWatch.
We share our A.M. Best rating with ZFS. In the fall of 2001, A.M. Best
placed ZFS under review with developing implications but did not change its
ratings. In March 2002, ZFS's A.M. Best A+ (Superior) financial strength rating
was affirmed, removed from under review and assigned a negative outlook. Our
non-supported Moody's Investors Service rating remains at Aa3, its fourth
highest rating. In March 2002, Moody's Investors Service placed our rating
under review for possible downgrade.
Stockholder's equity
Stockholder's equity totaled $818.0 million at December 31, 2001, compared
with $730.1 million at December 31, 2000 and $630.0 million at December 31,
1999. The increase in stockholder's equity in 2001 was primarily due to an
increase in accumulated other comprehensive income of $49.3 million and net
income of $51.6 million, offset by dividends of $13.0 million paid to Kemper.
The increase in accumulated other comprehensive income was primarily related to
unrealized appreciation of the fixed maturity investment portfolio due to
declining interest rates during 2001.
The increase in stockholder's equity in 2000 was primarily due to an
increase in accumulated other comprehensive income of $88.1 million and net
income of $48.3 million, offset by dividends of $36.3 million paid to Kemper.
The increase in accumulated other comprehensive income was primarily related to
unrealized appreciation of the fixed maturity investment portfolio due to the
anticipation of declining interest rates at the end of 2000.
26
Emerging issues
In July 2001, the Financial Accounting Standards Board (''FASB'') issued
Statement of Financial Accounting Standard 141 (''SFAS 141''), Business
Combinations. SFAS 141 supercedes Accounting Principles Board Opinion No. 16
("APB 16"). SFAS 141 requires that the purchase method of accounting must be
used for all business combinations initiated after June 30, 2001. It also
requires that unrecognized negative goodwill must be written off immediately as
an extraordinary gain and provides more specific guidance on how to determine
the accounting acquirer, recognizing intangible assets apart from goodwill, as
well as additional financial statement disclosures. We intend to adopt SFAS 141
in the first quarter of 2002. However, the implementation of SFAS 141 is not
expected to have a material impact on our 2002 financial results.
Also in July 2001, the FASB issued Statement of Financial Accounting
Standard 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142
primarily addresses the accounting that must be applied to goodwill and
intangible assets subsequent to their acquisition. Effective January 1, 2002,
SFAS 142 requires that goodwill and indefinite-lived intangible assets will no
longer be amortized, but will be tested for impairment at the reporting unit
level. Goodwill and indefinite-lived intangible assets will be tested for
impairment at least annually and the amortization period for finite-lived
intangible assets will no longer be limited to forty years. SFAS 142 also
requires additional financial statement disclosure about goodwill and
intangible assets. We intend to adopt SFAS 142 in the first quarter of 2002. We
are currently evaluating the impact of implementing SFAS 142, however, it is
not expected to have a material impact on our 2002 financial results.
In June 2001, the FASB issued Statement of Financial Accounting Standard 143
("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143 amends FASB
Statement of Financial Accounting Standard 19 and is effective for financial
statements issued for fiscal years beginning after June 15, 2002, although
earlier application is encouraged. SFAS 143 clarifies and revises existing
guidance on financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. We intend to adopt SFAS 143 in 2002. We are currently
evaluating the impact of implementing SFAS 143, however, it is not expected to
have a material impact on our 2002 financial results.
In October 2001, the FASB issued Statement of Financial Accounting Standard
144 ("SFAS 144"), Accounting for Impairment or Disposal of Long-lived Assets.
This Standard will generally be effective on a prospective basis, beginning
January 1, 2002. SFAS 144 clarifies and revises existing guidance on accounting
for impairment of plant, property, and equipment, amortized intangibles, and
other long-lived assets not specifically addressed in other accounting
literature. Significant changes include (1) establishing criteria beyond those
previously specified in existing literature for determining when a long-lived
is held for sale, and (2) requiring that the depreciable life of a long-lived
asset to be abandoned is revised. These provisions could be expected to have
the general effect of reducing or delaying recognition of future impairment
losses on assets to be disposed, offset by higher depreciation during the
remaining holding period. However, we do not expect the adoption of this
Standard to have a significant impact on our 2002 financial results. SFAS 144
also broadens the presentation of discontinued operations to include a
component of an entity (rather than only a segment of a business).
27
Item 8. Financial Statements and Supplementary Data
Page(s)
-------
Report of Independent Accountants................................................................... 28
Consolidated Balance Sheets, December 31, 2001 and 2000............................................. 29
Consolidated Statements of Operations, three years ended December 31, 2001.......................... 30
Consolidated Statements of Comprehensive Income, each of the three years in the period ended
December 31, 2001................................................................................. 31
Consolidated Statements of Stockholder's Equity, each of the three years in the period ended
December 31, 2001................................................................................. 32
Consolidated Statements of Cash Flows, each of the three years in the period ended December 31, 2001 33
Notes to Consolidated Financial Statements.......................................................... 34-56
Financial Statement Schedules:
Supplementary Insurance Information.............................................................. 64
Reinsurance...................................................................................... 65
Valuation and Qualifying Accounts................................................................ 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Kemper Investors Life Insurance Company and its subsidiaries (the
''Company'') at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 22, 2002
28
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
2001 2000
------------ ------------
Assets
Fixed maturity securities available for sale, at fair value (amortized cost:
December 31, 2001, $3,057,139; December 31, 2000, $3,189,719).............. $ 3,094,560 $ 3,157,169
Equity securities, at fair value (cost: December 31, 2001 and
December 31, 2000, $65,473)................................................ 67,731 63,879
Short-term investments....................................................... 159,105 15,900
Joint venture mortgage loans................................................. 104,303 67,473
Third-party mortgage loans................................................... 63,897 63,476
Other real estate-related investments........................................ 8,240 9,468
Policy loans................................................................. 239,787 256,226
Other invested assets........................................................ 20,799 21,792
----------- -----------
Total investments........................................................ 3,758,422 3,655,383
Cash......................................................................... 57,374 34,101
Accrued investment income.................................................... 140,762 134,585
Reinsurance recoverable...................................................... 240,536 310,183
Deferred insurance acquisition costs......................................... 381,506 240,801
Value of business acquired................................................... 75,806 95,621
Goodwill..................................................................... 178,418 191,163
Other intangible assets...................................................... 6,261 4,531
Deferred income taxes........................................................ 95,688 120,781
Federal income tax receivable................................................ 13,866 8,803
Receivable on sales of securities............................................ 2,100 8,286
Other assets and receivables................................................. 30,336 22,766
Assets held in separate accounts............................................. 13,108,753 11,179,639
----------- -----------
Total assets............................................................. $18,089,828 $16,006,643
=========== ===========
Liabilities
Future policy benefits....................................................... $ 3,634,161 $ 3,588,140
Other policyholder benefits and funds payable................................ 436,449 399,585
Other accounts payable and liabilities....................................... 92,472 109,152
Liabilities related to separate accounts..................................... 13,108,753 11,179,639
----------- -----------
Total liabilities........................................................ 17,271,835 15,276,516
----------- -----------
Commitments and contingent liabilities
Stockholder's equity
Capital stock--$10 par value, authorized 300,000 shares; outstanding 250,000
shares..................................................................... 2,500 2,500
Additional paid-in capital................................................... 804,347 804,347
Accumulated other comprehensive income (loss)................................ 16,551 (32,718)
Retained deficit............................................................. (5,405) (44,002)
----------- -----------
Total stockholder's equity............................................... 817,993 730,127
----------- -----------
Total liabilities and stockholder's equity............................... $18,089,828 $16,006,643
=========== ===========
See accompanying notes to consolidated financial statements.
29
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
Revenue
Net investment income........................... $ 269,419 $ 257,470 $264,640
Realized investment gains (losses).............. 20,660 (8,277) (9,549)
Premium income.................................. 486 8,394 21,990
Separate account fees and charges............... 70,993 68,293 74,715
Other income.................................... 36,739 35,030 11,623
--------- --------- --------
Total revenue............................... 398,297 360,910 363,419
--------- --------- --------
Benefits and Expenses
Interest credited to policyholders.............. 159,127 152,289 162,243
Claims incurred and other policyholder benefits. 21,933 13,718 18,185
Taxes, licenses and fees........................ 10,714 17,861 30,234
Commissions..................................... 179,585 114,162 67,555
Operating expenses.............................. 66,026 61,671 45,989
Deferral of insurance acquisition costs......... (166,202) (104,608) (69,814)
Amortization of insurance acquisition costs..... 18,052 23,231 5,524
Amortization of value of business acquired...... 15,606 19,926 12,955
Amortization of goodwill........................ 12,744 12,744 12,744
Amortization of other intangible assets......... 961 368 --
--------- --------- --------
Total benefits and expenses................. 318,546 311,362 285,615
--------- --------- --------
Income before income tax expense................ 79,751 49,548 77,804
Income tax expense.............................. 28,154 1,247 32,864
--------- --------- --------
Net income.................................. $ 51,597 $ 48,301 $ 44,940
========= ========= ========
See accompanying notes to consolidated financial statements.
30
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
-----------------------------
2001 2000 1999
-------- -------- ---------
Net income.................................................................... $ 51,597 $ 48,301 $ 44,940
-------- -------- ---------
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on investments arising during period:....
Unrealized holding gains (losses) on investments........................... 54,155 61,487 (180,267)
Adjustment to value of business acquired................................... (5,914) (3,400) 12,811
Adjustment to deferred insurance acquisition costs......................... (1,050) (230) 5,726
-------- -------- ---------
Total unrealized holding gains (losses) on investments arising
during period........................................................ 47,191 57,857 (161,730)
-------- -------- ---------
Less reclassification adjustments for items included in net income:
Adjustment for (gains) losses included in realized investment gains
(losses)................................................................. (9,203) (24,583) 16,651
Adjustment for amortization of premium on fixed maturity securities
included in net investment income........................................ (5,732) (4,538) (10,533)
Adjustment for (gains) losses included in amortization of value of
business acquired........................................................ (1,705) 214 (454)
Adjustment for losses included in amortization of insurance acquisition
costs.................................................................... 6,395 13 1,892
-------- -------- ---------
Total reclassification adjustments for items included in net
income............................................................ (10,245) (28,894) 7,556
-------- -------- ---------
Other comprehensive income (loss), before related income tax expense
(benefit)................................................................... 57,436 86,751 (169,286)
Related income tax expense (benefit).......................................... 8,167 (1,350) (15,492)
-------- -------- ---------
Other comprehensive income (loss), net of tax....................... 49,269 88,101 (153,794)
-------- -------- ---------
Comprehensive income (loss)......................................... $100,866 $136,402 $(108,854)
======== ======== =========
See accompanying notes to consolidated financial statements.
31
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- --------- ---------
Capital stock, beginning and end of period........................ $ 2,500 $ 2,500 $ 2,500
-------- --------- ---------
Additional paid-in capital, beginning and end of period........... 804,347 804,347 804,347
-------- --------- ---------
Accumulated other comprehensive income (loss), beginning of period (32,718) (120,819) 32,975
Other comprehensive income (loss), net of tax..................... 49,269 88,101 (153,794)
-------- --------- ---------
End of period.................................................. 16,551 (32,718) (120,819)
-------- --------- ---------
Retained earnings (deficit), beginning of period.................. (44,002) (56,023) 14,037
Net income........................................................ 51,597 48,301 44,940
Dividends to parent............................................... (13,000) (36,280) (115,000)
-------- --------- ---------
End of period.................................................. (5,405) (44,002) (56,023)
-------- --------- ---------
Total stockholder's equity................................. $817,993 $ 730,127 $ 630,005
======== ========= =========
See accompanying notes to consolidated financial statements.
32
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------------
2001 2000 1999
----------- --------- -----------
Cash flows from operating activities
Net income.......................................................... $ 51,597 $ 48,301 $ 44,940
Reconciliation of net income to net cash from operating activities:
Realized investment (gains) losses.............................. (20,660) 8,277 9,549
Net change in trading account securities........................ -- -- (51,239)
Interest credited and other charges............................. 169,084 142,344 158,557
Deferred insurance acquisition costs, net....................... (148,150) (81,377) (64,290)
Amortization of value of business acquired...................... 15,606 19,926 12,955
Amortization of goodwill........................................ 12,744 12,744 12,744
Amortization of discount and premium on investments............. 5,731 4,538 11,157
Amortization of other intangible assets......................... 961 368 --
Deferred income taxes........................................... 16,927 (25,930) (42,952)
Net change in current federal income taxes...................... (5,063) (18,593) (10,594)
Benefits and premium taxes due related to separate account
business-owned life insurance................................. (6,392) (61,476) 149,477
Other, net...................................................... 5,120 42,377 (11,901)
----------- --------- -----------
Net cash flow from operating activities...................... 97,505 91,499 218,403
----------- --------- -----------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturity securities held to maturity...................... 281,664 170,465 335,735
Fixed maturity securities sold prior to maturity................ 1,331,168 589,933 1,269,290
Equity securities............................................... -- 1,271 11,379
Mortgage loans, policy loans and other invested assets.......... 60,495 73,177 75,389
Cost of investments purchased or loans originated:
Fixed maturity securities....................................... (1,481,699) (569,652) (1,455,496)
Equity securities............................................... -- (1,264) (8,703)
Mortgage loans, policy loans and other invested assets.......... (41,395) (47,109) (43,665)
Investment in subsidiaries...................................... (2,690) (4,899) --
Short-term investments, net......................................... (143,205) 26,491 15,943
Net change in receivable and payable for securities transactions.... 6,186 (4,786) --
Net change in other assets.......................................... 2,248 (5,141) (2,725)
----------- --------- -----------
Net cash from investing activities........................... 12,772 228,486 197,147
----------- --------- -----------
Cash flows from financing activities
Policyholder account balances:
Deposits........................................................ 680,106 608,363 383,874
Withdrawals..................................................... (733,521) (881,888) (694,848)
Dividends to parent................................................. (13,000) (36,280) (115,000)
Cash overdrafts..................................................... (20,589) 11,906 8,953
----------- --------- -----------
Net cash from financing activities........................... (87,004) (297,899) (417,021)
----------- --------- -----------
Net increase (decrease) in cash.............................. 23,273 22,086 (1,471)
Cash, beginning of period.............................................. 34,101 12,015 13,486
----------- --------- -----------
Cash, end of period.................................................... $ 57,374 $ 34,101 $ 12,015
=========== ========= ===========
See accompanying notes to consolidated financial statements.
33
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 its subsidiaries (''the
Company'') issue fixed and variable annuity products, variable life, term life
and interest-sensitive life insurance products marketed primarily through a
network of financial institutions, securities brokerage firms, insurance agents
and financial planners. The Company is licensed in the District of Columbia and
all states except New York. Zurich Kemper Life Insurance Company of New York
("ZKLICONY"), a newly formed, wholly-owned subsidiary, received its license
from the state of New York early in 2001 and began writing business in May of
2001. The Company is a wholly-owned subsidiary of Kemper Corporation
(''Kemper''), a non-operating holding company. Kemper is a wholly-owned
subsidiary of Zurich Group Holding (''ZGH'' or ''Zurich''), a Swiss holding
company. ZGH is wholly-owned by Zurich Financial Services (''ZFS''), a Swiss
holding company.
The financial statements include the accounts of the Company on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to the 2000 and 1999
consolidated financial statements in order for them to conform to the 2001
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 2001, 2000 and 1999, have been
prepared in conformity with accounting principles generally accepted in the
United States of America.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that could affect the reported
amounts of assets and liabilities as well as the disclosure of contingent
assets or liabilities at the date of the financial statements. As a result,
actual results reported as revenue and expenses could differ from the estimates
reported in the accompanying financial statements. As further discussed in the
accompanying notes to the consolidated financial statements, significant
estimates and assumptions affect goodwill, deferred insurance acquisition
costs, the value of business acquired, provisions for real estate-related
losses and reserves, other-than-temporary declines in values for fixed maturity
securities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
Goodwill and other intangibles
The Company reviews goodwill and other intangibles (''intangible assets'')
to determine if events or changes in circumstances may have affected the
recoverability of the outstanding intangible assets as of each reporting
period. In the event that the Company determines that the intangible assets are
not recoverable, it would amortize such amounts as additional amortization
expense in the accompanying financial statements. As of December 31, 2001, the
Company believes that no such adjustment is necessary.
During 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 141 (''SFAS 141''), Business Combinations and
Statement of Financial Accounting Standard 142 ("SFAS 142"), Goodwill and Other
Intangible Assets in July 2001. SFAS 141 requires that the purchase method of
accounting must be used for all business combinations initiated after June 30,
2001. SFAS 142 primarily addresses the accounting that must be applied to
goodwill and other intangible assets subsequent to their acquisition. The
Company intends to adopt SFAS 141 and SFAS 142 in the first quarter of 2002,
however they are not expected to have a material impact on the Company's 2002
financial results.
The difference between ZFS's cost of acquiring the Company and the net fair
value of the assets and liabilities as of January 4, 1996 was recorded as
goodwill. Goodwill is amortized on a straight-line basis over a
34
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
twenty-year period. Other intangible assets of $7.6 million, recorded in 2001
and 2000 in connection with the purchase of PMG, are being amortized on a
straight-line basis over a ten-year period.
Value of business acquired
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition, January 4, 1996. Such value is the present value of the
actuarially determined projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated
gross profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2006 are as follows:
Projected
Accretion
Beginning Of Ending
Year Ended December 31, Balance Amortization Interest Balance
----------------------- --------- ------------ --------- --------
(in thousands)
1999 (actual)..... $126,066 $(20,891) $7,936 $113,111
2000 (actual)..... 113,111 (26,805) 6,879 93,185
2001 (actual)..... 93,185 (21,394) 5,788 77,579
2002.............. 77,579 (17,308) 4,548 64,819
2003.............. 64,819 (15,003) 3,812 53,628
2004.............. 53,628 (13,464) 3,142 43,306
2005.............. 43,306 (11,686) 2,527 34,147
2006.............. 34,147 (10,191) 1,971 25,927
The projected ending balance of the value of business acquired will be
further adjusted to reflect the impact of unrealized gains or losses on fixed
maturity securities held as available for sale in the investment portfolio.
Such adjustments are not recorded in the Company's net income but rather are
recorded as a credit or charge to accumulated other comprehensive income, net
of income tax. This adjustment decreased the value of business acquired by $1.8
million as of December 31, 2001 and increased the value of business acquired by
$2.4 million and $6.0 million as of December 31, 2000 and 1999, respectively.
Accumulated other comprehensive income decreased by approximately $1.2 million
as of December 31, 2001 due to this adjustment and increased accumulated other
comprehensive income by approximately $1.6 million and $3.9 million as of
December 31, 2000 and 1999, respectively.
Life insurance revenue and expenses
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
Reinsurance
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to
certain blocks of annuities and to individual death claims. Although these
35
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reinsurance agreements contractually obligate the reinsurers to reimburse the
Company, they do not discharge the Company from its primary liabilities and
obligations to policyholders. As such, these amounts paid or deemed to have
been paid are recorded on the Company's consolidated balance sheet as
reinsurance recoverables and ceded future policy benefits.
Deferred insurance acquisition costs
The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for annuities,
separate account business and interest-sensitive life insurance products are
being amortized over the estimated contract life in relation to the present
value of estimated gross profits. Deferred insurance acquisition costs related
to such interest-sensitive products also reflect the estimated impact of
unrealized gains or losses on fixed maturity securities held as available for
sale in the investment portfolio, through a charge or credit to accumulated
other comprehensive income, net of income tax. The deferred insurance
acquisition costs for term-life insurance products are being amortized over the
premium paying period of the policies.
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. A liability has been
established for guaranteed death benefits in excess of account values. The
guaranteed retirement income benefit ("GRIB") is an optional benefit to the
DESTINATIONS/SM/ variable annuity, for an additional asset-based fee. It allows
for a proxy account value, called the GRIB Base, to be applied to the
guaranteed annuity factors (settlement option purchase rates) in the contract.
The GRIB Base prior to attained age 80 is the greatest of:
. the contract value (account value)
. the greatest anniversary value before the exercise (annuitization) date, or
. purchase payments minus previous withdrawals, accumulated at 5
percent interest per year to the annuitization date.
GRIB reserves have been established for policies that have withdrawn a
substantial portion of their contract values, exposing a proportionately large
GRIB benefit in relation to the account value. These policies were deemed to
have elected annuitization and a reserve has been established to cover the
present value of future benefits. No additional liabilities for future policy
benefits related to guaranteed living benefits have been established. Had such
a benefit been established, total liabilities would have been increased by $7.8
million.
Current interest rates credited during the contract accumulation period
range from 3.0 percent to 10.0 percent. Future minimum guaranteed interest
rates vary from 3.0 percent to 4.0 percent. For contracts that have annuitized,
interest rates used in determining the present value of future payments range
principally from 2.5 percent to 12.0 percent.
Liabilities for future term life policy benefits have been computed
principally by a net level premium method. Anticipated rates of mortality are
based on the 1975-1980 Select and Ultimate Table modified by Company
experience, including withdrawals. Assumed investment yields are by policy
duration and range from 7.3 percent to 6.0 percent over 20 years.
36
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Guaranty fund assessments
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
2001 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
the Company believes it will be assessed in the future for which the life
insurance industry has estimated the cost to cover losses to policyholders.
Invested assets and related income
Investments in fixed maturity securities and equity securities are carried
at fair value. Short-term investments are carried at cost, which approximates
fair value.
The amortized cost of fixed maturity securities is adjusted for amortization
of premiums and accretion of discounts to maturity, or in the case of
mortgage-backed and asset-backed securities, over the estimated life of the
security. Such amortization is included in net investment income. Amortization
of the discount or premium from mortgage-backed and asset-backed securities is
recognized using a level effective yield method which considers the estimated
timing and amount of prepayments of the underlying loans and is adjusted to
reflect differences which arise between the prepayments originally anticipated
and the actual prepayments received and currently anticipated. To the extent
that the estimated lives of such securities change as a result of changes in
prepayment rates, the adjustment is also included in net investment income. The
Company does not accrue interest income on fixed maturity securites deemed to
be impaired on an other-than-temporary basis, or on mortgage loans and other
real estate loans where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. Real
estate reserves are established when declines in collateral values, estimated
in light of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily
of venture capital investments and a leveraged lease, are carried primarily at
cost.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or
losses on revaluation of investments are credited or charged to accumulated
other comprehensive income (loss). Such unrealized gains are recorded net of
deferred income tax expense, while unrealized losses are not tax benefited.
Derivative instruments
The Company is party to an interest rate swap agreement with Zurich Capital
Markets, Inc. ("ZCM"), an affiliated counterparty. The Company uses interest
rate swaps to hedge against interest rate exposures arising from mismatches
between assets and liabilities. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional principal amount. No cash is exchanged at the outset of the
contract and no principal payments are made by either party. A single net
payment is made by one counterparty at each due date. In 2001, the Company paid
$0.9 million as settlement for the difference between the fixed-rate and
floating-rate interest.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it does not
expect its counterparty to fail to meet its obligations given its high credit
ratings. The credit exposure of interest rate swaps is represented by the fair
value (market value) of contracts. At
37
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001, an open swap agreement with a notional value of $100.0
million and an expiration date of November 2004, had a negative market value of
$5.0 million. The negative market value was included as a component of other
accounts payable and liabilities in the accompanying consolidated balance
sheets.
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 contractholders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contractholders. The assets and liabilities of the separate
accounts are carried at fair value.
Income tax
The Company files a separate Federal income tax return. Deferred taxes are
provided on the temporary differences between the tax and financial statement
basis of assets and liabilities.
(2) Cash Flow Information
The Company defines cash as cash in banks and money market accounts. The
Company paid federal income taxes of $19.8 million, $43.9 million and $83.8
million directly to the United States Treasury Department during 2001, 2000 and
1999, respectively.
(3) Invested Assets and Related Income
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturity securities are considered available for sale. The
carrying value of fixed maturity securities compared with amortized cost,
adjusted for other-than-temporary declines in value and estimated unrealized
gains and losses, were as follows:
Estimated Unrealized
Carrying Amortized -------------------
Value Cost Gains Losses
---------- ---------- ------- --------
(in thousands)
December 31, 2001
U.S. treasury securities and obligations of U.S.
government agencies and authorities............. $ 21,354 $ 21,286 $ 254 $ (186)
Obligations of states and political subdivisions,
special revenue and nonguaranteed............... 13,488 13,292 196 --
Debt securities issued by foreign governments..... 4,537 4,508 29 --
Corporate securities.............................. 1,945,006 1,926,160 45,602 (26,756)
Mortgage and asset-backed securities.............. 1,110,175 1,091,893 24,795 (6,513)
---------- ---------- ------- --------
Total fixed maturity securities............... $3,094,560 $3,057,139 $70,876 $(33,455)
========== ========== ======= ========
December 31, 2000
U.S. treasury securities and obligations of U.S.
government agencies and authorities............. $ 11,822 $ 11,777 $ 69 $ (24)
Obligations of states and political subdivisions,
special revenue and nonguaranteed............... 24,021 24,207 -- (186)
Debt securities issued by foreign governments..... 21,812 21,893 90 (171)
Corporate securities.............................. 2,060,679 2,093,916 12,634 (45,871)
Mortgage and asset-backed securities.............. 1,038,835 1,037,926 7,495 (6,586)
---------- ---------- ------- --------
Total fixed maturity securities............... $3,157,169 $3,189,719 $20,288 $(52,838)
========== ========== ======= ========
38
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 2001, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
Carrying Amortized
Value Cost
---------- ----------
(in thousands)
One year or less................................................................. $ 38,884 $ 38,175
Over one year through five years................................................. 836,094 814,386
Over five years through ten years................................................ 880,118 874,543
Over ten years................................................................... 229,289 238,142
Securities not due at a single maturity date, primarily mortgage and asset-backed
securities(1).................................................................. 1,110,175 1,091,893
---------- ----------
Total fixed maturity securities........................................... $3,094,560 $3,057,139
========== ==========
- --------
(1) Weighted average maturity of 4.5 years.
Proceeds from sales of investments in fixed maturity securities prior to
maturity were $1,331.2 million, $589.9 million and $1,269.3 million during
2001, 2000 and 1999, respectively. Gross gains of $32.9 million, $8.6 million
and $7.9 million and gross losses, including write-downs of fixed maturity
securities for other-than-temporary declines in value, of $28.6 million, $20.8
million and $17.7 million were realized on sales and maturities in 2001, 2000
and 1999, respectively. Pre-tax write-downs due to other-than-temporary
declines in value amounted to $15.5 million, $11.4 million and $0.1 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
At December 31, 2001 the Company held a $92.5 million mortgage loan
investment in Delta Wetlands which exceeded 10 percent of the Company's
stockholder's equity at December 31, 2001. Excluding agencies of the U.S.
government, no other individual investment exceeded 10 percent of the Company's
stockholder's equity at December 31, 2001.
At December 31, 2001, securities carried at approximately $6.6 million were
on deposit with governmental agencies as required by law.
For its securitized financial assets, the Company recognizes an impairment
loss if the fair value of the security is below book value and the net present
value of expected future cash flows is less than the net present value of
expected future cash flows at the most recent (prior) estimation date. These
impairment losses are included as part of the write-downs for
other-than-temporary declines in value discussed above.
Upon default or indication of potential default by an issuer of fixed
maturity securities other than securitized financial assets, the issue(s) of
such issuer would be placed on nonaccrual status and, since declines in fair
value would no longer be considered by the Company to be temporary, would be
analyzed for possible write-down. Any such issue would be written down to its
net realizable value during the fiscal quarter in which the impairment was
determined to have become other than temporary. Thereafter, each issue on
nonaccrual status is regularly reviewed, and additional write-downs may be
taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its
39
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $176.4 million real estate portfolio at December 31, 2001
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 2001 and 2000, total impaired real
estate-related loans were as follows:
December 31, December 31,
2001 2000
------------ ------------
(in millions)
Impaired loans without reserves--gross $ 7.3 $ 62.6
Impaired loans with reserves--gross... 11.3 23.7
----- ------
Total gross impaired loans..... 18.6 86.3
Reserves related to impaired loans.... (2.7) (18.5)
Write-downs related to impaired loans. (3.5) (3.5)
----- ------
Net impaired loans............. $12.4 $ 64.3
===== ======
The Company had an average balance of $65.3 million and $90.2 million in
impaired loans for 2001 and 2000, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance.
At December 31, 2001 and 2000, loans on nonaccrual status, before reserves
and write-downs, amounted to $13.0 million and $86.3 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
Net Investment Income
During 2001, a change in circumstances surrounding a water development
project located in California's Sacramento River Valley led to a decision to
reclassify the related mortgage loans to accrual status and release the general
reserve allowance originally set up for these loans. These changes included the
State of California's State Water Resources Control Board ("SWRCB") approval of
the project's water right permit as well as the completion of a third-party
appraisal of the project, subsequent to the SWRCB's approval of the permit.
Taken together, these facts support, in management's best judgment, not
only the level of existing debt on the project but also the accrual of interest
as specified in the terms of the loans. As a result, interest income was
recorded in the fourth quarter of 2001 in the amount of $24.9 million,
representing interest earned in 2001 as well as recaptured interest from 2000
and 1999, the years in which these loans were on non-accrual status. The
release of the general reserve allowance generated a realized gain of $16.4
million in 2001.
40
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The sources of net investment income were as follows:
2001 2000 1999
-------- -------- --------
(in thousands)
Interest on fixed maturity securities............ $214,505 $223,964 $231,176
Dividends on equity securities................... 4,598 4,573 4,618
Income from short-term investments............... 2,332 3,433 3,568
Income from mortgage loans....................... 30,771 6,091 6,296
Income from policy loans......................... 19,394 20,088 20,131
Income from other real estate-related investments 27 99 155
Income from other loans and investments.......... 646 2,455 2,033
-------- -------- --------
Total investment income................... 272,273 260,703 267,977
Investment expense............................... 2,854 3,233 3,337
-------- -------- --------
Net investment income..................... $269,419 $257,470 $264,640
======== ======== ========
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) for the years ended December 31,
2001, 2000 and 1999, were as follows:
2001 2000 1999
------- -------- -------
(in thousands)
Real estate-related......................................... $16,081 $ 1,711 $ 4,201
Fixed maturity securities................................... 4,284 (12,185) (9,755)
Trading account securities--gross gains..................... -- -- 491
Trading account securities--gross losses.................... -- -- (7,794)
Equity securities........................................... 262 245 1,039
Other....................................................... 33 1,952 2,269
------- -------- -------
Realized investment gains (losses) before income
tax expense (benefit).............................. 20,660 (8,277) (9,549)
Income tax expense (benefit)................................ 7,231 (2,897) (3,342)
------- -------- -------
Net realized investment gains (losses)............... $13,429 $ (5,380) $(6,207)
======= ======== =======
Unrealized gains (losses) are computed below as follows: fixed maturity
securities--the difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 2001,
2000 and 1999 were as follows:
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(in thousands)
Fixed maturity securities..................................... $69,970 $89,421 $(182,456)
Equity and other securities................................... (879) 1,187 (3,929)
Adjustment to deferred insurance acquisition costs............ (7,446) (243) 3,834
Adjustment to value of business acquired...................... (4,209) (3,614) 13,265
------- ------- ---------
Unrealized gain (loss) before income tax expense (benefit). 57,436 86,751 (169,286)
Income tax expense (benefit).................................. 8,167 (1,350) (15,492)
------- ------- ---------
Net unrealized gain (loss) on investments.............. $49,269 $88,101 $(153,794)
======= ======= =========
41
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Unconsolidated Investees
At December 31, 2001 and 2000 the Company, along with other Kemper
subsidiaries, directly held partnership interests in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships.
The Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any
event, major decisions of the partnership must be made jointly by all partners.
As of December 31, 2001 and 2000, the Company's net equity investment in
unconsolidated investees amounted to $0.9 million and $1.0 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $27 thousand, $99 thousand and $155 thousand in 2001,
2000 and 1999, respectively.
(5) Concentration of Credit Risk
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 22.0 percent of the investment-grade fixed maturity securities
at December 31, 2001 were mortgage-backed securities, up from 18.9 percent at
December 31, 2000. These investments consist primarily of marketable mortgage
pass-through securities issued by the Government National Mortgage Association,
the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation and other investment-grade securities collateralized by mortgage
pass-through securities issued by these entities. The Company has not made any
investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. The Company's mortgage-backed investments are
generally of AAA credit quality, and the markets for these investments have
been and are expected to remain liquid.
Approximately 15.3 percent and 15.1 percent of the investment-grade fixed
maturity securities at December 31, 2001 and 2000, respectively, consisted of
corporate asset-backed securities. The majority of investments in asset-backed
securities were backed by commercial mortgage-backed securities (36.5%), home
equity loans (22.9%), collateralized loan and bond obligations (12.1%),
manufactured housing loans (11.7%), and other commercial assets (5.5%).
The Company's real estate portfolio is distributed by geographic location
and property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 2001 was as follows: California (52.9%),
Washington (9.8%), Colorado (8.1%) and Illinois (6.7%). The property type
distribution of a majority of the real estate portfolio as of December 31, 2001
was as follows: land (51.9%), hotels (32.4%) and office (7.8%).
To maximize the value of certain land and other projects, additional
development has been proceeding or has been planned. Such development of
existing projects would continue to require funding, either from the Company or
third parties. In the present real estate markets, third-party financing can
require credit enhancing arrangements (e.g., standby financing arrangements and
loan commitments) from the Company. The values of development projects are
dependent on a number of factors, including Kemper's and the Company's plans
with respect thereto, obtaining necessary construction and zoning permits and
market demand for the permitted use of the property. There can be no assurance
that such permits will be obtained as planned or at all, nor that such
expenditures will occur as scheduled, nor that Kemper's or the Company's plans
with respect to such projects may not change substantially.
More than half of the Company's real estate mortgage loans are on properties
or projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners.
42
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2001 loans to a master limited partnership (the ''MLP'')
between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty
Company, a former affiliate, constituted approximately $92.5 million, or 52.4
percent, of the Company's real estate portfolio. Kemper's interest in the MLP
is 75.0 percent at December 31, 2001. Loans to the MLP were placed on
non-accrual status at the beginning of 1999 due to management's desire not to
increase book value of the MLP over net realizable value, as interest on these
loans has historically been added to principal. During 2001, a change in
circumstances surrounding the water development project related to these loans
led to the reclassification of these loans to accrual status. As a result,
interest income was recorded in the fourth quarter of 2001 and the general
reserve allowance related to these loans was released. At December 31, 2001,
MLP-related commitments accounted for approximately $0.2 million of the
Company's off-balance-sheet legal commitments.
At December 31, 2001, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates (''Nesbitt''), a third-party real estate
developer, have ownership interests constituted approximately $63.9 million, or
6.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 2001, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding. In the fourth quarter
of 2001, a valuation reserve of $600 thousand was recorded for one of these
properties as its estimated fair value decreased below the debt supported by
the property.
At December 31, 2001, a loan to a joint venture amounted to $11.8 million.
This affiliated mortgage loan was on an office property located in Illinois. At
December 31, 2001, the Company did not have any off-balance-sheet legal funding
commitments outstanding related to this investment.
The remaining real estate-related investment amounted to $7.4 million at
December 31, 2001 and consisted of various unzoned residential and commercial
lots located in Hawaii. Due to certain negative zoning restriction developments
in January 1997 and a continuing economic slump in Hawaii, these real
estate-related investments were placed on nonaccrual status. All zoned
properties were sold by March of 2001. We are currently pursuing an out of
court settlement against the city of Honolulu for the downzoning of certain
unzoned properties. If a settlement is not reached, trial will begin this year.
We are holding the unzoned properties for future zoning and sales. However, due
to the state of Hawaii's economy, which has lagged behind the economic
expansion of most of the rest of the United States, it is anticipated that it
could be several additional years until the Company completely disposes of all
investments in Hawaii. At December 31, 2001, off-balance-sheet legal
commitments related to Hawaiian properties totaled $4.0 million.
At December 31, 2001, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 2001.
(6) Income Taxes
Income tax expense (benefit) was as follows for the years ended December 31,
2001, 2000 and 1999:
2001 2000 1999
------- -------- --------
(in thousands)
Current.......... $11,228 $ 28,274 $ 75,816
Deferred......... 16,926 (27,027) (42,952)
------- -------- --------
Total..... $28,154 $ 1,247 $ 32,864
======= ======== ========
43
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
------- ------- --------
(in thousands)
Unrealized gains and losses on investments $12,246 $ -- $(21,477)
Value of business acquired................ (1,473) (1,265) 4,643
Deferred insurance acquisition costs...... (2,606) (85) 1,342
------- ------- --------
Total.............................. $ 8,167 $(1,350) $(15,492)
======= ======= ========
The actual income tax expense for 2001, 2000 and 1999 differed from the
''expected'' tax expense for those years as displayed below. ''Expected'' tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 2001, 2000, and 1999 to income before income tax expense.
2001 2000 1999
------- -------- -------
(in thousands)
Computed expected tax expense.......................... $27,913 $ 17,342 $27,232
Difference between ''expected'' and actual tax expense:
State taxes......................................... (2,302) 737 1,608
Amortization of goodwill and other intangibles...... 4,797 4,589 4,460
Dividend received deduction......................... -- (1,191) --
Foreign tax credit.................................. (15) (214) (306)
Change in valuation allowance....................... -- (15,201) --
Recapture of affiliated reinsurance................. -- (4,599) --
Prior year tax settlements.......................... (2,577) -- --
Other, net.......................................... 338 (216) (130)
------- -------- -------
Total actual tax expense........................ $28,154 $ 1,247 $32,864
======= ======== =======
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The $4.6 million tax benefit in 2000 is due to the deferred tax effect
related to the deemed dividend distribution. (See the note captioned ''Summary
of Significant Accounting Policies--Reinsurance.") This deferred tax benefit
was recognized in the tax provision under current accounting guidance relating
to the recognition of deferred taxes.
The Company only records deferred tax assets if future realization of the
tax benefit is more likely than not. The Company had established a valuation
allowance to reduce the deferred federal tax asset related to real estate and
unrealized losses on investments to a realizable amount. This amount was based
on the evidence available and management's judgment. The valuation allowance is
subject to future adjustments based upon, among other items, the Company's
estimates of future operating earnings and capital gains. The decrease in the
valuation allowance in 2001 is related to the change in the amount of
unrealized losses on investments.
44
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred federal tax assets or liabilities were
as follows:
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(in thousands)
Deferred federal tax assets:
Deferred insurance acquisition costs (''DAC Tax'')........ $135,307 $131,591 $121,723
Unrealized losses on investments.......................... -- 12,045 43,758
Life policy reserves...................................... 90,870 67,260 43,931
Unearned revenue.......................................... 55,574 58,200 59,349
Real estate-related....................................... -- 6,515 7,103
Other investment-related.................................. 12,646 5,330 928
Other..................................................... 3,349 4,329 3,133
-------- -------- --------
Total deferred federal tax assets..................... 297,746 285,270 279,925
Valuation allowance....................................... -- (12,045) (58,959)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance........................................... 297,746 273,225 220,966
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired................................ 24,608 33,467 55,884
Deferred insurance acquisition costs...................... 135,317 84,280 41,706
Depreciation and amortization............................. 21,165 21,799 19,957
Other investment-related.................................. 7,239 7,973 7,670
Unrealized gains on investments........................... 12,246 -- --
Other..................................................... 1,483 4,925 2,247
-------- -------- --------
Total deferred federal tax liabilities................ 202,058 152,444 127,464
-------- -------- --------
Net deferred federal tax assets.............................. $ 95,688 $120,781 $ 93,502
======== ======== ========
The net deferred tax assets relate primarily to unearned revenue and the DAC
Tax associated with a non-registered individual and group variable
business-owned life insurance contract (''BOLI''). Management believes that it
is more likely than not that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
The tax returns through the year 1996 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 1997 through 1999 are
currently under examination by the IRS.
(7) Related-Party Transactions
The Company paid cash dividends of $13.0 million, $20.0 million and $115.0
million to Kemper during 2001, 2000 and 1999, respectively. The Company
reported a deemed dividend distribution of $16.3 million during 2000 related to
the recapture of a reinsurance agreement with Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company.
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, 2001 and 2000, joint venture mortgage loans
totaled $104.3 million and $67.5 million, respectively, and during 2001, 2000
and 1999, the Company earned interest income on these joint venture loans of
$25.4 million, $0.8 million and $0.6 million, respectively.
45
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 2001, the Company sold a $60 million group variable life policy
to FKLA, covering all current FKLA employees as of February 14, 2001. The
transaction, as business-owned life insurance ("BOLI"), will permit FKLA to
indirectly fund certain of its employee benefit obligations.
All of the Company's personnel are employees of FKLA. Expenses are allocated
to the Company for the utilization of FKLA employees and facilities. Expenses
allocated to the Company from FKLA during 2001, 2000 and 1999 amounted to $27.4
million, $23.3 million and $18.3 million, respectively. The Company also paid
to Kemper real estate subsidiaries fees of $0.5 million, $0.6 million and $1.0
million in 2001, 2000 and 1999, respectively, related to the management of the
Company's real estate portfolio.
The Company also has allocated expenses related to investment management
services provided by Zurich Scudder Investments, Inc. (''ZSI''), (formerly
Scudder Kemper Investments, Inc.), an affiliated company. The Company paid to
ZSI investment management fees of $1.7 million, $1.6 million and $1.8 million
during 2001, 2000 and 1999, respectively. On December 4, 2001, Deutsche Bank
and ZFS announced that they had signed a definitive agreement under which
Deutsche Bank will acquire 100 percent of ZSI, with the exception of ZSI's UK
operations, Threadneedle Investments. The transaction is expected to be
completed, subject to regulatory approval and satisfaction of other conditions,
in the first half of 2002.
FKLA has a formal management and services agreement with Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"), which charges FLA based
upon certain predetermined charges and factors. The Company shares directors,
management, operations and employees with FLA. FLA is a mutual company, owned
by its policyholders, and is not a member of the Zurich Holding Company System.
In 2000, the Company purchased PMG Securities Corporation, PMG Asset
Management, Inc., PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively
''PMG''). The total cost was $8.2 million, resulting in the recording of
intangible assets in the amount of $7.6 million. The Company owns 100 percent
of the stock of PMG. Also in 2000, the Company transferred $63.3 million in
fixed maturity securities and cash to fund the operations of its newly formed
subsidiary, Zurich Kemper Life Insurance Company of New York (''ZKLICONY'').
ZKLICONY received its insurance license from the state of New York in January
2001 and began writing business in May of 2001.
At December 31, 2000, the Company held a $100.0 million investment in ZSLM
Trust, issued by an affiliate. On October 30, 2001, the Company sold these
bonds to various Farmers insurance companies, all of which are affiliated
companies.
The Company held a $11.8 million real estate-related investment in an
affiliated mortgage loan at December 31, 2001.
As previously discussed, the Company is party to an interest rate swap
agreement with ZCM, an affiliated counterparty. (See the note captioned
''Summary of Significant Accounting Policies--Derivative instruments'' above.)
(8) Reinsurance
As of December 31, 2001 and 2000, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to FLA amounted to $230.1 million and
$262.1 million, respectively.
The Company cedes 90 percent of all new direct life insurance premiums to
outside reinsurers. Life reserves ceded to outside reinsurers on the Company's
direct business amounted to approximately $2.1 million and $2.0 million as of
December 31, 2001 and 2000, respectively.
46
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is party to a funds withheld reinsurance agreement with a ZFS
affiliated company, Zurich Insurance Company, Bermuda Branch (''ZICBB''). Under
the terms of this agreement, the Company cedes, on a yearly renewable term
basis, 100 percent of the net amount at risk (death benefit payable to the
insured less the insured's separate account cash surrender value) related to
BOLI. As consideration for this reinsurance coverage, the Company cedes
separate account fees (cost of insurance charges) to ZICBB and retains a
portion of such funds under the terms of the reinsurance agreement in a funds
withheld account ("FWA") which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets.
Effective December 31, 2001, the Company entered into a quota share
reinsurance agreement with ZICBB. Under the terms of this agreement, the
Company cedes 100 percent of the net amount at risk of the guaranteed minimum
death benefit and guaranteed retirement income benefit portions of a small
number of specific variable annuity contracts. As consideration for this
reinsurance coverage, the Company cedes 100 percent of all charges to
policyholders and all revenue sharing income received from fund managers
related to such reinsured policies. In 2001, the Company received $7.9 million
of ceding commissions and expense allowances, and paid $1.2 million of ceded
premiums, related to this reinsurance agreement. The account values related to
these policies are held in the Company's separate account during the
accumulation period of the contracts. The reserve credits under this treaty are
secured by a trust agreement that requires the fair market value of assets
therein to at least equal 102 percent of such reserve credits.
In the fourth quarter of 2000, the yearly renewable term reinsurance
agreement between the Company and FKLA was terminated. Premiums and reserves
were both reduced by $7.7 million. A difference in the basis of the reserves
between GAAP and statutory accounting resulted in a deemed dividend
distribution to Kemper of $16.3 million.
Also in the fourth quarter of 2000, the Company assumed from FKLA $100.0
million in premiums related to a Funding Agreement. Funding Agreements are
insurance contracts similar to structured settlements, immediate annuities and
guaranteed investment contracts (''GICs''). The contracts qualify as insurance
under state laws and are sold as non-surrenderable immediate annuities to a
trust established by a securities firm. The securities firm sold interests in
the trust to institutional investors. This Funding Agreement has a variable
rate of interest based upon LIBOR, is an obligation of the Company's general
account and is recorded as a future policy benefit. As previously discussed,
the Company entered into an interest rate swap in 2000 to exchange the
floating-rate interest payments for fixed interest payments.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement with ZICBB (in millions):
Business Owned Life Insurance (BOLI)
(in millions)
Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
Face amount in force........... $ 85,564 $ 85,358 $ 82,021
======== ======== ========
Net amount at risk ceded....... $(76,283) $(78,169) $(75,979)
======== ======== ========
Cost of insurance charges ceded $ 168.1 $ 173.8 $ 166.4
======== ======== ========
Funds withheld account......... $ 236.1 $ 228.8 $ 263.4
======== ======== ========
The Company's FWA supports reserve credits on reinsurance ceded on the BOLI
product. In 1998, to properly match revenue and expenses, the Company placed
assets supporting the FWA in a segmented portion of its General Account. This
portfolio was classified as ''trading'' under Statement of Financial Accounting
47
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standards No. 115 (''SFAS 115'') at December 31, 1998 and through November 30,
1999. SFAS 115 mandates that assets held in a trading account be valued at fair
value, with changes in fair value flowing through the income statement as
realized capital gains and losses. The Company recorded realized capital losses
of $7.3 million related to the changes in fair value of this portfolio during
1999.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion of
the FWA liability and therefore no longer designated the related portion of
assets as ''trading''. As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
(9) Postretirement Benefits Other Than Pensions
FKLA sponsors a health and welfare benefit plan that provides insurance
benefits covering substantially all eligible, active and retired employees of
FKLA and their covered dependents and beneficiaries. The Company is allocated a
portion of the costs of providing such benefits. The Company is self insured
with respect to medical benefits, and the plan is not funded except with
respect to certain disability-related medical claims. The medical plan provides
for medical insurance benefits at retirement, with eligibility based upon age
and the participant's number of years of participation attained at retirement.
The plan is contributory for pre-Medicare retirees, and will be contributory
for all retiree coverage for most current employees, with contributions
generally adjusted annually. Postretirement life insurance benefits are
noncontributory and are limited to $5,000 per participant retiring in 2001 and
subsequent years, and $10,000 per participant retiring in years prior to 2001.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.3 million at both December 31, 2001 and 2000.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.5 percent for 2001 and 2000, respectively. The
assumed health care trend rate used was based on projected experience for 2001,
7.5 percent for 2002, gradually declining to 6.4 percent by the year 2006 and
gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 2001 and 2000 by $142 thousand and $78 thousand,
respectively.
(10) Commitments and Contingent Liabilities
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management,
based upon the advice of legal counsel, the resolution of such litigation is
not expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been
identified as a ''potentially responsible party'' under federal environmental
guidelines, inherent in the ownership of, or lending to, real estate projects
is the possibility that environmental pollution conditions may exist on or near
or relate to properties owned or previously owned or 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
48
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(11) Financial Instruments--Off-Balance-Sheet Risk
At December 31, 2001, the Company had future legal loan commitments and
stand-by financing agreements totaling $29.9 million to support the financing
needs of various real estate investments. To the extent these arrangements are
called upon, amounts loaned would be collateralized by assets of the joint
ventures, including first mortgage liens on the real estate. The Company's
criteria in making these arrangements are the same as for its mortgage loans
and other real estate investments. These commitments are included in the
Company's analysis of real estate-related reserves and write-downs. The fair
values of loan commitments and standby financing agreements are estimated in
conjunction with and using the same methodology as the fair value estimates of
mortgage loans and other real estate-related investments.
(12) Fair Value of Financial Instruments
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. A significant portion of the Company's financial
instruments are carried at fair value. Fair value estimates for financial
instruments not carried at fair value are generally determined using discounted
cash flow models and assumptions that are based on judgments regarding current
and future economic conditions and the risk characteristics of the investments.
Although fair value estimates are calculated using assumptions that management
believes are appropriate, changes in assumptions could significantly affect the
estimates and such estimates should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The Company used the following methods and assumptions in estimating the
fair value of its financial instruments:
Fixed maturity securities and equity securities: Fair values were
determined by using market quotations, or independent pricing services that
use prices provided by market makers or estimates of fair values obtained
from yield data relating to instruments or securities with similar
characteristics, or fair value as determined in good faith by the Company's
portfolio manager, ZSI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
Policy loans: The carrying value of policy loans approximates the fair
value as the Company adjusts the rates to remain competitive.
49
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage loans and other real estate-related investments: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty in estimating the fair value of real estate due to the lack
of a liquid quotable market. Mortgage loans and other real estate-related
investments are stated at their aggregate unpaid balances, less a valuation
allowance of $2.8 million and $18.6 million in 2001 and 2000, respectively. The
real estate portfolio is monitored closely and reserves are adjusted to reflect
market conditions. This results in a carrying value that approximates fair
value at December 31, 2001 and 2000.
Other investments: The carrying amounts reported in the consolidated balance
sheets for these instruments approximate fair values.
Life policy benefits: For deposit liabilities with defined maturities, the
fair value was based on the discounted value of future cash flows. The discount
rate was based on the rate that would be offered for similar deposits at the
reporting date. For all other deposit liabilities, primarily deferred annuities
and universal life contracts, the fair value was based on the amount payable on
demand at the reporting date.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 2001 and 2000 were as follows:
December 31, 2001 December 31, 2000
--------------------- ---------------------
Carrying Carrying
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(in thousands)
Financial instruments recorded as assets:
Fixed maturity securities........................... $3,094,560 $3,094,560 $3,157,169 $3,157,169
Cash and short-term investments..................... 216,479 216,479 50,001 50,001
Mortgage loans and other real estate-related assets. 176,440 176,440 140,417 140,417
Policy loans........................................ 239,787 239,787 256,226 256,226
Equity securities................................... 67,731 67,731 63,879 63,879
Other invested assets............................... 20,799 20,799 21,792 20,109
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life reserves.. 3,376,604 3,324,417 3,273,573 3,206,501
Funds withheld account.............................. 236,134 236,134 228,822 228,822
(13) Stockholder's Equity--Retained Earnings
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. In 2002, the Company cannot pay
dividends. The Company paid cash dividends of $13.0 million, $20.0 million and
$115.0 million to Kemper during 2001, 2000 and 1999, respectively. The Company
reported a deemed dividend distribution of $16.3 million during 2000 related to
the recapture of the reinsurance agreement with FKLA.
The Company's net income (loss) and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
2001 2000 1999
-------- -------- --------
(in thousands)
Net income (loss)............ $(71,854) $ 19,975 $ 59,116
======== ======== ========
Statutory capital and surplus $332,598 $397,423 $394,966
======== ======== ========
50
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's statutory net loss reflects the market downturn and its impact
on reserves for guaranteed death and living benefits consistent with statutory
methodology.
As of January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (''Codification'') guidance. The NAIC Accounting
Practices and Procedures Manual - version effective January 1, 2001 - is the
National Association of Insurance Commissioners' primary guidance on statutory
accounting. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas. The Illinois Insurance Department adopted the Codification guidance,
effective January 1, 2001. The Company's statutory surplus was positively
impacted by $16.7 million upon adoption as a result of the net effect of
recording a deferred tax asset, of non-admitting non-operating system software,
of non-admitting net affiliated receivables and other changes caused by the
Codification.
(14) Unaudited Interim Financial Information
The following table sets forth the Company's unaudited quarterly financial
information:
Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31 Year
-------- -------- ------------ ----------- --------
(in thousands)
2001 Operating Summary
Revenue.................................. $91,072 $ 98,360 $85,013 $123,852 $398,297
======= ======== ======= ======== ========
Net operating income (loss), excluding
realized gains......................... $ 8,183 $ (1,364) $(6,443) $ 37,792 $ 38,168
Net realized investment gains............ 1,375 5,257 1,206 5,591 13,429
------- -------- ------- -------- --------
Net income (loss).................... $ 9,558 $ 3,893 $(5,237) $ 43,383 $ 51,597
======= ======== ======= ======== ========
2000 Operating Summary
Revenue.................................. $87,648 $103,446 $94,249 $ 75,567 $360,910
======= ======== ======= ======== ========
Net operating income, excluding realized
gains (losses)......................... $12,031 $ 9,953 $ 8,710 $ 22,987 $ 53,681
Net realized investment gains (losses)... (1,378) (105) 948 (4,845) (5,380)
------- -------- ------- -------- --------
Net income........................... $10,653 $ 9,848 $ 9,658 $ 18,142 $ 48,301
======= ======== ======= ======== ========
1999 Operating Summary
Revenue.................................. $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income, excluding realized
gains (losses)......................... $11,222 $ 14,385 $11,568 $ 13,972 $ 51,147
Net realized investment gains (losses)... (627) (1,286) (5,098) 804 (6,207)
------- -------- ------- -------- --------
Net income........................... $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
51
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Operating Segments and Related Information
The Company, FKLA, Zurich Life Insurance Company of America, (''ZLICA''),
and FLA, operate under the trade name Zurich Life ("ZL"), formerly known as
Zurich Kemper Life. For purposes of this operating segment disclosure, ZL will
also include the operations of Zurich Direct, Inc., an affiliated direct
marketing life insurance agency and excludes FLA, as it is owned by its
policyholders.
ZL is segregated by Strategic Business Unit (''SBU''). The SBU concept
employed by ZFS has each SBU concentrate on a specific customer market. The SBU
is the focal point of ZL, because it is at the SBU level that ZL can clearly
identify customer segments and then work to understand and satisfy the needs of
each customer. The contributions of ZL's SBUs to consolidated revenues,
operating results and certain balance sheet data pertaining thereto, are shown
in the following tables on the basis of accounting principles generally
accepted in the United States of America.
ZL is segregated into the Life Brokerage, Financial Institutions
(''Financial''), Retirement Solutions Group (''RSG'') and Direct SBUs. The SBUs
are not managed at the legal entity level, but rather at the Zurich Life level.
Zurich Life's SBUs cross legal entity lines, as certain similar products are
sold by more than one legal entity. The vast majority of the Company's business
is derived from the Financial and RSG SBUs.
Each SBU's revenue is derived from geographically dispersed areas as ZL is
licensed in the District of Columbia and all states. During 2001, 2000 and
1999, ZL did not derive net revenue from one customer that exceeded 10 percent
of the total revenue of ZL.
The principal products and markets of ZL's SBUs are as follows:
Life Brokerage: The Life Brokerage SBU develops low cost term, universal
life insurance and variable universal life, as well as fixed annuities, to
market through independent agencies and national marketing organizations.
Financial: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and primarily
includes variable and fixed annuities, variable universal life and
business-owned life insurance. These products are distributed to consumers
through financial intermediaries such as banks, brokerage firms and independent
financial planners.
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
variable annuities to K-12 schoolteachers, administrators, and healthcare
workers, along with college professors and certain employees of selected
non-profit organizations. This target market is eligible for what the IRS
designates as retirement-oriented savings or investment plans that qualify for
special tax treatment.
Direct: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for ZL's SBU's is as follows:
As of and for the period ending December 31, 2001:
Income Statement
--------------------------------------------------------------
Life
Brokerage Financial RSG Direct Total
---------- ----------- ---------- ---------- -----------
(in thousands)
Revenue
Net investment income................... $ 100,201 $ 226,974 $ 96,113 $ 129 $ 423,417
Realized investment gains............... 6,393 15,148 5,878 8 27,427
Premium income.......................... 84,993 3,090 38 20,166 108,287
Fees and other income................... 69,794 42,854 62,826 40,200 215,674
---------- ----------- ---------- ---------- -----------
Total revenue....................... 261,381 288,066 164,855 60,503 774,805
========== =========== ========== ========== ===========
Benefits and Expenses
Policyholder benefits................... 121,224 166,390 60,636 7,082 355,332
Intangible asset amortization........... 44,924 11,668 18,547 -- 75,139
Net deferral of insurance acquisition
costs................................. (37,375) (130,547) (17,098) (36,213) (221,233)
Commissions and taxes, licenses and
fees.................................. (787) 145,935 48,251 3,979 197,378
Operating expenses...................... 56,900 34,940 29,594 83,048 204,482
---------- ----------- ---------- ---------- -----------
Total benefits and expenses......... 184,886 228,386 139,930 57,896 611,098
---------- ----------- ---------- ---------- -----------
Income before income tax expense............ 76,495 59,680 24,925 2,607 163,707
Income tax expense.......................... 26,468 20,355 10,145 496 57,464
---------- ----------- ---------- ---------- -----------
Net income.......................... $ 50,027 $ 39,325 $ 14,780 $ 2,111 $ 106,243
========== =========== ========== ========== ===========
Balance Sheet
Future policy benefits.................. $1,916,097 $ 2,887,014 $1,468,261 $ 135,034 $ 6,406,406
========== =========== ========== ========== ===========
Liabilities related to separate
accounts.............................. $ 25,549 $10,955,660 $2,127,544 $ -- $13,108,753
========== =========== ========== ========== ===========
Liabilities
Future Related to
Net Income Policy Separate
Revenue (Loss) Benefits Accounts
----------- ---------- ---------- -----------
Total revenue, net income, future policy benefits and
liabilities related to separate accounts, respectively,
from above............................................. $ 774,805 $ 106,243 $6,406,406 $13,108,753
----------- ---------- ---------- -----------
Less:
Revenue, net income and selected liabilities of
FKLA............................................. 277,589 46,645 2,397,798 --
Revenue, net income and selected liabilities of
ZLICA............................................ 57,752 17,492 374,447 --
Revenue, net loss and selected liabilities of Zurich
Direct........................................... 41,167 (9,491) -- --
----------- ---------- ---------- -----------
Totals per the Company's consolidated
financial statements..................... $ 398,297 $ 51,597 $3,634,161 $13,108,753
=========== ========== ========== ===========
53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of and for the period ending December 31, 2000:
Income Statement
------------------------------------------------------------
Life
Brokerage Financial RSG Direct Total
---------- ---------- ---------- ---------- -----------
(in thousands)
Revenue
Net investment income.................... $ 124,518 $ 198,322 $ 93,299 $ 2,458 $ 418,597
Realized investment losses............... (4,480) (4,130) (3,356) (88) (12,054)
Premium income........................... 96,744 464 -- 12,946 110,154
Fees and other income.................... 61,976 38,869 60,210 43,916 204,971
---------- ---------- ---------- ---------- -----------
Total revenue........................ 278,758 233,525 150,153 59,232 721,668
---------- ---------- ---------- ---------- -----------
Benefits and Expenses
Policyholder benefits.................... 118,556 131,552 63,318 1,650 315,076
Intangible asset amortization............ 55,186 12,782 20,860 -- 88,828
Net deferral of insurance acquisition
costs.................................. (35,392) (67,048) (11,416) (43,259) (157,115)
Commissions and taxes, licenses and
fees................................... 8,260 84,232 44,431 11,264 148,187
Operating expenses....................... 48,166 32,182 29,463 94,635 204,446
---------- ---------- ---------- ---------- -----------
Total benefits and expenses.......... 194,776 193,700 146,656 64,290 599,422
---------- ---------- ---------- ---------- -----------
Income (loss) before income tax expense
(benefit).................................. 83,982 39,825 3,497 (5,058) 122,246
Income tax expense (benefit)................. 32,873 7,982 (3,914) (1,762) 35,179
---------- ---------- ---------- ---------- -----------
Net income (loss).................... $ 51,109 $ 31,843 $ 7,411 $ (3,296) $ 87,067
========== ========== ========== ========== ===========
Balance Sheet
Future policy benefits................... $1,954,307 $2,956,326 $1,365,963 $ 75,065 $ 6,351,661
========== ========== ========== ========== ===========
Liabilities related to separate accounts. $ 23,410 $8,646,454 $2,509,775 $ -- $11,179,639
========== ========== ========== ========== ===========
Liabilities
Future Related to
Net Income Policy Separate
Revenue (Loss) Benefits Accounts
---------- ---------- ---------- -----------
Total revenue, net income, future policy benefits and
liabilities related to separate accounts, respectively,
from above............................................. $ 721,668 $ 87,067 $6,351,661 $11,179,639
---------- ---------- ---------- -----------
Less:
Revenue, net income and selected liabilities of
FKLA............................................. 268,198 43,922 2,427,185 --
Revenue, net income and selected liabilities of
ZLICA............................................ 48,650 7,212 336,336 --
Revenue, net loss and selected liabilities of Zurich
Direct........................................... 43,910 (12,368) -- --
---------- ---------- ---------- -----------
Totals per the Company's consolidated
financial statements..................... $ 360,910 $ 48,301 $3,588,140 $11,179,639
========== ========== ========== ===========
54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of and for the period ending December 31, 1999:
Income Statement
-----------------------------------------------------------
Life
Brokerage Financial RSG Direct Total
---------- ---------- ---------- ---------- -----------
(in thousands)
Revenue
Net investment income.................... $ 137,106 $ 175,590 $ 101,202 $ 1,297 $ 415,195
Realized investment gains (losses)....... 976 (6,980) (98) -- (6,102)
Premium income........................... 145,533 410 -- 8,038 153,981
Fees and other income.................... 70,477 48,873 35,742 44,528 199,620
---------- ---------- ---------- ---------- ----------
Total revenue........................ 354,092 217,893 136,846 53,863 762,694
========== ========== ========== ========== ==========
Benefits and Expenses
Policyholder benefits.................... 200,161 112,869 68,801 3,529 385,360
Intangible asset amortization............ 54,957 12,053 13,989 -- 80,999
Net deferral of insurance acquisition
costs.................................. (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes, licenses and
fees................................... 21,881 66,702 26,700 17,411 132,694
Operating expenses....................... 56,179 25,101 23,611 71,194 176,085
---------- ---------- ---------- ---------- ----------
Total benefits and expenses.......... 295,745 173,061 112,477 50,722 632,005
---------- ---------- ---------- ---------- ----------
Income before income tax expense............. 58,347 44,832 24,369 3,141 130,689
Income tax expense........................... 25,707 19,235 10,966 1,114 57,022
---------- ---------- ---------- ---------- ----------
Net income........................... $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== ========== ========== ========== ==========
Balance Sheet
Future policy benefits................... $2,099,940 $2,620,132 $1,577,944 $ 34,957 $6,332,973
========== ========== ========== ========== ==========
Liabilities related to separate accounts. $ 20,552 $6,916,807 $2,840,709 $ -- $9,778,068
========== ========== ========== ========== ==========
Liabilities
Future Related to
Net Income Policy Separate
Revenue (Loss) Benefits Accounts
---------- ---------- ---------- -----------
Total revenue, net income, future policy benefits and
liabilities related to separate accounts, respectively,
from above............................................. $ 762,694 $ 73,667 $6,332,973 $9,778,068
---------- ---------- ---------- ----------
Less:
Revenue, net income and selected liabilities of FKLA 305,334 24,801 2,299,783 --
Revenue, net income and selected liabilities of
ZLICA............................................ 49,460 8,528 314,357 --
Revenue, net loss and selected liabilities of Zurich
Direct........................................... 44,481 (4,602) -- --
---------- ---------- ---------- ----------
Totals per the Company's consolidated financial
statements............................... $ 363,419 $ 44,940 $3,718,833 $9,778,068
========== ========== ========== ==========
55
(16) Subsequent Event
In the first quarter of 2002, the Company amended its BOLI reinsurance
agreement with ZICBB. Under the amended agreement, the balance in the FWA will
be transferred to a trust account which will act as security for the
reinsurance agreement.
(17) Effects of New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 141 ("SFAS 141"), Business
Combinations. SFAS 141 supercedes Accounting Principles Board Opinion No. 16
("APB 16"). SFAS 141 requires that the purchase method of accounting must be
used for all business combinations initiated after June 30, 2001. It also
requires that unrecognized negative goodwill must be written off immediately as
an extraordinary gain and provides more specific guidance on how to determine
the accounting acquirer, recognizing intangible assets apart from goodwill, as
well as additional financial statement disclosures. The Company intends to
adopt SFAS 141 in the first quarter of 2002. However, the implementation of
SFAS 141 is not expected to have a material impact on the Company's 2002
financial results.
Also in July 2001, the FASB issued Statement of Financial Accounting
Standard 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142
primarily addresses the accounting that must be applied to goodwill and
intangible assets subsequent to their acquisition. Effective January 1, 2002,
SFAS 142 requires that goodwill and indefinite-lived intangible assets will no
longer be amortized, but will be tested for impairment at the reporting unit
level. Goodwill and indefinite-lived intangible assets will be tested for
impairment at least annually and the amortization period for finite-lived
intangible assets will no longer be limited to forty years. SFAS 142 also
requires additional financial statement disclosure about goodwill and
intangible assets. The Company intends to adopt SFAS 142 in the first quarter
of 2002. The Company is currently evaluating the impact of implementing SFAS
142, however it is not expected to have a material impact on the Company's 2002
financial results.
In June 2001, the FASB issued Statement of Financial Accounting Standard 143
("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143 amends FASB
Statement of Financial Accounting Standard 19 and is effective for financial
statements issued for fiscal years beginning after June 15, 2002, although
earlier application is encouraged. SFAS 143 clarifies and revises existing
guidance on financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company intends to adopt SFAS 143 in 2002. The Company is
currently evaluating the impact of implementing SFAS 143, however, it is not
expected to have a material impact on the Company's 2002 financial results.
In October 2001, the FASB issued Statement of Financial Accounting Standard
144 ("SFAS 144"), Accounting for Impairment or Disposal of Long-lived Assets.
This Standard will generally be effective on a prospective basis, beginning
January 1, 2002. SFAS 144 clarifies and revises existing guidance on accounting
for impairment of plant, property, and equipment, amortized intangibles, and
other long-lived assets not specifically addressed in other accounting
literature. Significant changes include (1) establishing criteria beyond those
previously specified in existing literature for determining when a long-lived
is held for sale, and (2) requiring that the depreciable life of a long-lived
asset to be abandoned is revised. These provisions could be expected to have
the general effect of reducing or delaying recognition of future impairment
losses on assets to be disposed, offset by higher depreciation during the
remaining holding period. However, the Company does not expect the adoption of
this Standard to have a significant impact on the Company's 2002 financial
results. SFAS 144 also broadens the presentation of discontinued operations to
include a component of an entity (rather than only a segment of a business).
56
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
Name and Age
Position with Kemper Investors Life
Insurance Company (''KILICO'')
Year of Election Other Business Experience During Past 5 Years or More
-------- -----------------------------------------------------
Gale K. Caruso (44) President and Chief Executive Officer of Federal Kemper Life
President and Chief Executive Assurance Company ("FKLA"), Fidelity Life Association ("FLA") and
Officer since June 1999. Director Zurich Life Insurance Company of America ("ZLICA"). President and
since July 1999. Chief Executive Officer of Zurich Direct, Incorporated ("ZD") since
April 2000. Director of FKLA, FLA and ZLICA since July 1999 and of
ZD since March 2000. President and Chief Executive Officer of Zurich
Kemper Life Insurance Company of New York ("ZKLICONY") since
April 2000 and Director since October 1999. Chairman and Director of
Investors Brokerage Services, Inc. ("IBS") since May 2000 and of
Investors Brokerage Services Insurance Agency, Inc. ("IBSIA") since
March 2000. Chairman and Director of PMG Asset Management, Inc.
("PMGAM"), PMG Life Agency Inc. ("PMGLA"), PMG Marketing,
Inc. ("PMG Marketing") and PMG Securities Corporation ("PMG
Securities") since March 2000. Executive Vice President and Director
of Kemper Corporation ("Kemper") since February 2000. Chairman,
President and Chief Executive Officer of Scudder Canada Investor
Services, Ltd. from 1995 to June 1999. Managing Director of Scudder
Kemper Investments, Inc. from July 1986 to June 1999.
Frederick L. Blackmon (50) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May 2001. Chief
June 2000. Chief Financial Officer Financial Officer of FKLA since December 1995. Chief Financial
since December 1995. Director Officer of FLA since January 1996. Chief Financial Officer of ZLICA
since January 2001. and ZD since March 1996. Chief Financial Officer of ZKLICONY
since April 2000. Director of FKLA, ZLICA and ZKLICONY since
January 2001. Senior Vice President of KILICO and FKLA from
December 1995 to June 2000. Senior Vice President of FLA from
January 1996 to June 2000. Senior Vice President of ZLICA and ZD
from March 1996 to June 2000. Senior Vice President of ZKLICONY
from April 2000 to May 2001. Director of FLA since May 1998.
Director of ZD from March 1996 to March 1997 and since January
2001. Chief Financial Officer of Kemper since January 1996. Treasurer
of Kemper from January 1996 to February 2000.
Russell M. Bostick (45) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May 2001. Chief
June 2000. Chief Information Information Officer of FKLA, FLA, ZLICA and ZD since April 1998.
Officer since April 1998. Chief Information Officer of ZKLICONY since April 2000. Senior
Vice President of FKLA, FLA, ZLICA and ZD from March 1999 to
June 2000. Senior Vice President of ZKLICONY from April 2000 to
May 2001. Vice President of FKLA, FLA, KILICO, ZLICA and ZD
from April 1998 to March 1999. Chief Technology Officer of
Corporate Software & Technology from June 1997 to April 1998. Vice
President, Information Technology Department of CNA Insurance
Companies from January 1995 to June 1997.
57
Name and Age
Position with Kemper Investors Life
Insurance Company (''KILICO'')
Year of Election Other Business Experience During Past 5 Years or More
-------- -----------------------------------------------------
Eliane C. Frye (54) Executive Vice President of FKLA and FLA since March 1995.
Executive Vice President since Executive Vice President of ZLICA and ZD since March 1996.
March 1995. Director since May Executive Vice President of ZKLICONY since April 2000 and Director
1998. since October 1999. Director of FLA since December 1997. Director of
FKLA and ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS since 1995. Director of IBSIA from 1995
to March 2002.
James C. Harkensee (43) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May 2001. Senior
June 2000. Vice President of ZKLICONY from April 2000 to May 2001 and
Director since October 1999. Senior Vice President of KILICO, FKLA
and FLA from January 1996 to June 2000. Senior Vice President of
ZLICA and ZD from 1995 to June 2000. Director of ZD from April
1993 to March 1997 and since March 1998. President of Zurich Direct
Insurance Agency, Inc. of Massachusetts since October 2001.
Edward K. Loughridge (47) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May 2001.
June 2000. Corporate Development Corporate Development Officer of FKLA and FLA since January 1996.
Officer since January 1996. Corporate Development Officer for ZLICA and ZD since March 1996.
Corporate Development Officer of ZKLICONY since April 2000.
Senior Vice President of KILICO, FKLA and FLA from January 1996
to June 2000. Senior Vice President of ZLICA and ZD from March
1996 to June 2000. Senior Vice President of ZKLICONY from April
2000 to May 2001.
Debra P. Rezabek (46) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May
June 2000. General Counsel since 2001.General Counsel of FKLA and FLA since 1992. General Counsel
May 1993. Corporate Secretary ZLICA and ZD since March 1996. Corporate Secretary of FKLA and
since January 1996. Director since FLA since January 1996. Corporate Secretary of ZLICA and ZD since
January 2001. March 1996. General Counsel and Corporate Secretary of ZKLICONY
since April 2000. Director of FKLA and ZLICA since January 2001.
Senior Vice President of KILICO, FKLA, FLA, ZLICA and ZD from
March 1996 to June 2000. Senior Vice President of ZKLICONY from
April 2000 to May 2001. Director of FLA since May 1998. Director of
ZKLICONY since January 2001. Director of ZD from March 1996 to
March 1997. Secretary of IBS and IBSIA since 1993. Secretary of
PMGAM, PMGLA, PMG Marketing and PMG Securities since March
2000. Director of Government Affairs of FKLA and FLA from 1992 to
April 1997 and of KILICO from 1993 to April 1997. Assistant Secretary
of Kemper since January 1996.
Edward L. Robbins (62) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May 2001. Chief
June 2000. Chief Actuary since Actuary of FKLA, FLA, ZLICA and ZD since March 1999 and of
March 1999. ZKLICONY since April 2000. Senior Vice President of KILICO,
FKLA, FLA, ZLICA and ZD from March 1999 to June 2000. Senior
Vice President of ZKLICONY from April 2000 to May 2001. Senior
Actuary of FKLA, FLA, KILICO, ZLICA and ZD from July 1998 to
March 1999. Principal of KPMG Peat Marwick LLP from May 1984 to
July 1998.
58
Name and Age
Position with Kemper Investors Life
Insurance Company (''KILICO'')
Year of Election Other Business Experience During Past 5 Years or More
-------- -----------------------------------------------------
Ivor K. H. Tham (39) Executive Vice President of FKLA, FLA and ZLICA since September
Executive Vice President since 2000 and of ZD since January 2001. Executive Vice President of
September 2000. ZKLICONY since May 2001. Vice President of Mass Mutual Financial
from 1999 to September 2000. Assistant Vice President of Times
Publishing Ltd. from 1994 to 1999.
George Vlaisavljevich (59) Executive Vice President of FKLA, FLA, ZLICA and ZD since June
Executive Vice President since 2000. Executive Vice President of ZKLICONY since May 2001.
June 2000. Director since May Director of FKLA and ZLICA since May 2001. Director of FLA since
2001. January 2001. Senior Vice President of KILICO, FKLA, FLA and
ZLICA since October 1996. Senior Vice President of ZD from March
1997 to June 2000. Senior Vice President of ZKLICONY from April
2000 to May 2001. Director of IBS and IBSIA since October 1996.
Director of PMGAM, PMGLA, PMG Marketing and PMG Securities
since March 2000. Executive Vice President of The Copeland
Companies from April 1983 to September 1996.
Martin D. Feinstein (53) Chairman of the Board of FKLA, FLA, ZLICA and ZKLICONY since
Chairman of the Board since January 2001. Chairman of the Board of Farmers Group, Inc.("FGI")
January 2001. since November 1997 and President since January 1995. Chief
Executive Officer of FGI since January 1995 and Director since
February 1995. Member of Group Management Board of Zurich
Financial Services since March 1998. Director of Zurich Scudder
Investments, Inc. since January 2001. Director of Farmers New World
Life. Chief Operating Officer of FGI from January 1995 to January
1997. Director of B.A.T. from January 1997 to September 1998.
58.1
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
--------------------- --------------
Other Annual Long Term All Other
Compensation Incentive Plan Compensation
Name and Principal Position Year Salary($) Bonus($)(2) ($)(3) Payouts ($)(2) ($)(4)
--------------------------- ---- --------- ----------- ------------ -------------- ------------
Gale K. Caruso.................... 2001 $211,500 $ -- $17,466 $ -- $27,841
Chief Executive Officer(1) 2000 179,500 91,920 10,866 126,720 14,094
1999 91,636 93,840 23,088 117,600 4,800
Frederick L. Blackmon............. 2001 109,760 -- 6,306 -- 9,567
Executive Vice President and 2000 109,760 50,715 7,060 51,695 11,637
Chief Financial Officer(1) 1999 113,420 62,805 20,545 90,630 13,640
George Vlaisavljevich............. 2001 275,000 -- 20,042 -- 28,650
Executive Vice President(1) 2000 260,000 116,500 17,493 126,000 30,750
1999 260,000 152,500 -- 208,000 30,600
Edward Robbins.................... 2001 110,250 -- 6,436 -- 11,099
Executive Vice President and 2000 110,250 52,185 6,382 -- 11,937
Chief Actuary(1) 1999 90,000 -- 4,575 -- 4,625
Debra Rezabek..................... 2001 135,450 -- 8,791 -- 13,135
Executive Vice President, General 2000 100,000 49,250 6,809 48,500 10,700
Counsel and Corporate 1999 88,000 52,360 7,797 70,400 9,614
Secretary(1)
- --------
(1) Also served in same positions for FKLA, ZLICA, ZKLICONY and FLA. An
allocation of the time devoted to duties as executive officer of KILICO has
been made. All compensation items reported in the Summary Compensation
Table reflect this allocation.
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses and long-term compensation awards earned in 2001 for all
officers were not available as of the date of this filing.
(3) The amounts disclosed in this column include:
(a) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(b) Relocation expense reimbursements of $18,574 in 1999 for Ms. Caruso.
(4) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of March 1, 2002, 100 percent of the outstanding shares of KILICO
were owned by Kemper Corporation, 1600 McConnor Parkway, Schaumburg,
Illinois 60196.
(b) Not applicable.
(c) Not applicable.
59
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.
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 28 in ITEM 8.
(a)(2) Schedules.
The following schedules are supplemental to the financial statements of
KILICO and its subsidiaries for 2001 and are included in this Form 10-K on
the pages indicated below. All other schedules are omitted because the
information required to be stated therein is included in the financial
statements or notes thereto or because they are not applicable.
Schedule Title Page
- -------- ----- ----
III Supplementary insurance information at December 31, 2001 and 2000....... 64
IV Reinsurance, for the year ended December 31, 2001*...................... 65
V Valuation and qualifying accounts, for the year ended December 31, 2001* 66
- --------
* This schedule for the years ended December 31, 2000 and 1999 is
incorporated by reference to KILICO's Form 10-K filed on March 28, 2001
and on March 28, 2000, respectively.
(a)(3) Exhibits.
The exhibits required to be filed by Item 601 of Regulation S-K are
listed under the caption ''Exhibits'' in Item 14(c).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 2001.
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
2 Not applicable.
3(a) Articles of Incorporation are incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 12,
1996.
3(b) Bylaws are incorporated herein by reference to Exhibits filed with Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 12, 1996.
61
Exhibit No. Description
- ----------- -----------
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.
9 Not applicable.
10 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.
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the registrant are incorporated herein by reference to Post-Effective
Amendment No. 29 to the Registration Statement on Form N-4 (File No. 2-72671) filed
on or about April 26, 2000.
22 Not applicable.
23 Not applicable.
24 Power of Attorney (filed herewith).
99 Not applicable.
62
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, 2001 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Schaumburg, State of Illinois, on the 29th day of March, 2002.
KEMPER INVESTORS LIFE INSURANCE
COMPANY
By: /s/ GALE K. CARUSO*
-----------------------------
Gale K. Caruso
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 has been
signed below by the following persons on behalf of Kemper Investors Life
Insurance Company in the capacities indicated on the 29th day of March, 2002.
Signature Title
--------- -----
/s/ MARTIN D. FEINSTEIN* Chairman of the Board
- -----------------------------
Martin D. Feinstein
/s/ GALE K. CARUSO* President, Chief Executive
- ----------------------------- Officer and Director
Gale K. Caruso
/s/ FREDERICK L. BLACKMON* Executive Vice President and
- ----------------------------- Chief Financial Officer
Frederick L. Blackmon
/s/ ELIANE C. FRYE* Director
- -----------------------------
Eliane C. Frye
/s/ DAVID S. JORGENSEN * Senior Vice President,
-------------------------- Controller and Treasurer
By:
David S. Jorgensen
Pursuant to a Power of
Attorney
63
SCHEDULE III
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
December 31, 2001
(in thousands)
Other
Future Policyholder
Deferred Policy Policy Benefits and
Segment Acquisition Cost Benefits Funds Payable
- ------- ---------------- ---------- -------------
Life Brokerage Strategic Business Unit ("SBU")...... $297,865 $1,916,097 $365,094
Financial Institutions SBU.......................... 276,990 2,887,014 72,996
Retirement Solutions Group ("RSG") SBU.............. 107,149 1,468,261 179,766
Direct SBU.......................................... 154,897 135,034 63,829
-------- ---------- --------
Subtotal............................................ 836,901 6,406,406 681,685
Deduct:
Federal Kemper Life Assurance Company ("FKLA")...... 283,043 2,397,798 210,251
Zurich Life Insurance Company of America ("ZLICA").. 172,352 374,447 34,985
Zurich Direct....................................... -- -- --
-------- ---------- --------
455,395 2,772,245 245,236
-------- ---------- --------
Net KILICO.......................................... $381,506 $3,634,161 $436,449
======== ========== ========
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
December 31, 2000
(in thousands)
Other
Future Policyholder
Deferred Policy Policy Benefits and
Segment Acquisition Cost Benefits Funds Payable
------- ---------------- ---------- -------------
Life Brokerage SBU........ $294,387 $1,954,307 $338,686
Financial Institutions SBU 133,785 2,956,326 121,178
RSG SBU................... 84,822 1,365,963 55,300
Direct SBU................ 110,893 75,065 50,354
-------- ---------- --------
Subtotal.................. 623,887 6,351,661 565,518
Deduct:
FKLA...................... 242,354 2,427,185 163,343
ZLICA..................... 140,732 336,336 2,590
Zurich Direct............. -- -- --
-------- ---------- --------
383,086 2,763,521 165,933
-------- ---------- --------
Net KILICO................ $240,801 $3,588,140 $399,585
======== ========== ========
64
SCHEDULE IV
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
Year Ended December 31, 2001
(in thousands)
Assumed Percentage
From of Amount
Ceded to Other Assumed
Description Gross Amount Other(1) Companies Net Amount to Net
- ----------- ------------ ------------ --------- ----------- ----------
Life insurance in force $89,173,103 $(77,811,249) $-- $11,361,854 0.0%
=========== ============ === =========== ===
Life insurance premiums $ 1,334 $ (848) $-- $ 486 0.0%
=========== ============ === =========== ===
- --------
(1) Life insurance in force ceded to other companies was primarily ceded to an
affiliated company, Zurich Insurance Company, Bermuda Branch.
65
SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2001
(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.......... $16,433 $ -- $-- $16,433 $ --
Third-party mortgage loans............ -- 600 -- -- 600
Other real estate-related investments. 2,183 -- -- -- 2,183
------- ---- --- ------- ------
Total............................. $18,616 $600 $-- $16,433(1) $2,783
======= ==== === ======= ======
- --------
(1) These deductions represent the release of a general valuation reserve.
66
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
24 Power of Attorney
67