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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from N/A to N/A.
Commission file number 333-02491*.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in charter)
ILLINOIS
(State of Incorporation)
ONE KEMPER DRIVE
LONG GROVE, ILLINOIS
(Address of Principal Executive Offices)
36-3050975
(I.R.S. Employer
Identification Number)
60049
(Zip Code)
Registrant's telephone number, including area code: (847) 550-5500
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___ .
As of March 1, 1997, 250,000 shares of Common Stock (all held by an affiliate,
Kemper Corporation) were outstanding. There is no market value for any such
shares. See ITEM 5 of this Form 10-K.
* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-K also
relates to Commission file numbers 33-33547, 33-43462 and 33-46881.
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2
PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
CORPORATE CONTROL EVENTS
On January 4, 1996, an investor group comprised of Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the
issued and outstanding common stock of Kemper. As a result of the change in
control, Zurich and Insurance Partners own 80 percent and 20 percent,
respectively, of Kemper and therefore KILICO.
The acquisition of KILICO was accounted for using the purchase method of
accounting. The consolidated financial statements of KILICO prior to January 4,
1996, were prepared on a historical cost basis and have been labeled as
"preacquisition" throughout this Annual Report on Form 10-K.
Under purchase accounting, KILICO's assets and liabilities have been marked to
their relative fair market values as of the acquisition date. The difference
between the allocated cost of $745.6 million of acquiring KILICO and the net
fair market values of KILICO's assets and liabilities as of the acquisition date
resulted in $254.9 million of goodwill. KILICO is amortizing goodwill on a
straight-line basis over twenty-five years. KILICO has presented January 4, 1996
(the acquisition date) as the opening purchase accounting balance sheet for
comparative purposes throughout the Annual Report on Form 10-K.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
(See note captioned "Summary of Significant Accounting Policies" in the notes to
the consolidated financial statements.)
STRATEGIC INITIATIVES
Since late 1991, KILICO has intensified the management of its real
estate-related investments due to adverse market conditions. KILICO also
successfully implemented strategies over the last several years to reduce both
its joint venture operating losses and the level of its real estate-related
investments. These strategies included individual property sales, refinancings
and restructurings, as well as bulk sale transactions completed in December 1995
in anticipation of the 1996 change in control. As a result of these strategies,
KILICO reduced its holdings of real estate-related investments from 36.2 percent
of its total invested assets and cash at year-end 1991 to 5.9 percent at
year-end 1996.
Further addressing the quality of its investment portfolio, KILICO has reduced
its holdings of below investment-grade securities to 0.3 percent of its total
invested assets and cash at year-end 1996.
The management, operations and strategic directions of KILICO were integrated
during 1992 and 1993 with those of another Kemper subsidiary, Federal Kemper
Life Assurance Company ("FKLA"). The integration was designed to streamline
management, control costs, improve profitability, increase operating
efficiencies and productivity, and to expand both companies' distribution
capabilities. Headquartered in Long Grove, Illinois, FKLA markets term and
interest-sensitive life insurance, as well as certain annuity products through
brokerage general agents and other independent distributors. As described below,
KILICO has emphasized different products and distribution methods.
NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and variable life insurance products through various
distribution channels. KILICO offers investment-oriented products, guaranteed
returns or a combination of both, to help policyholders meet multiple insurance
and financial objectives. Financial institutions, securities brokerage firms,
insurance agents and financial planners are important distribution channels for
KILICO's products. In 1996, INVEST Financial Corporation, an affiliated company
until June 28, 1996 and EVEREN Securities, Inc., an affiliated company until
September 13, 1995, accounted for approximately 24 percent and 12 percent,
respectively, of KILICO's first-year sales, compared with 37 percent and 21
percent, respectively, in 1995. KILICO's sales mainly consist of deposits
received on certain long duration
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annuity contracts as well as reinsurance assumed from FKLA during 1996. (See
note captioned "Reinsurance" in the notes to the consolidated financial
statements and see the table captioned "Sales" on page 8.)
Annuities have accounted for approximately 98 percent of KILICO's sales in
recent years. KILICO's annuities generally have surrender charges that are a
specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its separate account
products. Unlike the fixed-rate annuity business where KILICO manages spread
revenue, variable annuities pose minimal investment risk for KILICO, as
policyholders invest in one or more of several underlying investment funds.
KILICO, in turn, receives administrative fee revenue. KILICO's separate account
assets totaled $2.1 billion at December 31, 1996, compared with $1.8 billion and
$1.5 billion at December 31, 1995 and 1994, respectively. KILICO's sales of its
separate account annuities were $254.8 million in 1996, $151.1 million in 1995
and $250.8 million in 1994. Despite KILICO's strategy to emphasize the sale of
variable annuities, such sales declined in 1995, compared with 1994, due to
competitive conditions in certain distribution channels, in part reflecting
KILICO's financial strength and performance ratings and uncertainty concerning
KILICO's ownership during this period. Rating improvements in 1996 (see
"Rankings and ratings" on page 4) and the 1996 change in control helped to
increase KILICO's sales in 1996, compared with 1995.
In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit, tax-
free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995 and 1996, KILICO also added several
new subaccounts and new investment managers as investment portfolio choices for
certain purchasers of the Kemper Advantage III variable annuity product. During
late 1996, KILICO also introduced POWER V, a flexible premium variable life
insurance product.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO during
1996. Beginning in the second half of 1994 and in early 1995, KILICO began
raising crediting rates on certain of its existing and new general account
products, reflecting both competitive conditions and a rising interest rate
environment. As a result of these actions, sales of general account annuities
increased and represented 62.0 percent of KILICO's total sales in 1995, compared
with 46.0 percent in 1994. During late 1995, as interest rates fell, KILICO
began reducing crediting rates on certain of its existing and new general
account products reflecting both competitive conditions and the falling interest
rate environment. As a result of these events, as well as a strong stock and
bond market during 1996, which influenced potential buyers of fixed annuity
products to purchase variable annuity products, sales of general account
annuities decreased to 34.8 percent of KILICO's total sales in 1996.
Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. In December 1996, KILICO
also assumed $7.3 million of term life insurance premiums from FKLA. Excluding
the amounts assumed from FKLA, KILICO's total term life sales, including new and
renewal premiums, amounted to $565 thousand in 1996, compared with $236 thousand
in 1995.
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
Based on statutory financial data as of December 31, 1996, KILICO had only one
ratio outside the usual ranges. KILICO's change in reserving ratio reflected the
level of interest-sensitive life surrenders and withdrawals during 1996 as well
as the 1996 reinsurance agreement with FKLA. Other than certain states
requesting quarterly financial reporting and/or explanations of the underlying
causes for certain ratios, no state regulators have taken any action due to
KILICO's IRIS ratios for 1996 or earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed, to cover
losses to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state, in order to pay claims
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on the basis of the proportionate share of premiums written by member insurers
in the lines of business in which the insolvent or rehabilitated insurer
engaged. These assessments may be deferred or forgiven in certain states if they
would threaten an insurer's financial strength, and, in some states, these
assessments can be partially recovered through a reduction in future premium
taxes.
In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1996, 1995 and 1994 amounted to $601 thousand, $5.8 million and $0.0
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $5.8 million, $5.0 million and $4.0 million at December 31, 1996, 1995 and
1994, respectively. No assessments were charged to expense during 1994 as KILICO
had established adequate accruals for all known insolvencies where an estimate
of the cost to cover losses to policyholders was available as of December 31,
1994. Additional assessments charged to expense in 1996 and 1995 reflect
accruals for the life insurance industry's new or revised loss estimates for
certain insolvent insurance companies.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law and the
codification of statutory accounting principles, are being considered for future
implementation by the NAIC, it is not presently possible to predict the future
impact of potential regulatory changes on KILICO.
Under asset adequacy and risk-based capital rules in Illinois, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The new asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the new capital rules is a risk-based formula
that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. KILICO has capital
levels substantially exceeding any which would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
PREACQUISITION
---------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
General account annuities..................... $3,507 $3,805 $3,794 $4,010
Interest-sensitive life insurance............. 743 780 779 833
Term life reserves............................ 7 -- -- --
Ceded future policy benefits.................. 427 503 503 643
------ ------ ------ ------
Total............................... $4,684 $5,088 $5,076 $5,486
====== ====== ====== ======
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO insured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces whole life policies not produced by
FKLA or KILICO as well as other policies similar to certain FKLA policies. At
December 31, 1996, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled approximately $427.0 million. KILICO remains
primarily liable to its policyholders for this amount. Utilizing FKLA's
employees, KILICO is the servicing company for this coinsured business and is
reimbursed by FLA for the related servicing expenses. Excluding this
coinsurance, KILICO, because it is primarily an annuity company, reinsures only
a very limited portion of its business. During December 1996, KILICO assumed on
a yearly renewable term basis approximately $14.4 billion (face amount) of term
life insurance from FKLA. As a result of this transaction, KILICO recorded
premiums and reserves of approximately $7.3 million. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements.)
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COMPETITION
KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/ performance ratings,
however, were lower in 1994 and 1995 than in earlier years, and were under
review in 1994 and 1995, due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets;
however, increases in KILICO's financial strength ratings and
claims-paying/performance ratings in January 1996 favorably impacted variable
annuity sales during 1996 and should continue to favorably impact future sales.
To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity and
variable life insurance products; distribution through diversified channels; and
ongoing efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.
RANKINGS AND RATINGS
According to BEST'S AGENTS GUIDE TO LIFE INSURANCE COMPANIES, 1996, as of
December 31, 1995, KILICO ranked 70th of 1,273 life insurers by admitted assets;
443rd of 1,089 by insurance in force; and 167th of 1,179 by net premiums
written.
Following the January 1996 change in control, certain of KILICO's financial
strength ratings and claims-paying ability ratings were upgraded. KILICO's
ratings are as follows:
CURRENT RATING PRIOR RATING
--------------- ---------------
A.M. Best Company........................................... A (Excellent) A- (Excellent)
Moody's Investors Service................................... Aa3 (Excellent) Baa1 (Adequate)
Duff & Phelps Credit Rating Co.............................. AA (Very High) A+ (High)
Standard & Poor's........................................... AA- (Excellent) Aq (Good)
EMPLOYEES
At December 31, 1996, KILICO utilized the services of approximately 514
employees of FKLA, which are also shared with FLA. On January 1, 1996,
approximately 160 employees of Zurich Life Insurance Company of America
("ZLICA"), an affiliated company, became employees of FKLA in connection with
the integration of ZLICA's operations with those of FKLA's. On January 5, 1996,
KILICO, FKLA, FLA and ZLICA began to operate under the trade name Zurich Kemper
Life. On July 1, 1996, Kemper acquired 100 percent of the issued and outstanding
common stock of ZLICA from Zurich.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, variable life insurance and annuities offered by KILICO, and the
related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations. For information on regulatory and other dividend restrictions, see
ITEM 5(c).
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INVESTMENTS
A changing marketplace has affected the life insurance industry and to
accommodate customers' increased preference for safety over higher yields,
KILICO has systematically reduced its investment risk and strengthened its
capital position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Zurich Kemper Investments, Inc. ("ZKI"), and
its subsidiaries and affiliates, with KILICO's real estate-related investments
being handled by a Kemper real estate subsidiary. Investment policy is directed
by KILICO's board of directors. KILICO's investment strategies take into account
the nature of each annuity and life insurance product, the respective crediting
rates and the estimated future policy benefit maturities. See "INVESTMENTS" in
ITEM 7.
ITEM 2. PROPERTIES
KILICO shares 99,000 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois.
ITEM 3. LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. Based upon the advice of legal counsel, KILICO's management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective January 4, 1996, KILICO's board of directors changed reflecting the
acquisition of Kemper, and therefore KILICO, by Zurich and Insurance Partners.
See ITEM 10 below.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) There is no established public trading market for KILICO's common stock.
(b) Kemper owns all of the common stock of KILICO as of the date of this filing.
(c) KILICO has declared no cash dividends on its common stock in 1995 or 1996. A
cash dividend of $26.9 million has been declared and is expected to be paid to
Kemper on March 31, 1997.
RESTRICTIONS ON DIVIDENDS
Dividend distributions from KILICO to its stockholder are restricted by state
insurance laws. In Illinois, where KILICO is domiciled, if such dividend,
together with other distributions during the 12 preceding months would exceed
the greater of (a) ten percent of the insurer's statutory surplus as regards
policyholders as of the preceding December 31, or (b) the statutorily adjusted
net income for the preceding calendar year, then such proposed dividend must be
reported to the director of insurance at least 30 days prior to the proposed
payment date and may be paid only if not disapproved. The Illinois insurance
laws also permit payment of dividends only out of earned surplus, exclusive of
most unrealized capital gains.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1996 and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in ITEM 8 of this Annual Report on Form 10-K. All amounts are shown in
millions.
PREACQUISITION
----------------------------------------------
DECEMBER 31
DECEMBER 31 JANUARY 4 ----------------------------------------------
1996 1996 1995 1994 1993 1992
----------- --------- -------- -------- -------- --------
TOTAL REVENUE......................... $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4 $ 353.6
======== ======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS.................. $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7 $ 10.3
======== ======== ======== ======== ======== ========
NET INCOME (LOSS)..................... $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0 $ (51.9)
======== ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets......... $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5 $1,140.3
======== ======== ======== ======== ======== ========
Total assets.......................... $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7 $6,845.9
======== ======== ======== ======== ======== ========
Future policy benefits................ $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0 $5,040.7
======== ======== ======== ======== ======== ========
Stockholder's equity.................. $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6 $ 488.7
======== ======== ======== ======== ======== ========
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(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in ITEM 7.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair market values as of the acquisition date in conformity
with the purchase accounting method required under generally accepted accounting
principles.
KILICO's financial statements as of January 4, 1996, and as of and for the year
ended December 31, 1996, have been adjusted to reflect the effects of such
purchase accounting adjustments. KILICO's financial statements for the years
ended December 31, 1995 and 1994 have been prepared on a historical cost basis
and do not reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $34.4 million in 1996, compared with net loss of
$133.0 million in 1995 and net income of $26.4 million in 1994. The increase in
net income in 1996, compared with 1995 and 1994, was primarily due to a decrease
in the level of real estate-related realized investment losses. KILICO's
strategy with respect to its real estate-related investments changed
dramatically as of year-end 1995 in connection with the Zurich-led investor
group's acquisition of Kemper. This change, as further discussed below, resulted
in significant reductions in real estate-related investments and significant
realized capital losses in the second half of 1995.
The following table reflects the components of net income (loss):
NET INCOME (LOSS)
(in millions)
YEAR ENDED DECEMBER 31
--------------------------
PREACQUISITION
-----------------
1996 1995 1994
----- ------- ------
Operating earnings.......................... $25.6 $ 74.2 $ 61.9
Net realized investment gains (losses)...... 8.8 (207.2) (35.5)
----- ------- ------
Net income (loss)................. $34.4 $(133.0) $ 26.4
===== ======= ======
The following table reflects the major components of realized investment results
included in net income (loss) above. (See "INVESTMENTS" beginning on page 10,
and the note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
YEAR ENDED DECEMBER 31
--------------------------
PREACQUISITION
-----------------
1996 1995 1994
----- ------- ------
Real estate-related gains (losses).......... $11.4 $(211.6) $(27.1)
Fixed maturity write-downs.................. (.9) (4.7) --
Other gains (losses), net................... (1.7) 9.1 (8.4)
----- ------- ------
Total............................. $ 8.8 $(207.2) $(35.5)
===== ======= ======
The higher level of real estate-related losses in 1995, compared with both 1996
and 1994, reflected realized capital losses predominately from real
estate-related bulk sale transactions in December 1995, as well as a higher
level of write-downs on real estate-related investments. These sales and
write-downs in 1995, reflect Zurich's and Insurance Partners' strategies,
adopted by KILICO, with respect to the disposition of real estate-related
investments. Other realized investment gains and losses for 1996, 1995 and 1994
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1996 and 1994 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds and
collateralized mortgage obligations in 1996 and investment-grade corporate
securities and collateralized mortgage obligations in 1994, related to
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings, together with cash and short-term investments, were
reinvested into higher yielding corporate bonds and asset-backed securities in
1996 and U.S. government and agency guaranteed mortgage pass-through securities
issued by the Government National Mortgage Association and the Federal National
Mortgage Association in 1994. (See "INVESTMENTS" beginning on page 10.)
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Operating earnings decreased to $25.6 million in 1996, compared with $74.2
million and $61.9 million in 1995 and 1994, respectively, primarily due to
purchase accounting adjustments which reduced investment income and increased
expenses. Operating income increased in 1995, compared with 1994, primarily due
to an increase in fees and other income, reductions in operating expenses and an
increase in the net deferral of insurance acquisition costs, partially offset by
an increase in commissions, taxes, licenses and fees.
Investment income was lower in 1996, compared with both 1995 and 1994, primarily
reflecting purchase accounting adjustments related to the amortization of
premiums on fixed maturity investments. Under purchase accounting, the market
value of KILICO's fixed maturity investments as of January 4, 1996 became
KILICO's new cost basis in such investments. The difference between the new cost
basis and original par is then amortized against investment income over the
remaining effective lives of the fixed maturity investments. As a result of the
interest rate environment as of January 4, 1996, the market value of KILICO's
fixed maturity investments was approximately $133.9 million greater than
original par. The amortization of such premiums reduced investment income by
approximately $22.7 million in 1996, compared with 1995 and 1994.
Investment income and interest credited also declined in 1996, compared with
1995 and 1994, as a result of a decrease in total invested assets and future
policy benefits. Such decreases were the result of surrender and withdrawal
activity over the last three years.
Investment income was also negatively impacted during 1996, compared with 1995
and 1994, by a higher level of cash and short-term investments held in the first
quarter of 1996. The increase in cash and short-term investments in the first
quarter of 1996 was caused in part by the cash proceeds received from bulk sales
of real estate-related investments in late December 1995. The reduction in real
estate-related investments reflects KILICO's current strategy to continue to
reduce its investments in, and overall exposure to, real estate-related
investments.
Investment income was positively impacted in 1996, 1995 and 1994 from the
benefits of capital contributions to KILICO and from reductions in the level of
nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty companies.
These sales totaled $3.5 million in 1995 and $154.0 million in 1994 and resulted
in no realized gain or loss to KILICO. Investment income in 1996 and 1995 also
benefitted from the above-mentioned repositionings of KILICO's investment
portfolio, however, the full benefits of KILICO's 1996 repositioning will not
occur until 1997.
The following table reflects KILICO's sales.
SALES
(in millions)
YEAR ENDED DECEMBER 31
------------------------------
PREACQUISITION
------------------
1996 1995 1994
------ ------ ------
Annuities:
General account................................. $140.6 $247.6 $214.2
Separate account................................ 254.8 151.1 250.8
------ ------ ------
Total annuities.............................. 395.4 398.7 465.0
------ ------ ------
Life Insurance:
Term life....................................... 7.8 .2 --
Interest-sensitive life......................... .6 .2 .8
------ ------ ------
Total life................................... 8.4 .4 .8
------ ------ ------
Total sales........................ $403.8 $399.1 $465.8
====== ====== ======
Sales of annuity products consist of total deposits received. The decrease in
1996 general account (fixed annuity) sales, compared with 1995, and the increase
in general account annuity sales in 1995, compared with 1994, is reflective of
the fluctuating interest rate environments and the stock and bond markets during
1996 and 1995, respectively, which made variable annuities more attractive to
consumers in 1996, and fixed annuities more attractive to consumers during 1995.
The increase in separate account (variable sales) in 1996, compared with 1995
and 1994, was in part due to improvements in KILICO's financial strength and
performance ratings in January 1996, the addition of new separate account
investment fund options, new investment fund managers and a strong underlying
stock and bond market. Sales of variable annuities not only increase
administrative fees earned but they also pose minimal investment risk for
KILICO, as policyholders invest in one or more of several underlying investment
funds which invest in stocks and bonds. Separate account sales declined in 1995,
compared with 1994, due to competitive conditions in certain distribution
channels, in part reflecting KILICO's financial strength and performance ratings
which were lower in 1995 and 1994, compared with
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1996, and uncertainty concerning KILICO's ownership. KILICO believes that the
increase in its financial strength and performance ratings in January 1996
together with KILICO's association with Zurich, will continue to assist in
KILICO's future sales efforts.
Beginning in 1995, KILICO began to sell low-cost term life insurance products
offering initial level premiums for 5, 10, 15 and 20 years in order to balance
its product mix and asset-liability structure. In December 1996, KILICO also
assumed $7.3 million of term life insurance premiums from FKLA. (See the note
captioned "Reinsurance" in the notes to the consolidated financial statements.)
Excluding the amounts assumed from FKLA, KILICO's total term life sales,
including new and renewal premiums, amounted to $565 thousand in 1996, compared
with $236 thousand in 1995. Face amount of new business issued during 1996 and
1995 amounted to approximately $319 million and $120 million, respectively.
Included in fees and other income are administrative fees received from KILICO's
separate account products of $25.3 million in 1996, compared with $21.9 million
and $20.8 million in 1995 and 1994, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Other income also included surrender charge revenue of $5.4
million in 1996, compared with $7.7 million and $7.4 million in 1995 and 1994,
respectively, as total general account and separate account policyholder
surrenders and withdrawals decreased in 1996, compared with 1995. The decrease
in surrender charge revenue also reflects that 57 percent of KILICO's fixed and
variable annuity liabilities are subject to minimal (5 percent or less) or no
surrender charges, compared with 56 percent in 1995 and 43 percent in 1994. Also
included in other income in 1995 is a ceding commission experience adjustment
which resulted in income of $4.4 million related to certain reinsurance
transactions entered into by KILICO during 1992. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements.)
POLICYHOLDER SURRENDERS AND WITHDRAWALS
(in millions)
PREACQUISITION
---------------------
1996 1995 1994
------ ------ ------
General account................................ $652.0 $755.9 $652.5
Separate account............................... 196.7 205.6 150.3
------ ------ ------
Total..................................... $848.7 $961.5 $802.8
====== ====== ======
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income. Beginning in late 1994, as a result of rising interest rates
and other competitive market factors, KILICO began to increase crediting rates
on certain interest-sensitive products which adversely impacted spread income.
The declines in interest rates during the last three quarters of 1995, however,
and the current interest rate environment during 1996, have mitigated at
present, competitive pressures to increase existing renewal crediting rates
further.
Policyholder withdrawals increased during 1995, compared with 1994, due to
planned reductions in fixed annuity crediting rates, a rising interest rate
environment during the last half of 1994 and early 1995, uncertainty regarding
KILICO's ownership and KILICO's financial strength ratings and
claims-paying/performance ratings. KILICO's crediting rate increases in late
1994 and in early 1995 were designed to reduce the level of future withdrawals.
As a result of increases in renewal crediting rates and declining interest rates
in the last three quarters of 1995, policyholder surrenders and withdrawals in
1996 declined from the level of surrenders and withdrawals in 1995. KILICO
expects that the level of surrender and withdrawal activity experienced should
remain at a similar level in 1997 given current projections for relatively
stable interest rates.
Commissions, taxes, licenses and fees were lower in 1996, compared with 1995,
but were higher in 1995, compared with 1994, primarily reflecting the level of
guaranty fund assessments in each of those years. Expenses for such assessments
totaled $601 thousand, $5.8 million, and $0.0 million in 1996, 1995 and 1994,
respectively. (See "Guaranty association assessments" in ITEM 1 beginning on
page 2.)
Operating expenses declined in 1995, compared with 1994, primarily as a result
of a decrease in headcount. Headcount declined during 1995 as a result of
uncertainty concerning KILICO's ownership. Operating expenses increased in 1996,
compared with 1995, as a result of restaffing after the completion of the
merger.
Operating earnings were negatively impacted by the net deferral of insurance
acquisition costs and the amortization of the value of business acquired in
1996, compared with the net deferral of insurance acquisition costs in 1995 and
1994. Deferred insurance acquisition costs, and the related amortization
thereof, 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
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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. (See note captioned
"Summary of Significant Accounting Policies" in the notes to the consolidated
financial statements.) Deferred insurance acquisition costs are established on
all new policies sold after January 4, 1996.
The net amortization of the value of business acquired in 1996 was adversely
affected by net realized capital gains in 1996, while the net deferral of
insurance acquisition costs in 1995 and 1994, was positively affected by
realized capital losses, partially offset by the level of policyholder
surrenders and withdrawals in 1995 and 1994. Net realized capital gains and
policyholder surrenders tend to accelerate the amortization of both the value of
business acquired and deferred insurance acquisition costs as they tend to
decrease KILICO's projected future estimated gross profits. Net realized capital
losses tend to defer such amortization into future periods as they tend to
increase KILICO's projected future estimated gross profits.
The higher level of deferral of policy acquisition costs in 1995, compared with
1994, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted during 1995 due
to real estate-related capital losses. Excluding the effects of the real
estate-related capital losses, the amortization of policy acquisition costs
increased in 1995, compared with 1994, primarily as a result of improved net
operating earnings during 1995.
The difference between the cost of acquiring KILICO and the net fair market
value of KILICO's assets and liabilities as of January 4, 1996 was recorded as
goodwill. The amortization of goodwill increased expenses by $10.2 million in
1996, compared with 1995 and 1994. KILICO is amortizing goodwill on a
straight-line basis over twenty-five years.
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions. In addition, as previously discussed, KILICO's strategy
with respect to its real estate-related investments changed dramatically by
year-end 1995.
INVESTED ASSETS AND CASH
(in millions)
DECEMBER 31 JANUARY 4
1996 1996
--------------- ---------------
Cash and short-term investments............................. $ 74 1.6% $ 398 8.4%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........................................ 3,231 71.5 3,096 65.2
NAIC(1) Class 2........................................ 621 13.7 570 12.0
Below investment grade:
Performing............................................. 13 .3 78 1.6
Nonperforming.......................................... 1 -- 5 .1
Joint venture mortgage loans................................ 111 2.4 110 2.3
Third-party mortgage loans.................................. 107 2.4 145 3.1
Other real estate-related investments....................... 50 1.1 34 .7
Policy loans................................................ 288 6.4 289 6.1
Other....................................................... 24 .6 20 .5
------ ----- ------ -----
Total(2).......................................... $4,520 100.0% $4,745 100.0%
====== ===== ====== =====
- ---------------
(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 the consolidated financial statements.
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's
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equity, net of any applicable income tax expense. The aggregate unrealized
depreciation on fixed maturities at December 31, 1996 was $63.2 million,
compared with no unrealized appreciation or depreciation, at January 4, 1996 as
a result of purchase accounting adjustments. KILICO does not record a net
deferred tax benefit for the aggregate unrealized depreciation on investments.
Fair values are sensitive to movements in interest rates and other economic
developments and can be expected to fluctuate, at times significantly, from
period to period.
At December 31, 1996, investment-grade fixed maturities and cash and short-term
investments accounted for 86.8 percent of KILICO's invested assets and cash,
compared with 85.6 percent at January 4, 1996. Approximately 58.4 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1996,
compared with 66.0 percent at January 4, 1996.
Approximately 36.4 percent of KILICO's investment-grade fixed maturities at
December 31, 1996 were mortgage-backed securities, down from 45.7 percent at
January 4, 1996, due to sales and paydowns during 1996. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
As a result of the previously discussed 1996 repositioning of KILICO's fixed
maturity portfolio, approximately 8.8 percent of KILICO's investment-grade fixed
maturities at December 31, 1996 consisted of corporate asset-backed securities.
The majority of the Company's investments in asset-backed securities were backed
by manufactured housing loans, auto loans and home equity loans.
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of KILICO's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities. At
December 31, 1996, KILICO had unamortized premiums and discounts of $24.7
million and $5.7 million, respectively, related to mortgage-backed and
asset-backed securities. KILICO believes that as a result of the purchase
accounting adjustments and the current interest rate environment, anticipated
prepayment activity is expected to result in reductions to future investment
income similar to those reductions experienced by KILICO in 1996.
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 table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL 1996
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
Fixed Maturities:...........
Mortgage-backed bonds..... $1,402.0 $161.4 $239.0 $261.4 $166.1 $ 61.8 $512.3 $1,402.0 $1,402.0
Average yield.......... 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83%
Asset-backed bonds........ $ 339.3 $ 31.4 $ 38.1 $ 36.6 $ 44.4 $ 51.0 $137.8 $ 339.3 $ 339.3
Average yield.......... 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
-------- -------- --------
$1,741.3 $1,741.3 $1,741.3
======== ======== ========
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1996, is 4.6 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.
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Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 8 issuers at December 31, 1996, totaled 0.3 percent
of cash and invested assets at December 31, 1996, compared with 1.7 percent at
January 4, 1996. (See note captioned "Invested Assets and Related Income" in the
notes to the consolidated financial statements.) Below investment-grade
securities are generally unsecured and often subordinated to other creditors of
the issuers. These issuers may have relatively higher levels of indebtedness and
be more sensitive to adverse economic conditions than investment-grade issuers.
KILICO has significantly reduced its exposure to below investment-grade
securities since 1991. This strategy takes into account the more conservative
nature of today's consumer and the resulting demand for higher-quality
investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $267.7 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 5.9 percent of cash and invested assets at December 31,
1996, compared with $288.9 million, or 6.1 percent, at January 4, 1996. The
decrease in real estate-related investments during 1996 was primarily due to
asset sales.
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $197.4 million at December 31, 1996. This amount represented a net decrease
of $50.8 million since January 4, 1996, primarily due to sales and fundings in
1996. As of December 31, 1996, KILICO expects to fund approximately $39.6
million of these legal commitments, along with providing capital to existing
projects. The disparity between total legal commitments and the amount expected
to be funded relates principally to standby financing arrangements that provide
credit enhancements to certain tax-exempt bonds, which KILICO does not presently
expect to fund. The total legal commitments, along with estimated working
capital requirements, are considered in KILICO's evaluation of reserves and
write-downs. (See note captioned "Financial Instruments--Off-Balance-Sheet Risk"
in the notes to the consolidated financial statements.)
Generally, at the inception of a real estate loan, KILICO anticipated that it
would roll over the loan and reset the interest rate at least one time in the
future, although KILICO is not legally committed to do so. KILICO anticipates
that as certain mortgages mature they could be rolled over, restructured or
foreclosed if not earlier disposed of.
Excluding the $7.5 million of real estate owned and $11.7 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $248.5 million
at December 31, 1996, after reserves and write-downs. Of this amount, $210.3
million are on accrual status with a weighted average interest rate of
approximately 8.6 percent. Of these accrual loans, 17.0 percent have terms
requiring current periodic payments of their full contractual interest, 58.2
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 24.8 percent defer all interest to maturity.
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The equity investments in real estate at December 31, 1996 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
---------------- ---------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ --------- ------------ ------------ ------
Balance at January 4, 1996.......................... $110.2 $144.5 $ 22.3 $ .5 $11.4 $288.9(1)
Additions (deductions):
Fundings............................................ 9.6 2.5 -- 15.0 -- 27.1
Interest added to principal......................... 4.5 3.1 -- -- -- 7.6
Sales/paydowns/distributions........................ (13.1) (36.8) (10.1) (16.1) (2.6) (78.7)
Purchases from affiliated realty companies.......... 4.8 1.3 16.5 -- -- 22.6
Operating gain...................................... -- -- -- -- .3 .3
Transfers to real estate owned...................... -- -- -- 1.5 (1.5) --
Realized investments gains (losses)................. (2.9) 2.9 6.3 7.1 4.1 17.5
Other transactions, net............................. (2.1) (10.9) (4.1) (.5) -- (17.6)
------ ------ ------ ------ ----- ------
Balance at December 31, 1996........................ $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7(3)
====== ====== ====== ====== ===== ======
- ---------------
(1) Net of $15.5 million reserve and write-downs. Excludes $5.6 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 by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $11.8 million reserve and write-downs. Excludes $9.7 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See notes
captioned "Unconsolidated Investors" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)
REAL ESTATE OUTLOOK
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
DECEMBER 31 JANUARY 4
1996 1996
----------- ---------
Potential problem loans(1)......................... $ 3.2 $17.9
Past due loans(2).................................. -- --
Nonaccrual loans(3)................................ 43.5 3.5
Restructured loans (currently performing)(4)....... -- .2
Real estate owned.................................. 7.5 .5
----- -----
Total.................................... $54.2 $22.1
===== =====
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $38.2 million
and $3.5 million at December 31, 1996 and January 4, 1996, respectively.
(4) KILICO defines a "restructuring" of debt as an event whereby KILICO, for
economic or legal reasons related to the debtor's financial difficulties,
grants a concession to the debtor it would not otherwise consider. Such
concessions either stem from an agreement between KILICO and the debtor or
are imposed by law or a court. By this definition, restructured loans do not
include any loan that, upon the expiration of its term, both repays its
principal and pays interest then due from the proceeds of a new loan that
KILICO, at its option, may extend (roll over).
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KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments observable market price, net of
estimated costs to sell. (See note captioned "Summary of Significant Accounting
Policies" in the notes to the consolidated financial statements.) Real
estate-related reserves amounted to $9.5 million and $15.4 million at December
31, 1996 and January 4, 1996, respectively. Because KILICO's real estate review
process includes estimates, there can be no assurance that current estimates
will prove accurate over time due to changing economic conditions and other
factors.
KILICO's real estate-related investments are expected to continue to decline
further through future sales. Although the real estate-related investments have
been valued using an estimate of the investment's observable market price, net
of estimated costs to sell, KILICO's net income could be materially reduced in
future periods if real estate market conditions worsen in areas where KILICO's
portfolio is located or if Kemper's and KILICO's plans with respect to certain
projects change.
The increase in nonaccrual loans at December 31, 1996, compared with January 4,
1996, reflects certain negative developments in January 1997 related to the
zoning of undeveloped land in Hawaii. As a result of the uncertainty related to
the zoning process, KILICO placed the related real estate-related investments on
nonaccrual status at December 31, 1996 and increased its real estate-related
reserves by $5.3 million.
KILICO continues to devote significant attention to its real estate portfolio,
enhancing monitoring of the portfolio and formulating specific action plans
addressing nonperforming and potential problem loans. KILICO is continuing to
analyze various potential transactions designed to further reduce both its joint
venture operating losses and the amount of its real estate-related investments.
Specific types of transactions under consideration (and previously utilized)
include loan sales, property sales and mortgage refinancings. However, there can
be no assurance that such efforts will result in continued improvements in the
performance of KILICO's real estate portfolio.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $299.7 million in 1996, compared
with $348.4 million in 1995 and $353.1 million in 1994. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest expense on
loans by KILICO which are on nonaccrual status. As previously discussed,
KILICO's net investment income in 1996, compared with 1995 and 1994 has been
negatively impacted by purchase accounting adjustments.
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
YEAR ENDED DECEMBER 31
----------------------------
PREACQUISITION
-----------------
1996 1995 1994
---- ----- -----
Fixed maturities........................................ $ .7 $ .4 $--
Real estate-related investments......................... .5 20.5 28.4
---- ----- -----
Total............................................ $1.2 $20.9 $28.4
==== ===== =====
Basis points............................................ 3 43 55
==== ===== =====
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1996, KILICO
estimates foregone investment income in 1997 will increase compared with the
1996 level. Any increase in nonperforming securities, and either worsening or
stagnant real estate conditions, would increase the expected adverse effect on
KILICO's future investment income and realized investment results.
Future net investment income, results of operations and cash flow will reflect
KILICO's current levels of investments in investment-grade securities, real
estate fundings treated as equity investments, nonaccrual real estate loans and
joint venture operating losses. KILICO expects, however, that any adverse
effects should be offset, to some extent, by certain advantages that it expects
to realize over time from its other investment strategies, its product mix and
its continuing cost-control measures. Other mitigating factors include marketing
advantages that could result from KILICO having lower
14
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levels of investment risk, higher financial strength and claims-paying ability
ratings and earnings improvements from KILICO's ability to adjust crediting
rates on annuities and interest-sensitive life products over time.
REALIZED INVESTMENT RESULTS
Reflected in net income (loss) are after-tax realized investment gains of $8.8
million in 1996, compared with after-tax realized investment losses of $207.2
million and $35.5 million in 1995 and 1994, respectively. (See note captioned
"Invested Assets and Related Income" in the notes to the consolidated financial
statements.)
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income (loss). These changes in unrealized value are included
within a separate component of stockholder's equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an
other-than-temporary decline in value, however, such security is written down to
net realizable value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment more likely
than not to be realized. (See note captioned "Income Taxes" in the notes to the
consolidated financial statements.)
INTEREST RATES
In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995. In 1996, however, interest rates again began to rise.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.
The rising interest rate environment in 1996 contributed to an increase in net
investment income as well as to both realized and unrealized fixed maturity
investment losses. Also, lower renewal crediting rates on annuities, compared
with competitors' higher new money crediting rates, influenced certain annuity
holders to seek alternative products. KILICO mitigates this risk somewhat by
charging surrender fees which decrease over time when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately 57 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1996,
however, were no longer subject to significant surrender fees.
As interest rates rose during 1996, KILICO's capital resources were adversely
impacted by unrealized loss positions from its fixed maturity investments.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, investment income, other operating
revenue and cash provided from maturing or sold investments. (See the
Policyholder surrenders and withdrawals table and related discussion on page 9
and "INVESTMENTS" beginning on page 10.)
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
15
17
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. (See
"Ranking and ratings" on page 4.)
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $751.0 million at December 31, 1996, compared with
$745.6 million at January 4, 1996. The 1996 increase in stockholder's equity was
primarily due to net income of $34.4 million and an $18.4 million capital
contribution, offset by a $47.4 million decrease in stockholder's equity related
to the change in the unrealized loss position of KILICO's fixed maturity
investment portfolio due to rising interest rates during 1996.
16
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE(S)
-------
Report of Independent Public Accountants.................... 17
Consolidated Balance Sheets, December 31, 1996 and January
4, 1996................................................... 18
Consolidated Statements of Operations, three years ended
December 31, 1996......................................... 19
Consolidated Statements of Stockholder's Equity, three years
ended December 31, 1996................................... 20
Consolidated Statements of Cash Flows, three years ended
December 31, 1996......................................... 21
Notes to Consolidated Financial Statements.................. 22-35
Financial Statement Schedules:
Reinsurance............................................... 44
Valuation and Qualifying Accounts......................... 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder's
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and as of
January 4, 1996, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the periods from January 4, 1996 to
December 31, 1996 (post-acquisition), and for each of the years in the two-year
period ended December 31, 1995 (pre-acquisition). In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned post-acquisition consolidated financial
statements and financial statement schedules present fairly, in all material
respects, the financial position of Kemper Investors Life Insurance Company and
subsidiaries as of December 31, 1996 and as of January 4, 1996, and the results
of their operations and their cash flows for the post-acquisition period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned pre-acquisition consolidated financial statements
present fairly, in all material respects, the financial position of Kemper
Investors Life Insurance Company and subsidiaries and the results of their
operations and their cash flows for the pre-acquisition periods, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 4, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kemper Investors Life Insurance Company in a business
combination accounted for as a purchase. As a result of the acquisition, the
consolidated financial information for the periods after the acquisition is
presented on a different cost basis than that for the periods before the
acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 21, 1997
17
19
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31 JANUARY 4
1996 1996
----------- ----------
ASSETS
Fixed maturities, available for sale, at fair value (cost:
December 31, 1996, $3,929,650; January 4, 1996,
$3,749,323)............................................... $3,866,431 $3,749,323
Short-term investments...................................... 71,696 372,515
Joint venture mortgage loans................................ 110,971 110,194
Third-party mortgage loans.................................. 106,585 144,450
Other real estate-related investments....................... 50,157 34,296
Policy loans................................................ 288,302 289,390
Other invested assets....................................... 23,507 19,215
---------- ----------
Total investments................................. 4,517,649 4,719,383
Cash........................................................ 2,776 25,811
Accrued investment income................................... 115,199 104,402
Goodwill.................................................... 244,688 254,883
Value of business acquired.................................. 189,639 190,222
Deferred insurance acquisition costs........................ 26,811 --
Federal income tax receivable............................... 3,840 112,646
Reinsurance recoverable..................................... 427,165 502,836
Receivable on sales of securities........................... 32,569 902
Other assets and receivables................................ 30,277 10,540
Assets held in separate accounts............................ 2,127,247 1,761,110
---------- ----------
Total assets...................................... $7,717,860 $7,682,735
========== ==========
LIABILITIES
Future policy benefits...................................... $4,256,521 $4,585,148
Ceded future policy benefits................................ 427,165 502,836
Benefits and claims payable to policyholders................ 36,142 4,535
Other accounts payable and liabilities...................... 59,462 30,030
Deferred income taxes....................................... 60,362 53,472
Liabilities related to separate accounts.................... 2,127,247 1,761,110
---------- ----------
Total liabilities................................. 6,966,899 6,937,131
---------- ----------
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.................................. 761,538 743,104
Unrealized loss on investments.............................. (47,498) --
Retained earnings........................................... 34,421 --
---------- ----------
Total stockholder's equity........................ 750,961 745,604
---------- ----------
Total liabilities and stockholder's equity........ $7,717,860 $7,682,735
========== ==========
See accompanying notes to consolidated financial statements.
18
20
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
YEAR ENDED DECEMBER 31
-----------------------------------
PREACQUISITION
----------------------
1996 1995 1994
-------- --------- --------
REVENUE
Net investment income....................................... $299,688 $ 348,448 $353,084
Realized investment gains (losses).......................... 13,602 (318,700) (54,557)
Premium income.............................................. 7,822 236 --
Fees and other income....................................... 35,095 38,101 31,950
-------- --------- --------
Total revenue..................................... 356,207 68,085 330,477
-------- --------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders............. 237,349 245,615 248,494
Commissions, taxes, licenses and fees....................... 28,135 31,793 26,910
Operating expenses.......................................... 24,678 20,837 25,324
Deferral of insurance acquisition costs..................... (27,820) (36,870) (31,852)
Amortization of insurance acquisition costs................. 2,316 14,423 20,809
Amortization of value of business acquired.................. 21,530 -- --
Amortization of goodwill.................................... 10,195 -- --
-------- --------- --------
Total benefits and expenses....................... 296,383 275,798 289,685
-------- --------- --------
Income (loss) before income tax expense (benefit)........... 59,824 (207,713) 40,792
Income tax expense (benefit)................................ 25,403 (74,664) 14,431
-------- --------- --------
Net income (loss)................................. $ 34,421 $(133,049) $ 26,361
======== ========= ========
See accompanying notes to consolidated financial statements.
19
21
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
PREACQUISITION
-------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
CAPITAL STOCK, beginning and end of period............. $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of period........ 743,104 491,994 491,994 409,423
Capital contributions from parent...................... 18,434 -- -- 82,500
Adjustment to reflect purchase accounting method....... -- 251,110 -- --
Transfer of limited partnership interest to parent..... -- -- -- 71
-------- -------- --------- ---------
End of period................................ 761,538 743,104 491,994 491,994
-------- -------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
period............................................... -- 68,502 (236,443) 93,096
Unrealized gain (loss) on revaluation of investments,
net.................................................. (47,498) -- 304,945 (329,539)
Adjustment to reflect purchase accounting method....... -- (68,502) -- --
-------- -------- --------- ---------
End of period................................ (47,498) -- 68,502 (236,443)
-------- -------- --------- ---------
RETAINED EARNINGS, beginning of period................. -- 42,880 175,929 149,568
Net income (loss)...................................... 34,421 -- (133,049) 26,361
Adjustment to reflect purchase accounting method....... -- (42,880) -- --
-------- -------- --------- ---------
End of period................................ 34,421 -- 42,880 175,929
-------- -------- --------- ---------
Total stockholder's equity................... $750,961 $745,604 $ 605,876 $ 433,980
======== ======== ========= =========
See accompanying notes to consolidated financial statements.
20
22
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
-----------------------------------------
PREACQUISITION
-------------------------
1996 1995 1994
----------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 34,421 $(133,049) $ 26,361
Reconcilement of net income (loss) to net cash provided:
Realized investment losses (gains)..................... (13,602) 318,700 54,557
Interest credited and other charges.................... 230,298 237,984 242,591
Deferred insurance acquisition costs................... (25,504) (22,447) (11,043)
Amortization of value of business acquired............. 21,530 -- --
Amortization of goodwill............................... 10,195 -- --
Amortization of discount and premium on investments.... 25,743 4,586 (1,383)
Deferred income taxes.................................. (897) 38,423 20,809
Net change in Federal income tax receivable............ 108,806 (86,990) 809
Other, net............................................. (22,283) (29,905) (14,161)
----------- --------- -----------
Net cash provided from operating activities....... 368,707 327,302 318,540
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 264,383 320,143 144,717
Fixed maturities sold prior to maturity................ 891,995 297,637 910,913
Mortgage loans, policy loans and other invested
assets............................................... 168,727 450,573 536,668
Cost of investments purchased or loans originated:
Fixed maturities....................................... (1,369,091) (549,867) (1,447,393)
Mortgage loans, policy loans and other invested
assets............................................... (119,044) (131,966) (281,059)
Short-term investments, net............................... 300,819 (168,351) 198,299
Net change in receivable and payable for securities
transactions........................................... (31,667) (1,397) (16,553)
Net reductions in other assets............................ 105 1,996 2,678
----------- --------- -----------
Net cash provided by investing activities......... 106,237 218,768 48,270
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 141,159 247,778 215,034
Withdrawals............................................ (700,084) (755,917) (652,513)
Capital contributions from parent......................... 18,434 -- 82,500
Other..................................................... 42,512 (35,309) 3,871
----------- --------- -----------
Net cash used in financing activities............. (497,979) (543,448) (351,108)
----------- --------- -----------
Net increase (decrease) in cash.............. (23,035) 2,622 15,702
CASH, beginning of period................................... 25,811 23,189 7,487
----------- --------- -----------
CASH, end of period......................................... $ 2,776 $ 25,811 $ 23,189
=========== ========= ===========
See accompanying notes to consolidated financial statements.
21
23
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investor group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners own 80 percent
and 20 percent, respectively, of Kemper and therefore the Company.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated.
PURCHASE ACCOUNTING METHOD
The acquisition of the Company on January 4, 1996, was accounted for using the
purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
financial statements and notes thereto prepared prior to January 4, 1996 have
been labeled "preacquisition". The accompanying consolidated financial
statements of KILICO as of January 4, 1996 (the acquisition date) and as of and
for the year ended December 31, 1996, have been prepared in conformity with the
purchase method of accounting. The Company has presented January 4, 1996 (the
acquisition date), as the opening purchase accounting balance sheet for
comparative purposes throughout the accompanying financial statements and notes
thereto.
Under purchase accounting, the Company's assets and liabilities have been marked
to their relative fair market values as of the acquisition date. The difference
between the cost of acquiring the Company and the net fair market values of the
Company's assets and liabilities as of the acquisition date has been recorded as
goodwill. KILICO is amortizing goodwill on a straight-line basis over
twenty-five years. The allocated cost of acquiring the Company was $745.6
million and the acquisition resulted in goodwill of $254.9 million as of January
4, 1996.
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1996, the Company
believes that no such adjustment is necessary.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996, have been replaced by the value of
business acquired.
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
A 15 percent discount rate was used to determine such value and represents the
rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value the
policies purchased, the Company considered the magnitude of the risks associated
with each of the actuarial assumptions used in determining expected future cash
flows, the cost of capital available to fund the acquisition, the perceived
likelihood of changes in insurance regulations and tax laws, the complexity of
the Company's business, and the prices paid (i.e., discount rates used in
determining other life insurance company valuations) on similar blocks of
business sold in recent periods.
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
22
24
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract rate on the value of business acquired. The estimated amortization and
accretion of interest for the value of business acquired for each of the years
through December 31, 2001 are as follows:
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- -------------------------------------------------------- --------- ------------ ------------ ---------
1996.................................................... $190,222 $(31,427) $ 9,897 $168,692
1997.................................................... 168,692 (26,330) 10,152 152,514
1998.................................................... 152,514 (26,769) 9,085 134,830
1999.................................................... 134,830 (26,045) 8,000 116,785
2000.................................................... 116,785 (24,288) 6,834 99,331
2001.................................................... 99,331 (21,538) 5,867 83,660
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to stockholder's equity, net of income tax. As of December 31, 1996, this
adjustment increased the value of business acquired and stockholder's equity by
approximately $20.9 million and $13.6 million, respectively.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, the value of business acquired, provisions for real
estate-related losses and reserves, other-than-temporary declines in values for
fixed maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities and interest-sensitive life insurance products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income is a ceding commission experience adjustment
received in 1995 as a result of certain reinsurance transactions entered into by
the Company during 1992. (See note captioned "Reinsurance".)
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.
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business after January 4, 1996, principally
commission expense and certain policy issuance and underwriting expenses, have
been deferred to the extent they are recoverable from estimated future gross
profits on the related contracts and policies. The deferred insurance
acquisition costs for annuities, separate account business and
interest-sensitive life insurance products are being amortized over the
estimated contract life in relation to the present value of estimated gross
profits. Deferred insurance acquisition costs related to such interest-sensitive
products also reflect the estimated impact of unrealized gains or losses on
fixed maturities held as available for sale in the investment portfolio, through
a credit or charge to stockholder's equity, 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. Current interest rates credited
during the contract accumulation period range from 4.0 percent to
23
25
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7.5 percent. Future minimum guaranteed interest rates vary from 3.0 percent to
4.5 percent. For contracts that have annuitized, interest rates used in
determining the present value of future payments range principally from 3.0
percent to 12.0 percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 7 percent for
reinsurance assumed and for direct business, 8 percent for three years; 7
percent for year four; and 6 percent thereafter.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See note
captioned "Fair Value of Financial Instruments".)
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans, real estate-related bonds 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 reserve and write-downs include notes
receivable from real estate ventures; investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures; common
stock carried at fair value and real estate owned carried at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. At year-end
1995, reflecting the Company's change in strategy with respect to its real
estate portfolio, and the disposition thereof, and on January 4, 1996,
reflecting the acquisition of the Company, real estate-related investments were
valued using an estimate of the investments observable market price, net of
estimated costs to sell. Prior to year-end 1995, the Company evaluated its real
estate-related assets (including accrued interest) by estimating the
probabilities of loss utilizing various projections that included several
factors relating to the borrower, property, term of the loan, tenant
composition, rental rates, other supply and demand factors and overall economic
conditions. Generally, at that time, the reserve was based upon the excess of
the loan amount over the estimated future cash flows from the loan, discounted
at the loan's contractual rate of interest taking into consideration the effects
of recourse to, and subordination of loans held by, affiliated non-life realty
companies.
Under purchase accounting, the market value of the Company's policy loans and
other invested assets consisting primarily of venture capital investments and a
leveraged lease, became the Company's new cost basis in such investments.
Investments in policy loans and other invested assets after January 4, 1996 are
carried at cost. Other invested assets also include equity securities, not
related to real estate-related investments, which are carried at fair value.
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 stockholder's equity.
Such unrealized gains are recorded net of deferred income tax expense, while
unrealized losses are not tax benefitted.
24
26
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
The operations of the Company prior to January 4, 1996 have been included in the
consolidated Federal income tax return of Kemper. Income taxes receivable or
payable have been determined on a separate return basis, and payments have been
received from or remitted to Kemper pursuant to a tax allocation arrangement
between Kemper and its subsidiaries, including the Company. The Company
generally had received a tax benefit for losses to the extent such losses can be
utilized in Kemper's consolidated Federal tax return. Subsequent to January 4,
1996, the Company and its subsidiaries will file separate Federal income tax
returns.
Deferred taxes are provided on the temporary differences between the tax and
financial statement basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. Federal
income tax refunded by Kemper under the tax allocation arrangement for the
period from January 1, 1996 to January 4, 1996 and for the years ended December
31, 1995 and 1994 amounted to $108.8 million, $25.2 million and $10.7 million,
respectively. The Company paid $28.1 million of Federal income taxes directly to
the United States Treasury Department during 1996.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million in 1994.
25
27
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value (estimated fair value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, were as follows:
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
VALUE COST GAINS LOSSES
(in thousands) -------- --------- ----- ------
DECEMBER 31, 1996
U.S. treasury securities and obligations of U.S. government
agencies and authorities.................................. $ 92,238 $ 93,202 $ -- $ (964)
Obligations of states and political subdivisions, special
revenue and nonguaranteed................................. 30,853 31,519 -- (666)
Debt securities issued by foreign governments............... 105,394 108,456 504 (3,566)
Corporate securities........................................ 1,896,615 1,935,511 5,918 (44,814)
Mortgage and asset-backed securities........................ 1,741,331 1,760,962 1,990 (21,621)
---------- ---------- ------ --------
Total fixed maturities............................... $3,866,431 $3,929,650 $8,412 $(71,631)
========== ========== ====== ========
JANUARY 4, 1996
U.S. treasury securities and obligations of U.S. government
agencies and authorities.................................. $ 215,637 $ 215,637 $ -- $ --
Obligations of states and political subdivisions, special
revenue and nonguaranteed................................. 24,241 24,241 -- --
Debt securities issued by foreign governments............... 139,361 139,361 -- --
Corporate securities........................................ 1,695,268 1,695,268 -- --
Mortgage and asset-backed securities........................ 1,674,816 1,674,816 -- --
---------- ---------- ------ --------
Total fixed maturities............................... $3,749,323 $3,749,323 $ -- $ --
========== ========== ====== ========
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $267.7 million real estate portfolio at December 31, 1996 consists
of joint venture and third-party mortgage loans and other real estate-related
investments.
At December 31, 1996 and January 4, 1996, total impaired loans were as follows:
DECEMBER 31 JANUARY 4
1996 1996
(in millions) ----------- ---------
Impaired loans without reserves--gross...................... $39.8 $--
Impaired loans with reserves--gross......................... 7.6 21.9
----- -----
Total gross impaired loans........................... 47.4 21.9
Reserves related to impaired loans.......................... (4.4) (6.5)
----- -----
Net impaired loans................................... $43.0 $15.4
===== =====
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. At December 31, 1996, the Company's deficit in
26
28
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
equity investments considered in determining reserve and write-downs amounted to
$5.9 million. The Company had an average balance of $30.8 million and $124.2
million in impaired loans for 1996 and 1995, respectively. Cash payments
received on impaired loans are generally applied to reduce the outstanding loan
balance.
At December 31, 1996 and January 4, 1996, loans on nonaccrual status amounted to
$43.5 million and $3.5 million, respectively. The Company's nonaccrual loans are
generally included in impaired loans.
At December 31, 1996, securities carried at approximately $6.1 million were on
deposit with governmental agencies as required by law.
At December 31, 1996, the Company had six separate asset-backed securities
included in fixed maturity investments from trusts formed to securitize assets
underwritten by Green Tree Financial Corporation, which in aggregate amounted to
$90.7 million. No other investments exceeded ten percent of the Company's
stockholder's equity at December 31, 1996.
Proceeds from sales of investments in fixed maturities prior to maturity were
$892.0 million, $297.6 million and $910.9 million during 1996, 1995 and 1994,
respectively. Gross gains of $9.9 million, $21.2 million and $6.0 million and
gross losses of $16.2 million, $11.9 million and $55.9 million were realized on
sales of fixed maturities in 1996, 1995 and 1994, respectively.
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1996:
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
One year or less............................................ $ 36,814 $ 36,862
Over one year through five.................................. 643,741 648,811
Over five years through ten................................. 1,170,034 1,200,620
Over ten years.............................................. 274,511 282,395
Securities not due at a single maturity date(1)............. 1,741,331 1,760,962
---------- ----------
Total fixed maturities............................... $3,866,431 $3,929,650
========== ==========
- ---------------
(1) Weighted average maturity of 4.6 years.
The sources of net investment income were as follows:
PREACQUISITION
-----------------------
1996 1995 1994
(in thousands) -------- -------- --------
Interest and dividends on fixed maturities.................. $250,683 $269,934 $274,231
Dividends on equity securities.............................. 646 681 1,751
Income from short-term investments.......................... 9,130 13,159 10,668
Income from mortgage loans.................................. 20,257 40,494 41,713
Income from policy loans.................................... 20,700 19,658 18,517
Income from other real estate-related investments........... 4,917 15,565 21,239
Income from other loans and investments..................... 2,480 1,555 3,533
-------- -------- --------
Total investment income.............................. 308,813 361,046 371,652
Investment expense.......................................... (9,125) (12,598) (18,568)
-------- -------- --------
Net investment income................................ $299,688 $348,448 $353,084
======== ======== ========
27
29
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1996, 1995 and 1994,
were as follows:
REALIZED GAINS (LOSSES)
------------------------------------------
PREACQUISITION
--------------------------
1996 1995 1994
(in thousands) ------- --------- --------
Real estate-related......................................... $17,462 $(325,611) $(41,720)
Fixed maturities............................................ (6,344) 9,336 (49,857)
Equity securities........................................... -- (346) 28,243
Other....................................................... 2,484 (2,079) 8,777
------- --------- --------
Realized investment gains (losses) before income tax
expense (benefit)...................................... 13,602 (318,700) (54,557)
Income tax expense (benefit)................................ 4,761 (111,545) (19,095)
------- --------- --------
Net realized investment gains (losses).................... $ 8,841 $(207,155) $(35,462)
======= ========= ========
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1996,
1995 and 1994 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------------
PREACQUISITION
--------------------
DECEMBER 31
DECEMBER 31 JANUARY 4 --------------------
1996 1996 1995 1994
(in thousands) ------------ ---------- -------- ---------
Fixed maturities............................................ $(63,219) $-- $351,964 $(351,646)
Equity securities........................................... 1,256 -- 180 (32,710)
Adjustment to deferred insurance acquisition costs.......... 1,307 -- (14,277) 11,325
Adjustment to value of business acquired.................... 20,947 -- -- --
-------- --- -------- ---------
Unrealized gain (loss) before income tax expense
(benefit).............................................. (39,709) -- 337,867 (373,031)
Income tax expense (benefit)................................ 7,789 -- 32,922 (43,492)
-------- --- -------- ---------
Net unrealized gain (loss) on investments............ $(47,498) $-- $304,945 $(329,539)
======== === ======== =========
(4) UNCONSOLIDATED INVESTEES
At December 31, 1996, 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, 1996 and January 4, 1996, the Company's net equity investment
in unconsolidated investees amounted to $11.7 million and $11.4 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $223 thousand for the year ended December 31, 1996,
compared with net losses of $453 thousand, and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.
Also at January 4, 1996, the Company had joint venture-related loans totaling
$21.8 million before reserves to partnerships in which Lumbermens Mutual
Casualty Company, an affiliate until August 1993 ("Lumbermens"), had equity
interests. These joint venture-related loans were sold during 1996.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in
mortgage-backed securities (see "INVESTMENTS" beginning on page 10) and real
estate.
28
30
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1996
California........................... 35.2%
Illinois............................. 13.5
Hawaii............................... 11.0
Colorado............................. 7.9
Oregon............................... 7.6
Washington........................... 7.4
Florida.............................. 5.4
Texas................................ 4.2
Ohio................................. 2.7
Other states......................... 5.1
-----
Total...................... 100.0%
=====
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1996
Hotel................................ 38.8%
Land................................. 24.4
Office............................... 14.1
Residential.......................... 9.1
Retail............................... 2.6
Industrial........................... 1.0
Other................................ 10.0
-----
Total...................... 100.0%
=====
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. Portions of California's and
Hawaii's real estate market conditions have continued to be worse than in many
other areas of the country. Real estate markets in northern California and
Illinois continue to show some stabilization and improvement.
Undeveloped land represented approximately 24.4 percent of the Company's real
estate portfolio at December 31, 1996. 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. The
values of certain development projects have been written down as of December 31,
1995, reflecting changes in plans in connection with the Zurich-led acquisition
of Kemper. There can be no assurance that such permits will be obtained as
planned or at all, nor that such expenditures will occur as scheduled, nor that
Kemper's and the Company's plans with respect to such projects may not change
substantially.
Approximately half of the Company's real estate loans are on properties or
projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners. (See note captioned
"Unconsolidated Investees".)
At December 31, 1996, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), have interests constituted
approximately $101.3 million, or 37.8 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1996, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1996, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $53.0 million, or 19.8 percent, of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest and Kemper's interest is 75 percent at December 31,
1996. At December 31, 1996, MLP-related commitments accounted for approximately
$9.4 million of the Company's off-balance-sheet legal commitments, which the
Company expects to fund.
At December 31, 1996, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $(5.3) million.
Negative amounts represent the Company's share of project related operating
losses in excess of the Company's investment. Prime Group-related commitments,
however, accounted for $145.2 million of the off-balance-sheet legal commitments
at December 31, 1996, of which the Company expects to fund $15.9 million.
29
31
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1996, 1995 and 1994:
PREACQUISITION
----------------------
1996 1995 1994
(in thousands) ------- --------- -------
Current..................................................... $26,300 $(113,087) $(6,898)
Deferred.................................................... (897) 38,423 21,329
------- --------- -------
Total............................................. $25,403 $ (74,664) $14,431
======= ========= =======
Included in the 1995 current tax benefit is the recognition of a net operating
loss carryover at December 31, 1995 which was utilized against taxable income on
Kemper's consolidated short-period Federal income tax return for the January 1
through January 4, 1996 tax year. Beginning January 5, 1996, the Company and its
subsidiaries will each file a stand alone Federal income tax return. Previously,
the Company had filed a consolidated Federal income tax return with Kemper. In
1996, the Company and Kemper settled all outstanding balances under the tax
allocation agreement.
The actual income tax expense (benefit) for 1996, 1995 and 1994 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. Federal
corporate tax rate of 35 percent in 1996, 1995, and 1994 to income (loss) before
income tax expense (benefit).
PREACQUISITION
---------------------
1996 1995 1994
(in thousands) ------- -------- -------
Computed expected tax expense (benefit)..................... $20,938 $(72,700) $14,277
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................... 913 (1,370) 645
Amortization of goodwill.................................. 3,568 -- --
Foreign tax credit........................................ -- (183) (155)
Other, net................................................ (16) (411) (336)
------- -------- -------
Total actual tax expense (benefit)................ $25,403 $(74,664) $14,431
======= ======== =======
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The Company has established a valuation allowance to reduce the deferred Federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's Federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred Federal tax asset or liability from
unrealized gains or losses on investments.
30
32
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax liability were as follows:
Preacquisition
---------------------
December 31
December 31 January 4 ---------------------
1996 1996 1995 1994
(in thousands) ----------- --------- --------- --------
Deferred Federal tax assets:
Unrealized losses on investments....................... $ 16,624 $ -- $ -- $ 85,331
Life policy reserves................................... 46,452 46,654 42,512 51,519
Real estate-related.................................... 20,642 27,736 21,920 39,360
Other investment-related............................... 5,409 1,773 1,725 7,435
Other.................................................. 8,159 9,750 6,864 6,415
-------- -------- --------- --------
Total deferred Federal tax assets................... 97,286 85,913 73,021 190,060
Valuation allowance.................................... (31,825) (15,201) (15,201) (100,532)
-------- -------- --------- --------
Total deferred Federal tax assets after valuation
allowance......................................... 65,461 70,712 57,820 89,528
-------- -------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs................... 9,384 -- 111,523 108,663
Value of business acquired............................. 66,373 66,578 -- --
Other investment-related............................... 28,855 37,919 -- --
Unrealized gains on investments........................ -- -- 37,919 --
Depreciation and amortization.......................... 15,473 15,490 18,767 18,878
Other.................................................. 5,738 4,197 2,320 3,351
-------- -------- --------- --------
Total deferred Federal tax liabilities.............. 125,823 124,184 170,529 130,892
-------- -------- --------- --------
Net deferred Federal tax liabilities..................... $(60,362) $(53,472) $(112,709) $(41,364)
======== ======== ========= ========
The valuation allowance is subject to future adjustments based on, among other
items, the Company's estimates of future operating earnings and capital gains.
The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1993 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $18.4 million and $82.5
million during 1996 and 1994, respectively.
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, 1996 and January 4, 1996, joint venture
mortgage loans totaled $111.0 million and $110.2 million, respectively, and
during 1996, 1995 and 1994, the Company earned interest income on these joint
venture loans of $9.5 million, $19.6 million and $22.0 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1996,
1995 and 1994, expenses allocated to the Company from ZKI and KSvC amounted to
$1.7 million, $4.4 million and $6.5 million, respectively. The Company also paid
to ZKI investment management fees of $3.6 million, $3.4 million and $6.0 million
during 1996, 1995 and 1994, respectively. In addition, expenses allocated to the
Company from FKLA during 1996, 1995 and 1994 amounted to $10.5 million, $14.3
million and $11.1 million, respectively.
During 1995 and 1994, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million and $154.0
million, respectively, to an affiliated non-life realty company, in
31
33
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
exchange for cash. No gain or loss was recognized on these sales. During 1996,
the Company purchased approximately $24.5 million of real estate-related
investments from such affiliated non-life realty subsidiaries for cash. The
Company also paid to Kemper real estate subsidiaries $1.8 million in both 1996
and 1995, related to the management of the Company's real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management and common board members with the Company, FKLA and
Kemper. As of December 31, 1996 and January 4, 1996, the reinsurance recoverable
related to the fixed-rate annuity liabilities ceded to FLA amounted to $427.0
million and $502.8 million, respectively. During 1995, the Company recorded
income of $4.4 million related to a ceding commission experience adjustment from
the 1992 reinsurance agreement.
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles, of approximately $18.4
million, was deemed to be a capital contribution from Kemper and was recorded as
additional paid-in-capital during 1996.
The Company's retention limit on term life insurance is $300 thousand (face
amount) on the life of any one individual with the excess amounts ceded to
outside reinsurers. The term life insurance business assumed from FKLA during
1996 did not have any individual contracts greater than $300 thousand in face
amount. Reserves ceded to outside reinsurers on the Company's direct business
amounted to approximately $102 thousand as of December 31, 1996.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a welfare plan that provides medical and life insurance benefits
to its retired and active employees and the Company is allocated a portion of
the costs of providing such benefits. The Company is self insured with respect
to medical benefits, and the plan is not funded except with respect to certain
disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.7 million and $687 thousand at December 31, 1996 and
January 4, 1996, respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.75 percent and 7.25 percent for 1996 and 1995, respectively.
The assumed health care trend rate used was based on projected experience for
1996 and 1997, 10 percent in 1998, gradually declining to 5.0 percent by the
year 2001 and remaining at that level 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, 1996 and January 4, 1996 by $56 thousand and $146 thousand,
respectively.
During 1995, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
32
34
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1996 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. The Company is
also contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1996.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1996, the Company had future legal loan commitments and stand-by
financing agreements totaling $197.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be secured by assets of the joint ventures, including
first mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $39.6 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
The Company was party to derivative financial instruments in the normal course
of business for other than trading purposes to hedge exposures in foreign
currency fluctuations related to certain foreign fixed maturity securities held
by the Company. The Company sold its interest in such securities during 1996.
The following table summarizes various information regarding these derivative
financial instruments as of January 4, 1996:
WEIGHTED
(In thousands) WEIGHTED AVERAGE
AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
JANUARY 4, 1996 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
--------------- -------- -------- ---------- ---------- ---------
Non-trading foreign exchange forward options................ $43,754 $112 $112 .32 30
The Company's hedges relating to foreign currency exposure were implemented
using forward contracts on foreign currencies. These are generally
short-duration contracts with U.S. money-center banks. The Company records
realized and unrealized gains and losses on such investments in net income on a
current basis. The amounts of gain (loss)
33
35
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
included in net income during 1996, 1995 and 1994 totaled $227 thousand, $(1.0)
million and $6.4 million, respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Fixed maturities and equity securities: Fair values for fixed maturity
securities and for equity securities were determined by using market quotations,
or independent pricing services that use prices provided by market makers or
estimates of fair values obtained from yield data relating to instruments or
securities with similar characteristics, or fair value as determined in good
faith by the Company's portfolio manager, ZKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated based
upon the investments observable market price, net of estimated costs to sell.
The estimates of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1996 to be 4.75 percent, while the assumed average
market crediting rate was 5.8 percent in 1996.
34
36
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 were as follows:
DECEMBER 31, 1996 JANUARY 4, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
Financial instruments recorded as assets:
Fixed maturities(1).................................... $3,866,431 $3,866,431 $3,749,323 $3,749,323
Cash and short-term investments........................ 74,472 74,472 398,326 398,326
Mortgage loans and other real estate-related assets.... 267,713 267,713 288,940 288,940
Policy loans........................................... 288,302 288,302 289,390 289,390
Other invested assets.................................. 23,507 23,507 19,215 19,215
Financial instruments recorded as liabilities:
Life policy benefits................................... 4,249,264 4,101,588 4,585,148 4,585,148
- ---------------
(1) Includes $112 thousand carrying value and fair value for January 4, 1996, of
derivative securities used to hedge the foreign currency exposure on certain
specific foreign fixed maturity investments.
(14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. (See "Restrictions on dividends" on page
6.) The maximum amount of dividends which can be paid by the Company without
prior approval in 1997 is $40.9 million. The Company paid no cash dividends in
1996, 1995 or 1994.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles were as follows:
1996 1995 1994
(in thousands) -------- -------- --------
Net income (loss)........................................... $ 37,287 $(64,707) $ 44,491
======== ======== ========
Statutory surplus........................................... $411,837 $383,374 $416,243
======== ======== ========
35
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION WITH KILICO AND OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
------------ ------------------------ --------------------------------
John B. Scott (52)................ Chief Executive Officer since Chief Executive Officer, President and Director of
February 1992. President since Federal Kemper Life Assurance Company (FKLA) and
November 1993. Director since Fidelity Life Association (FLA) since 1988. Chief
1992. Executive Officer, President and Director of Zurich
Life Insurance Company of America (ZLICA) and Zurich
Direct, Inc. (ZD) since March 1996. Chairman of the
Board and Director of Investors Brokerage Services,
Inc. (IBS) and Investors Brokerage Services
Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to
January 1996. Chairman of the Board of KILICO from
February 1992 to January 1996. Executive Vice
President and Director of Kemper Corporation
(Kemper) from January 1994 and March 1996,
respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to
January 1996 and Director from 1992 to January 1996.
Jerome J. Cwiok (49).............. Executive Vice President since Executive Vice President of FKLA and FLA since 1995.
1995. Executive Vice President of ZLICA and ZD since March
1996. Director of IBS and IBSIA since 1994. Director
of FKLA from October 1995 to January 1996. Senior
Vice President of KILICO, FKLA and FLA from November
1993 to March 1995. Vice President of FKLA, KILICO
and FLA since 1993. Executive Vice President of
Academy Insurance Group from 1986 to 1993.
Eliane C. Frye (49)............... Executive Vice President since Executive Vice President of FKLA and FLA since 1995.
1995. Executive Vice President of ZLICA and ZD since March
1996. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to
1995. Vice President of FKLA and FLA from 1988 to
1993.
Frederick L. Blackmon (45)........ Senior Vice President and Chief Senior Vice President and Chief Financial Officer of
Financial Officer since FKLA since December 1995. Senior Vice President and
December 1995. Chief Financial Officer of FLA since January 1996.
Senior Vice President and Chief Financial Officer of
ZLICA since March 1996. Senior Vice President, Chief
Financial Officer and Director of ZD since March
1996. Treasurer and Chief Financial Officer of
Kemper since January 1996. Chief Financial Officer
of Alexander Hamilton Life Insurance Company from
April 1989 to November 1995.
James C. Harkensee (38)........... Senior Vice President since Senior Vice President of FKLA and FLA since January
January 1996. 1996. Senior Vice President of ZLICA since 1995.
Senior Vice President of ZD since 1995. Vice
President of ZLICA from 1992 to 1995. Chief Actuary
of ZLICA from 1991 to 1994. Assistant Vice President
of ZLICA from 1990 to 1992. Vice President of ZD
from 1994 to 1995.
36
38
POSITION WITH KILICO AND OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
------------ ------------------------ --------------------------------
James E. Hohmann (41)............. Senior Vice President and Chief Senior Vice President and Chief Actuary of FKLA
Actuary since December 1995. since December 1995. Senior Vice President and Chief
Actuary of FLA since January 1996. Senior Vice
President and Chief Actuary of ZLICA since March
1996. Senior Vice President, Chief Actuary and
Director of ZD since March 1996. Managing Principal
(Partner) of Tillinghast-Towers Perrin from January
1991 to December 1995. Consultant/Principal
(Partner) of Tillinghast-Towers Perrin from November
1986 to January 1991.
Edward K. Loughridge (42)......... Senior Vice President and Senior Vice President and Corporate Development
Corporate Development Officer Officer of FKLA and FLA since January 1996. Senior
since January 1996. Vice President and Corporate Development Officer for
ZLICA and ZD since March 1996. Senior Vice President
of Human Resources of Zurich-American Insurance
Group from February 1992 to March 1996.
Debra P. Rezabek (41)............. Senior Vice President since Senior Vice President of FKLA and FLA since March
1996. General Counsel since 1996. Corporate Secretary of FKLA and FLA since
1992. Corporate Secretary since January 1996. Vice President of KILICO, FKLA and FLA
January 1996. since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of
KILICO since 1993. Senior Vice President, General
Counsel and Corporate Secretary of ZLICA since March
1996. Senior Vice President, General Counsel,
Corporate Secretary and Director of ZD since March
1996. Secretary of IBS and IBSIA since 1993.
Director of IBS and IBSIA from 1993 to 1996.
Assistant General Counsel of FKLA and FLA from 1988
to 1992. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant
Secretary of Kemper since January 1996.
George Vlaisavljevich (54)........ Senior Vice President since Senior Vice President of FKLA, FLA and ZLICA since
October 1996. October 1996. Director of IBS and IBSIA since
October 1996. Executive Vice President of The
Copeland Companies from April 1983 to September
1996.
Loren J. Alter (58)............... Director since January 1996. Director of FKLA, FLA and Zurich Kemper Investments,
Inc. (ZKI) since January 1996. Director of ZLICA
since May 1979. Executive Vice President of Zurich
Insurance Company since 1979. President, Chief
Executive Officer and Director of K-Corp. since
January 1996.
William H. Bolinder (53).......... Chairman of the Board and Chairman of the Board and Director of FKLA and FLA
Director since January 1996. since January 1996. Chairman of the Board of ZLICA
and ZD since March 1995. Chairman of the Board of
Kemper since January 1996. Vice Chairman and
Director of ZKI since January 1996. Member of the
Corporate Executive Board of Zurich Insurance Group
since October 1994. Chairman of the Board of
American Guarantee and Liability Insurance Company,
Zurich American Insurance Company of Illinois,
American Zurich Insurance Company and Steadfast
Insurance Company since 1995. Chief Executive
Officer of American Guarantee and Liability
Insurance Company, Zurich American Insurance Company
of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America since
1986. Manager of Zurich Insurance Company, U.S.
Branch since 1986. Underwriter for Zurich American
Lloyds since 1986.
37
39
POSITION WITH KILICO AND OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
------------ ------------------------ --------------------------------
Daniel L. Doctoroff (38).......... Director since January 1996. Director of FKLA, FLA and Kemper since January 1996.
Director of ZLICA since March 1996. Managing Partner
of Insurance Partners Advisors, L.P. since February
1994. Vice President of Keystone, Inc. since October
1992. Managing Director of Rosecliff Inc./Oak Hill
Partners, Inc. since August 1987. Director of Bell &
Howell Company since 1989; National Re Corporation
since 1990; Specialty Foods Corporation since 1993;
and Transport Holdings, Inc. since 1995.
Steven M. Gluckstern (45)......... Vice Chairman and Director Director of FKLA, FLA and K-Corp. since January
since January 1996. 1996. Director of ZLICA since March 1996. Vice
Chairman of FKLA and FLA since January 1996. Member
of the Corporate Executive Board of Zurich Insurance
Group since March 1997. Chairman of the Board and
Director of ZKI since January 1996. Chairman of the
Board and Chief Executive Officer of Zurich
Reinsurance Centre, Inc. since May 1993. President
of Centre Re, Bermuda from December 1986 to May
1993.
Michael P. Stramaglia (37)........ Director since January 1996. Director of FKLA and FLA since January 1996.
Director of ZLICA since March 1996. President of
Zurich Life Insurance Company of Canada (ZLICC)
since June 1994. Chief Operating Officer of ZLICC
since March 1997. President of KEZMO, L.L.C. and
President of KEZLI, L.L.C. since 1995. Chief
Executive Officer of ZLICC from June 1994 to March
1997. Executive Vice President and Chief Operating
Officer of ZLICC from June 1993 to June 1994. Senior
Vice President of the Corporate Division of ZLICC
from January 1990 to June 1993. Director of ZLICC,
Zurich Life of Canada Holdings Limited, Zurich
Indemnity Company of Canada, Zurich Canadian
Holdings Limited, and Zurmex Canada Holdings
Limited.
Paul H. Warren (41)............... Director since January 1996. Director of FKLA , FLA and Kemper since January
1996. Director of ZLICA since March 1996. Partner of
Insurance Partners Advisors, L.P. since March 1994.
Managing Director of International Insurance
Advisors since March 1992. Vice President of J.P.
Morgan from June 1986 to March 1992. Director of
Unionamerica Holdings plc since June 1993;
Unionamerica Insurance Company since September 1993;
Tarquin plc since November 1994; Charman
Underwriting Agencies Ltd. since November 1994; and
Corporate Health Dimensions since March 1997.
38
40
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/
NAME AND BONUS COMPENSATION AWARD(S) SARS
PRINCIPAL POSITION YEAR SALARY ($) ($)(2) ($)(3) ($)(4) (#)(5)
- -------------------------------------------------------------------------------------------------------------------------
John B. Scott.............................. 1996 $212,500 $ -- $ -- $ -- $ --
Chief Executive Officer(1) 1995 172,800 129,600 20,035 -- 15,360
1994 163,200 160,800 396,801 125,280 16,080
Jerome J. Cwiok............................ 1996 112,500 -- -- -- --
Executive Vice President(1) 1995 95,000 67,500 23,381 -- 9,000
1994 84,896 59,000 113,926 40,600 2,000
Eliane C. Frye............................. 1996 105,000 -- -- -- --
Executive Vice President(1) 1995 91,200 67,200 9,261 -- 10,560
1994 73,800 58,560 57,525 38,976 1,920
James E. Hohmann........................... 1996 113,333 -- -- -- --
Senior Vice President and Chief Actuary(1)
Frederick L. Blackmon...................... 1996 100,583 -- 27,924 -- --
Senior Vice President and Chief Financial
Officer(1)
(A)
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)(6)(7)(8)
- ----------------------------------------------------------------------
John B. Scott.............................. $142,498
Chief Executive Officer(1) 260,106
256,915
Jerome J. Cwiok............................ 32,882
Executive Vice President(1) 28,357
9,922
Eliane C. Frye............................. 58,520
Executive Vice President(1) 41,546
57,913
James E. Hohmann........................... 11,333
Senior Vice President and Chief Actuary(1)
Frederick L. Blackmon...................... 11,226
Senior Vice President and Chief Financial
Officer(1)
- ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
(2) Annual bonuses are paid pursuant to an annual incentive plan. The amount of
the bonus earned in 1996 was not available as of the date of this filing.
(3) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $109,760 in 1994 and $15,474 in
1995 for Mr. Cwiok and $21,437 in 1996 for Mr. Blackmon.
(e) Compensation income reported in 1994 of $384,822 for Mr. Scott and
$55,974 for Ms. Frye, based on the market value on the vesting date of
restricted stock awarded under Kemper's long-term incentive plans.
(4) Due to the June 1994 vesting of all outstanding shares of restricted stock
granted in 1992 or earlier and the cancellation of shares awarded in 1993
and 1994, no shares of restricted stock were held by any of the named
executive officers on or after December 31, 1995.
(5) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.
(6) 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.
(7) Pursuant to the Conseco Merger Agreement, the restricted stock awards for
1993 and 1994 were cancelled. To replace these awards, on June 30, 1994, the
Committee, under the Kemper Bonus Restoration Plan and in its sole
discretion, granted cash awards to the named executive officers and other
affected executives entitling each of them to receive an amount in cash
immediately prior to the effective time of the then-planned Conseco merger
equal to
39
41
the product of the number of shares of restricted stock previously granted
to such individual under the 1993 Senior Executive Long-Term Incentive Plan
multiplied by the consideration payable in the merger. As a result of the
termination of the Conseco Merger Agreement, no cash awards were paid
pursuant to the Kemper Bonus Restoration Plan.
In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).
By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.
Phantom units awarded to the named executive officers subject to vesting on
December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and 12,600
phantom units, respectively, Ms. Frye 1,680 and 1,680 phantom units,
respectively, and Mr. Cwiok 0 and 1,680 phantom units, respectively. All
phantom stock units vested and were paid immediately prior to the
effectiveness of the January 4, 1996 acquisition of Kemper by Zurich and
Insurance Partners. Messrs. Scott and Cwiok and Ms. Frye received allocated
cash out payments of $430,272, $41,832 and $80,317, respectively, in 1996.
(8) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d)
NUMBER OF UNEXERCISED
OPTIONS/SARS AT
FY-END (#)(1)
Shares Acquired on
Name Exercise (#) Value Realized ($) Exercisable/Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
John B. Scott(2)................................... 133,325 $1,525,185 --
(a) (e)
Value of Unexercised
In-the-Money Options/
SARs at FY-End ($)(1)
Name Exercisable/Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
John B. Scott(2)................................... --
- ---------------
(1) All unexercised Kemper stock options were cancelled immediately prior to the
January 4, 1996 effectiveness of the acquisition of Kemper by Zurich and
Insurance Partners. Optionees were paid the spread between their option
exercise price and $49.80 per share. Mr. Cwiok and Ms. Frye received $84,150
and $112,370, respectively, in 1996 as a result of such payments.
(2) Includes options granted related to service for FKLA.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) AS OF MARCH 1, 1997, 100% OF THE OUTSTANDING SHARES OF KILICO WERE OWNED BY
KEMPER CORPORATION, 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049.
(B) NOT APPLICABLE.
(C) CHANGES IN CONTROL.
There are no arrangements known to KILICO, which may at a subsequent date result
in a change in control of KILICO.
40
42
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.
41
43
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 17 in ITEM 8.
(A)(2) SCHEDULES.
The following schedules are supplemental to the financial statements of KILICO
and its subsidiaries for 1996 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 inapplicable.
SCHEDULE TITLE PAGE
- -------- ----- ----
IV Reinsurance, for the year ended December 31, 1996........... 44
V Valuation and qualifying accounts, for the year ended
December 31, 1996*.......................................... 45
- ---------------
* This schedule for the years ended December 31, 1995 and 1994 is incorporated
by reference to KILICO's Form 10-K filed on March 25, 1996 and on March 28,
1995, respectively.
(A)(3) EXHIBITS.
The exhibits listed on the accompanying Index to Exhibits on page 46 are filed
as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1996.
42
44
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Frederick L. Blackmon,
Senior Vice President and Chief Financial Officer, and Robert A. Daniel,
Treasurer and Controller, his true and lawful attorney-in-fact with authority
together or individually to execute in the name of each such signatory, and with
authority to file with the Securities and Exchange Commission, any and all
amendments to this Annual Report on Form 10-K, together with any exhibits
thereto and other documents therewith, necessary or advisable to enable Kemper
Investors Life Insurance Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, which amendments may make such other
changes in the Annual Report on Form 10-K as the aforesaid attorney-in-fact
executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Kemper Investors Life Insurance Company has duly caused this Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Long Grove,
State of Illinois, on the 24th day of March, 1997.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ JOHN B. SCOTT
---------------------------------
John B. Scott
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KEMPER INVESTORS LIFE
INSURANCE COMPANY IN THE CAPACITIES INDICATED ON THE 24TH DAY OF MARCH, 1997.
SIGNATURE TITLE
--------- -----
/s/ WILLIAM H. BOLINDER Chairman of the Board
- -----------------------------------------------------------
William H. Bolinder
/s/ JOHN B. SCOTT President, Chief Executive Officer and Director
- -----------------------------------------------------------
John B. Scott
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial Officer
- -----------------------------------------------------------
Frederick L. Blackmon
/s/ LOREN J. ALTER Director
- -----------------------------------------------------------
Loren J. Alter
/s/ DANIEL L. DOCTOROFF Director
- -----------------------------------------------------------
Daniel L. Doctoroff
43
45
SCHEDULE IV
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
YEAR ENDED DECEMBER 31, 1996
(in thousands)
CEDED TO ASSUMED PERCENTAGE OF
GROSS OTHER FROM OTHER NET AMOUNT
DESCRIPTION AMOUNT COMPANIES COMPANIES(1) AMOUNT ASSUMED TO NET
----------- ------ --------- ------------ ------ --------------
Life insurance in force............... $1,764,531 $(308,521) $14,405,573 $15,861,583 90.8%
========== ========= =========== =========== =====
Life insurance premiums............... $ 659 $ (94) $ 7,257 $ 7,822 92.8%
========== ========= =========== =========== =====
- ---------------
(1) Premiums assumed during 1996 were from an affiliated company, Federal Kemper
Life Assurance Company.
44
46
SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
(in thousands)
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ---------------- ------------ ----------
Asset valuation reserves:
Joint venture mortgage loans............... $ 71 $2,289 $ -- $-- $2,360
Third-party mortgage loans................. 6,533 -- -- 6,186 347
Other real estate-related investments...... 8,829 -- -- 1,987 6,842
------- ------ ----- ------ ------
Total $15,433 $2,289 $ -- $8,173(1) $9,549
======= ====== ===== ====== ======
- ---------------
(1) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.
45
47
INDEX TO EXHIBITS
EXHIBIT NO.
3(a) Articles of Incorporation are incorporated herein by
reference to Exhibits filed with Registration Statement on
Form S-1 (File No. 333-02491) filed on or about April 12,
1996.
3(b) Bylaws are incorporated herein by reference to Exhibits
filed with Registration Statement on Form S-1 (File No.
333-02491) filed on or about April 12, 1996.
4(a) Form of Variable and Market Value Adjusted Deferred Annuity
Contract is incorporated herein by reference to Exhibits
filed with Registration Statement on Form S-1 (File No.
33-43462) filed October 23, 1991.
4(b) Form of Certificate to Variable and Market Value Adjusted
Deferred Annuity Contract and Enrollment Application is
incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-43462) filed
October 23, 1991.
4(c) Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application is incorporated
herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4
for KILICO Variable Annuity Separate Account (File No.
33-43501) filed November 19, 1993.
4(d) Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract is incorporated herein by
reference to Exhibits filed with Post-Effective Amendment
No. 4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed
November 19, 1993.
4(e) Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract is incorporated
herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4
for KILICO Variable Annuity Separate Account (File No.
33-43501) filed November 19, 1993.
4(f) Form of Revised Variable and Market Value Adjusted Deferred
Annuity Contract is incorporated herein by reference to
Exhibits filed with Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 for KILICO Variable
Annuity Separate Account (File No. 33-43501) filed November
19, 1993.
4(g) Form of Revised Certificate to Variable and Market Value
Adjusted Deferred Annuity Contract is incorporated herein by
reference to Exhibits filed with Post-Effective Amendment
No. 4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed
November 19, 1993.
10(a) Distribution Agreement between Kemper Investors Life
Insurance Company and Investors Brokerage Services, Inc. is
incorporated herein by reference to Exhibits filed with
Amendment No. 4 to Registration Statement on Form S-1 (File
No. 33-43462) filed on April 14, 1995.
46