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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from N/A to N/A.
Commission file number 333-02491*.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in charter)
ILLINOIS
(State of Incorporation)
ONE KEMPER DRIVE
LONG GROVE, ILLINOIS
(Address of Principal Executive Offices)
36-3050975
(I.R.S. Employer
Identification Number)
60049
(Zip Code)
Registrant's telephone number, including area code: (847) 550-5500
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
>Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___ .
As of March 1, 2000, 250,000 shares of Common Stock (all held by an affiliate,
Kemper Corporation) were outstanding. There is no market value for any such
shares. See ITEM 5 of this Form 10-K.
* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-K also
relates to Commission file numbers 33-33547, 33-43462 and 33-46881.
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PART I
ITEM 1. BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a non-operating
holding company. KILICO and Kemper are wholly-owned subsidiaries of Zurich
Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG and
Allied Zurich p.l.c., fifty-seven percent and forty-three percent, respectively.
Zurich Allied AG is listed on the Swiss Market Index. Allied Zurich p.l.c. is
included in the FTSE-100 Share Index in London.
STRATEGIC INITIATIVES
KILICO's management, operations and strategic directions are integrated with
those of several other Kemper subsidiaries, Federal Kemper Life Assurance
Company ("FKLA"), Zurich Life Insurance Company of America ("ZLICA") and Zurich
Direct, Inc., ("ZD"). This integration streamlines management, controls costs,
improves profitability, increases operating efficiencies and productivity, and
helps to expand the companies' distribution capabilities. Headquartered in Long
Grove, Illinois, FKLA markets term and interest-sensitive life insurance, as
well as certain annuity products through brokerage general agents and other
independent distributors. ZLICA markets term life insurance products primarily
through ZD. ZD is an affiliated direct marketing life insurance agency currently
marketing basic, low-cost term life insurance through various marketing media.
Over the last several years, KILICO increased the competitiveness of its
variable annuity products by adding multiple variable subaccount investment
options and investment managers to existing variable annuity products. In 1997,
KILICO introduced a non-registered individual and group variable bank-owned life
insurance contract ("BOLI") and a series of individual variable life insurance
contracts. In 1998, KILICO introduced a new registered individual variable
annuity product with 37 variable subaccount investment options and various
investment managers.
NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and individual and group variable life insurance products
through various distribution channels. KILICO offers investment-oriented
products, guaranteed returns or a combination of both, to help policyholders
meet multiple insurance and financial objectives. Financial institutions,
securities brokerage firms, insurance agents and financial planners are
important distribution channels for KILICO's products. KILICO's sales mainly
consist of deposits received on certain long duration annuity and variable life
insurance contracts as well as reinsurance premiums assumed from FKLA.
KILICO's fixed and variable annuities generally have surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its existing and new
separate account products. Unlike the fixed-rate annuity business where KILICO
manages spread revenue, such variable products pose minimal investment risk for
KILICO, as policyholders direct their premium to one or more subaccounts that
invest in underlying investment funds. KILICO, in turn, receives administrative
fee revenue on such variable products which compensates KILICO for providing
death benefits potentially in excess of cash surrender values. In addition, on
variable life insurance contracts, cost of insurance charges compensate KILICO
for providing death benefit coverage substantially in excess of surrender
values.
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As a result of this strategy, KILICO's separate account assets and related sales
of its variable annuity and life products have increased over the last couple of
years. KILICO's separate account assets and sales were as follows (in millions):
DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
Separate account assets..................................... $9,778.1 $7,099.2 $5,122.0
======== ======== ========
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
Variable annuity sales...................................... $ 468.9 $ 300.4 $ 259.8
Variable life sales......................................... 1,661.1 1,523.0 2,708.6
-------- -------- --------
Total separate account sales...................... $2,130.0 $1,823.4 $2,968.4
======== ======== ========
During mid-1998, KILICO introduced DESTINATIONS, a registered individual
variable annuity product. DESTINATIONS offers 37 variable subaccount investment
options with various investment managers, ten guarantee period accounts and a
fixed account, dollar cost averaging and a guaranteed retirement income benefit
option.
During mid-1997, KILICO introduced variable BOLI, a group variable life
insurance contract that is primarily marketed to banks and other large corporate
entities. Also in 1997, KILICO issued a series of non-registered variable
individual universal life insurance contracts that are marketed primarily to
high net worth individuals. Significant fluctuations in KILICO's sales of the
variable life products are due mainly to the nature of the BOLI product--high
dollar volume per sale, low frequency of sales--and the uncertainty surrounding
BOLI's tax advantaged status since the release of the Clinton Administration's
fiscal year budgets, from 1998 through 2001.
Investors Brokerage Services, Inc., ("IBS"), a wholly-owned subsidiary of
KILICO, is the principal underwriter and distributor of KILICO's registered
variable annuity and variable life products. IBS, Life Insurance Solutions,
L.L.C., an affiliate, and Benefit Finance Securities, L.L.C., a non-affiliate,
are distributors of KILICO's BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted KILICO's general account fixed annuity sales over
the last several years. KILICO's general account fixed annuity sales were as
follows (in millions):
YEAR ENDED
DECEMBER 31
------------------------
1999 1998 1997
------ ------ ------
General account fixed annuity sales......................... $383.8 $179.9 $145.7
====== ====== ======
KILICO's general account fixed annuity sales increased $203.9 million in 1999,
compared with 1998. This increase is primarily due to strong sales of the new
variable annuity product introduced in mid-1998 that offers both a variable and
a fixed option, including dollar cost averaging. Dollar cost averaging allows
contractholders the option to deposit amounts in the general account and
authorize pro-rated amounts to be automatically transferred into the separate
account over a specified period of time in order to reduce the effects of
significant market fluctuations.
During 1999, 1998 and 1997, KILICO assumed $21.3 million, $21.6 million and
$21.1 million, respectively, of term life insurance premiums from FKLA.
Excluding the amounts assumed from FKLA, KILICO's total term life sales,
including new and renewal premiums, net of reinsurance ceded, amounted to $677
thousand in 1999, compared with $846 thousand in 1998 and $1.1 million in 1997.
FEDERAL INCOME TAX DEVELOPMENTS
In early 2000, the Clinton Administration's Fiscal Year 2001 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore less attractive to those customers who purchase them in
recognition of their favorable tax attributes. Additionally, sales of these
products during 2000 may also be negatively impacted until the likelihood of the
current proposals being enacted into law has been determined.
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NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1999, KILICO had three
ratios outside the usual ranges; the change in capital and surplus ratios, gross
and net, and the change in reserving ratio. KILICO's change in capital and
surplus ratios, both gross and net is due to the payment of dividends to Kemper
in 1999 of $115.0 million. KILICO's change in reserving ratio primarily
reflected the level of interest-sensitive life surrenders and withdrawals during
1999, as well as an increase in individual variable life renewal premiums, as
compared to 1998. The increase in individual variable life renewal premiums in
1999 is mainly due to an increase in sales of individual universal life
insurance in 1998. Other than certain states requesting quarterly financial
reporting and/or explanations of the underlying causes for certain ratios, no
state regulators have taken any action due to KILICO's IRIS ratios for 1999 or
earlier years.
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based capital rules is a risk-based
formula that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. KILICO has capital
levels substantially exceeding any that would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001. KILICO has not quantified
the impact that codification will have on its statutory financial position or
results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
General account annuities................................... $2,729 $2,864
Interest-sensitive life insurance and other................. 671 688
Term life reserves.......................................... 9 9
Ceded future policy benefits................................ 310 345
------ ------
Total............................................. $3,719 $3,906
====== ======
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where KILICO insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with an affiliate, Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces policies not produced by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 1999 and 1998, KILICO's reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $309.7 million and $344.8
million, respectively. Utilizing FKLA's employees, KILICO is the servicing
company for this coinsured business and is reimbursed by FLA for the related
servicing expenses.
During December 1997, KILICO entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, Zurich Insurance Company, Bermuda Branch
("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, KILICO ceded, on a yearly renewable term basis, 90 percent of the net
amount at risk (death benefit payable to the insured less the insured's separate
account cash surrender value) related to BOLI, which is held in KILICO's
separate accounts. As consideration for this reinsurance coverage, KILICO cedes
separate account fees (cost of insurance charges) to ZICBB and retains a portion
of such funds under the terms of the reinsurance agreement in a funds withheld
account which is included as a component of benefits and funds payable in the
accompanying consolidated balance sheets. During 1998, KILICO modified the
reinsurance agreement to increase the reinsurance from 90 percent to 100
percent.
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The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(IN MILLIONS)
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
KILICO has a funds withheld account ("FWA") supporting reserve credits on
reinsurance ceded on the BOLI product. Amendments to the reinsurance contracts
during 1998 changed the methodology used to determine increases to the FWA. A
substantial portion of the FWA was marked-to-market based predominantly upon the
total return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, KILICO recorded a $2.5 million increase to the
FWA related to this mark-to-market. In November 1998, to properly match revenue
and expenses, KILICO had also placed assets supporting the FWA in a segmented
portion of its General Account. This portfolio was classified as "trading" under
Statement of Financial Accounting Standards No. 115 ("FAS 115") at December 31,
1998 and through November 30, 1999. FAS 115 mandates that assets held in a
trading account be valued at fair value, with changes in fair value flowing
through the income statement as realized capital gains and losses. During 1998,
KILICO recorded a realized capital gain of $2.8 million upon transfer of these
assets from "available for sale" to the trading portfolio as required by FAS
115. In addition, KILICO recorded realized capital losses of $7.3 million and
$0.2 million related to the changes in fair value of this portfolio during 1999
and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, KILICO no longer marked-to-market a portion of the
FWA liability and therefore no longer designated the related portion of assets
as "trading". As a result, changes in fair value to the FWA and the assets
supporting the FWA no longer flow through KILICO's operating results.
In 1996, KILICO assumed, on a yearly renewable term basis, term life insurance
from FKLA. As a result of this transaction, KILICO recorded reserves in 1999 and
1998 of approximately $8.0 million and $8.5 million, respectively.
COMPETITION
KILICO is in a highly competitive business. KILICO competes with a large number
of other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principle methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents.
To address its competition, KILICO has adopted certain business strategies.
These include:
- systematic review of investment risk and its capital position
- customer segmentation and focus
- continued focus on existing and new variable annuity and variable life
insurance products
- distribution through diversified channels, and
- ongoing efforts to continue as a low-cost provider of insurance products
and high-quality services to agents and policyholders through the use of
technology
RANKINGS AND RATINGS
According to BEST'S INSURANCE REPORTS, 1999, as of December 31, 1998, KILICO
ranked 60th of 1,282 life insurers by admitted assets; 55th of 984 by insurance
in force; and 68th of 1,206 by net premiums written.
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In October 1997, Zurich announced a planned merger with B.A.T. Industries plc.
In connection with that merger, KILICO's claims-paying ability ratings were
placed on ratings watch with negative implications by certain rating agencies.
However, during 1998 the current ratings were affirmed by each rating agency.
During 1999, KILICO received rating upgrades from both A.M. Best and Standard &
Poor's, primarily due to the perceived long-term strategic benefit of the merger
and the increased financial strength of Zurich and Zurich Kemper Life (discussed
below). KILICO's current ratings and their current status are as follows:
CURRENT RATING CURRENT STATUS
------------------- --------------
A.M. Best Company....................................... A+ (Superior) Affirmed
Moody's Investors Service............................... Aa3 (Excellent) Affirmed
Standard & Poor's....................................... AA+ (Very Strong) Affirmed
EMPLOYEES
At December 31, 1999, KILICO used the services of approximately 940 employees of
FKLA, which are also shared with FLA and ZLICA. KILICO, FKLA, FLA and ZLICA
collectively operate under the trade name Zurich Kemper Life.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where KILICO is licensed to do
business. These departments enforce laws and regulations designed to assure that
insurance companies maintain adequate capital and surplus, manage investments
according to prescribed character, standards and limitations and comply with a
variety of operational standards. The departments also make periodic
examinations of individual companies and review annual and other reports on the
financial condition of each company operating within their respective
jurisdictions. Regulations, which often vary from state to state, cover most
aspects of the life insurance business, including market practices, policy forms
and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, certain of KILICO's variable life insurance and annuity products,
and the related separate accounts, are subject to regulation by the Securities
and Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations. For information on regulatory and other dividend restrictions, see
ITEM 5(c).
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, KILICO has
systematically reduced its investment risk and strengthened its capital
position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Scudder Kemper Investments, Inc. ("SKI") and
its subsidiaries and affiliates. KILICO's real estate-related investments are
handled by a majority-owned Kemper real estate subsidiary. Investment policy is
directed by KILICO's board of directors. KILICO's investment strategies take
into account the nature of each annuity and life insurance product, the
respective crediting rates and the estimated future policy benefit maturities.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in other filings by KILICO with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
KILICO's products and trends in KILICO's operations or financial results, as
well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements
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are subject to known and unknown risks, uncertainties and other factors which
may cause actual results to be materially different from those contemplated by
the forward-looking statements. These factors include, among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the
ability of KILICO to sell its products, the market value of KILICO's
investments and the lapse rate and profitability of KILICO's contracts
(ii) KILICO's ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives
(iii) customer response to new products, distribution channels and marketing
initiatives
(iv) mortality, morbidity, and other factors which may affect the profitability
of KILICO's insurance products
(v) changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of KILICO's products
(vi) increasing competition which could affect the sale of KILICO's products
(vii) regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and
underwriting of insurance products, regulations of the sale and
underwriting and pricing of insurance products, and
(viii) the risk factors or uncertainties listed from time to time in KILICO's
other filings with the SEC
ITEM 2. PROPERTIES
KILICO primarily shares 84,270 sq. ft. of office space leased by FKLA from
Lumbermens Mutual Casualty Company, a former affiliate, ("Lumbermens"), located
in Long Grove, Illinois. KILICO also shares 93,666 sq. ft. of office space
leased by FKLA and ZLICA from Zurich American Insurance Company, an affiliate,
located in Schaumburg, Illinois.
ITEM 3. LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. Based upon the advice of legal counsel, KILICO's management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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) Cash dividends of $29.3 million were declared and paid to Kemper during
1997. Cash dividends of $40.0 million and $55.0 million were declared and paid
to Kemper on October 31, 1998 and December 30, 1998, respectively. Cash
dividends of $20.0 million, $25.0 million and $70.0 million were declared and
paid to Kemper on June 29, 1999, September 29, 1999 and December 29, 1999,
respectively. No additional dividends have been declared or paid through the
date of filing this Form 10-K.
RESTRICTIONS ON DIVIDENDS
Dividend distributions from KILICO to its stockholder are restricted by state
insurance laws. In Illinois, where KILICO is domiciled, if such dividend,
together with other distributions during the 12 preceding months would exceed
the greater of (a) ten percent of the insurer's statutory surplus as regards
policyholders as of the preceding December 31, or (b) the statutorily adjusted
net income for the preceding calendar year, then such proposed dividend must be
reported to the director of insurance at least 30 days prior to the proposed
payment date. The dividend then may be paid only if not disapproved. The
Illinois insurance laws also permit payment of dividends only out of earned
surplus, exclusive of most unrealized capital gains. During 1999, KILICO paid
dividends to Kemper in the amount of $115.0 million, which were approved by the
Illinois Department of Insurance. The maximum amount of dividends which can be
paid by KILICO without prior approval in 2000 is $59.1 million.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1999, and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in ITEM 8 of this Annual Report on Form 10-K. All amounts are shown in
millions.
PREACQUISITION
--------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 JANUARY 4 --------------
1999 1998 1997 1996 1996(2) 1995
----------- ----------- ----------- ----------- --------- --------------
TOTAL REVENUE.......... $ 363.4 $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1)
========= ========= ========= ======== ======== ========
NET INCOME EXCLUDING
REALIZED INVESTMENT
RESULTS.............. $ 51.1 $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2
========= ========= ========= ======== ======== ========
NET INCOME (LOSS)...... $ 44.9 $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1)
========= ========= ========= ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets............... $ 9,778.1 $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1
========= ========= ========= ======== ======== ========
Total assets........... $14,655.7 $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7
========= ========= ========= ======== ======== ========
Future policy
benefits............. $ 3,409.1 $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2
========= ========= ========= ======== ======== ========
Stockholder's equity... $ 630.0 $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9
========= ========= ========= ======== ======== ========
- ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net loss for 1995. These losses reflect a change in KILICO's strategy with
respect to its real estate-related investments resulting from the January 4,
1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
KILICO recorded net income of $44.9 million in 1999, compared with net income of
$65.1 million in 1998 and $38.7 million in 1997. The decrease in net income in
1999, compared with 1998, was due to a significant decrease in net realized
investment results, offset by an increase in operating earnings before
amortization of goodwill.
The following table reflects the components of net income:
NET INCOME
(in millions)
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
------ ------ ------
Operating earnings before amortization of
goodwill................................... $ 63.8 $ 44.1 $ 47.2
Amortization of goodwill..................... (12.7) (12.7) (15.3)
Net realized investment gains (losses)....... (6.2) 33.7 6.8
------ ------ ------
Net income.............................. $ 44.9 $ 65.1 $ 38.7
====== ====== ======
The following table reflects the major components of net realized investment
results included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
------ ------ ------
Real estate-related gains.................... $ 2.7 $ 26.9 $ 12.8
Fixed maturities and write-downs............. (6.3) 1.4 (6.7)
Trading account securities................... (4.7) 1.7 --
Other gains, net............................. 2.1 3.7 0.7
------ ------ ------
Total................................... $ (6.2) $ 33.7 $ 6.8
====== ====== ======
The real estate-related gains over the last three years reflect KILICO's
adoption of Zurich's strategy for disposition of real estate-related
investments. This strategy to reduce exposure to real estate-related
investments, as well as improving real estate market conditions in most areas of
the country, generated the real estate-related gains during the last three
years. Net realized investment losses on fixed maturities in 1999 were primarily
the result of rising interest rates throughout the year leading to lower market
values in fixed maturity investments. Net realized investment gains on fixed
maturities in 1998 were offset by other-than-temporary declines in value of
certain U.S. dollar denominated fixed maturity investments which had significant
exposure to countries in Southeast Asia, as well as other U.S. dollar
denominated securities that had other-than-temporary declines in value in 1998.
The net realized investment losses on fixed maturities generated in 1997 arose
primarily from the sales of lower yielding U.S. Treasury bonds, collateralized
mortgage obligations and corporate bonds, related to ongoing repositionings of
KILICO's fixed maturity investment portfolio. The proceeds from the
repositionings, together with cash and short-term investments, were reinvested
into higher yielding corporate bonds and asset-backed securities in 1997.
Trading account securities were used to manage KILICO's reinsurance strategy on
the BOLI product. Effective November 1, 1998, the methodology used to determine
the increase to the FWA was changed and a substantial portion of this liability
was marked-to-market based predominately upon the total return of the
Governmental Bond Division of KILICO's Series 1 Separate Account. KILICO also
placed assets supporting the FWA in a segmented portfolio and classified this
asset segment as "trading" under Statement of Financial Standards No. 115 ("FAS
115") at December 31, 1998 and through November 30, 1999. During 1998, KILICO
recorded a net realized capital gain of $2.8 million upon transfer of these
assets to the trading portfolio as required by FAS 115. KILICO recorded realized
capital losses of $7.3 million and $0.2 million related to the changes in fair
values of this portfolio during 1999 and 1998, respectively. Due to a change in
the reinsurance strategy related to the BOLI product, effective December 1,
1999, KILICO no longer marked-to-market a portion of the FWA liability and
therefore no longer designated the related portion of assets as "trading". As a
result, changes in fair value to the FWA and the assets supporting the FWA no
longer flow through KILICO's operating results.
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Other realized investment gains, net, relate primarily to the sale of equity
securities as KILICO took advantage of favorable market conditions.
Operating earnings before the amortization of goodwill increased to $63.8
million in 1999, compared with $44.1 million in 1998, primarily due to:
- an increase in spread revenue (investment income earned less interest
credited)
- an increase in separate account fees and charges
- a decrease in claims incurred and other policyholder benefits
- a decrease in the amortization of insurance acquisition costs and value
of business acquired, offset by
- an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997, primarily due to:
- a decrease in separate account fees and charges
- an increase in commissions and operating expenses
- an increase in the amortization of insurance acquisition costs, offset by
- a decrease in taxes, licenses and fees
- an increase in the deferral of insurance acquisition costs, and
- a decrease in the amortization of the value of business acquired
The following table reflects KILICO's sales.
SALES
(in millions)
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
Annuities:
General account.................................... $ 383.8 $ 179.9 $ 145.7
Separate account................................... 468.9 300.4 259.8
-------- -------- --------
Total annuities................................. 852.7 480.3 405.5
-------- -------- --------
Life Insurance:
Separate account bank-owned variable universal life
("BOLI")........................................ 1,622.0 1,501.0 2,700.0
Separate account variable universal life........... 39.1 22.0 8.6
Term life.......................................... 21.9 22.4 22.2
Interest-sensitive life............................ 0.7 .2 --
-------- -------- --------
Total life...................................... 1,683.7 1,545.6 2,730.8
-------- -------- --------
Total sales........................... $2,536.4 $2,025.9 $3,136.3
======== ======== ========
Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. KILICO's
general account annuity sales increased $203.9 million in 1999 when compared
with 1998. This increase is primarily due to strong sales of the new variable
annuity product introduced in the second half of 1998 that offers both a
variable and a fixed option, including dollar cost averaging. Dollar cost
averaging allows contractholders the option to deposit amounts in the general
account and authorize pro-rated amounts to be automatically transferred into the
separate account over a specified period of time in order to reduce the effects
of significant market fluctuations.
Total separate account annuity (variable) sales increased $168.5 million in
1999, compared with 1998, also due to strong sales of the new variable annuity
product mentioned earlier. The increase in variable annuity sales in 1998,
compared with 1997, was due, in part, to the addition of new separate account
investment fund options, the addition of new investment fund managers, a strong
overall underlying stock and bond market and the new variable annuity product
introduced during 1998.
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying investment funds
which
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invest in stocks and bonds. KILICO believes that the increase in its financial
strength and performance ratings in 1999, together with KILICO's association
with Zurich, will continue to assist in KILICO's future sales efforts.
In 1997, KILICO introduced several non-registered variable universal life
insurance contracts, BOLI and a series of individual universal life insurance
contracts. Sales of BOLI increased $121.0 million to $1,622.0 million in 1999,
compared with $1,501.0 million in 1998. Sales of individual variable universal
life insurance increased $17.1 million to $39.1 in 1999, compared with $22.0
million in 1998. Strong sales for these products continue due to favorable tax
treatment afforded these products as well as the opportunity for potentially
higher returns for contractholders. Sales of these separate account variable
products, like variable annuities, pose minimal investment risk for KILICO as
policyholders also direct their premium to one or more subaccounts that invest
in underlying investment funds which invest in stocks and bonds. KILICO receives
premium tax and DAC tax expense loads from certain contractholders, as well as
administrative fees and cost of insurance charges. These fees and charges
compensate KILICO for providing life insurance coverage to the contractholders
potentially in excess of their cash surrender values. Face amount of new
variable universal life insurance business issued amounted to $16.6 billion in
1999, compared with $7.7 billion in 1998 and $59.6 billion in 1997. The decrease
in face amount issued in 1999 and 1998, compared with 1997 is due to a
significant portion of renewal premiums in 1999 and 1998 and higher funded
policies issued in 1999 and 1998, compared to those issued in 1997.
In early 2000, the Clinton Administration's Fiscal Year 2001 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final 2001 Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore no longer attractive to those customers who purchase them because
of their favorable tax attributes. Sales of these products during 2000 may be
negatively impacted until the likelihood of the current proposals being enacted
into law has been determined.
In 1999, 1998 and 1997 KILICO assumed $21.3 million, $21.6 million and $21.1
million, respectively, of term life insurance premiums from FKLA. Excluding the
amounts assumed from FKLA, KILICO's total term life sales, including new and
renewal premiums, amounted to $677 thousand in 1999, compared with $846 thousand
in 1998 and $1.1 million in 1997.
Spread revenue increased in 1999 compared with 1998 and 1997 due to a more
modest decrease in investment income than in interest credited. Investment
income decreased in 1999, compared with 1998 and 1997 due to several factors.
These factors include a decrease in cash and invested assets from the 1998 and
1997 levels, reflecting the surrender and withdrawal activity during the last
three years, dividends paid to Kemper during 1999 and 1998 and the reinvestment
of 1998 sales proceeds and collateralized mortgage obligation ("CMO")
prepayments at lower yields due to the lower interest rate environment in 1998.
Net investment income was also negatively impacted by the placement of a real
estate-related investment on non-accrual status effective January 1, 1999. With
overall interest rates increasing during 1999, sales proceeds, maturities and
prepayments were reinvested at higher yields during 1999.
The decrease in interest credited in 1999, compared with 1998 and 1997, was
primarily due to a decrease in policyholder liabilities due to the surrender and
withdrawal activity over the last three years and a decrease in crediting rates
during 1999 and 1998.
Investment income was also reduced over the last three years reflecting purchase
accounting adjustments related to the amortization of premiums on fixed maturity
investments. Under purchase accounting, the fair value of KILICO's fixed
maturity investments as of January 4, 1996, the date Kemper was acquired by
Zurich became KILICO's new cost basis in the investments. The difference between
the new cost basis and original par is then amortized against investment income
over the remaining effective lives of the fixed maturity investments. As a
result of the interest rate environment as of January 4, 1996, the market value
of KILICO's fixed maturity investments was approximately $133.9 million greater
than original par. Premium amortization decreased investment income by
approximately $7.8 million in 1999, compared with $14.4 million in 1998 and
$15.3 million in 1997.
Included in separate account fees and charges are administrative fees received
from KILICO's separate account products of $46.1 million in 1999, compared with
$38.3 million and $31.0 million in 1998 and 1997, respectively. Administrative
fee revenue increased in each of the last three years due to growth in average
separate account assets.
Also included in separate account fees and charges are cost of insurance ("COI")
charges related to variable universal life insurance, primarily BOLI, of $167.9
million, $167.6 million and $27.6 million in 1999, 1998 and 1997, respectively.
Of these COI charges, $166.4 million, $175.5 million and $24.3 million were
ceded, respectively, to a Zurich affiliated company, Zurich Insurance Company,
Bermuda Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement. Separate account fees and charges in 1999, 1998 and 1997
also include BOLI-related premium tax expense loads of $26.8 million, $29.1
million and $51.1 million, respectively.
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Other income includes surrender charge revenue of $5.0 million in 1999, compared
with $4.0 million and $5.2 million in 1998 and 1997, respectively. The increase
in surrender charge revenue in 1999, compared with 1998, reflects the increased
policyholder surrender and withdrawal activity in the separate accounts during
1999, compared with 1998. Similarly, the decrease in surrender charge revenue in
1998, compared with 1997, reflects the decrease in total general account
policyholder surrenders and withdrawals during 1998, compared with 1997.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
1999 1998 1997
------ ------ ------
General account................................ $564.2 $645.5 $703.1
Separate account............................... 399.8 260.9 236.2
------ ------ ------
Total..................................... $964.0 $906.4 $939.3
====== ====== ======
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income.
General account surrenders, withdrawals and death benefits decreased $81.3
million in 1999, compared with 1998, reflecting a decrease in death benefits as
well as a decrease in overall surrenders and withdrawals.
Separate account surrenders, withdrawals and death benefits increased $138.9
million in 1999, compared with 1998. Contributing to this increase was a partial
withdrawal on a BOLI contract of $39.8 million in 1999. The remaining increase
is primarily due to the growth of assets under management in the separate
account and a related increase in surrenders and withdrawals as contractholders
seek alternative investment options during a period of strong market
performance.
The trend of decreasing policyholder surrenders, withdrawals and death benefits
in the general account and increasing in the separate account reflects a shift
in assets under management from the general account to the separate account over
the past three years, reflecting KILICO's increased emphasis on marketing its
existing and new separate account products.
Taxes, licenses and fees primarily reflect premium taxes on BOLI. Excluding the
taxes due on BOLI, for which KILICO received a corresponding expense load in
separate account fees and other charges, taxes, licenses and fees amounted to
$3.4 million in 1999, compared with $1.5 million in 1998 and $1.5 million in
1997.
Commission expense was higher in 1999, compared with both 1998 and 1997, due to
an increase in total sales.
Operating expenses increased slightly in 1999, to $46.0 million, compared with
$44.6 million and $36.8 million in 1998 and 1997, respectively. Operating
expenses increased in 1998, compared with 1997, as a result of staffing for new
business initiatives, an increase in various outside consulting fees, an
increase in printing and stationary expenses for sales materials and an increase
in data processing expenses.
Data processing expenses related to bringing KILICO's systems in compliance with
the year 2000 amounted to $0.6 million in 1999 and $1.3 million in 1998.
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1999, 1998 and 1997. The deferral of insurance acquisition
costs increased in 1999, compared with both 1998 and 1997, reflecting an
increase in commissions expense and operating expenses related directly to the
increased production of new business over the last several years.
Operating earnings were positively impacted by a decrease in the amortization of
deferred insurance acquisition costs in 1999, compared with 1998. This decrease
was primarily due to significant appreciation in KILICO's separate account
assets due to rising equity markets during 1999, as well as realized capital
losses on post-purchase investments during 1999, compared with realized capital
gains on post-purchase investments during 1998. Appreciation in separate account
assets increases estimated future gross profits, shifting amortization to later
years. Realized capital losses on post-purchase investments decreases current
gross profits and defers amortization into future periods. Realized capital
gains on post-purchase investments increases current gross profits and
accelerates amortization in the current period. The lower amortization in 1997
reflects a smaller deferred insurance acquisition cost asset in 1997. The
deferred insurance acquisition cost asset was $159.7 million, $91.5 million and
$59.5 million at December 31, 1999, 1998 and 1997, respectively.
Deferred insurance acquisition costs, and their related amortization, for
policies sold prior to January 4, 1996 have been replaced under purchase
accounting by the value of business acquired. The value of business acquired
reflects the
11
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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. Deferred insurance
acquisition costs are established on all new policies sold after January 4,
1996.
The amortization of the value of business acquired decreased in 1999, compared
with 1998, as a result of:
- significant appreciation in separate account assets, which increases
estimated future gross profits and shifts amortization to later years
- a decreasing block of business previously acquired, resulting in less
amortization as gross profits on this business decrease, and
- a significant decrease in realized investment results on pre-purchase
investments.
The significant realized capital gains in 1998 increased gross profits for that
period and accelerated the amortization of the value of business acquired during
1998.
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, KILICO began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, KILICO changed its amortization period
to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, KILICO recorded an
increase in amortization expense of $5.1 million during 1997.
OPERATIONS BY BUSINESS SEGMENT
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 establishes
standards for how to report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
KILICO, FKLA, ZLICA, and FLA operate under the trade name Zurich Kemper Life.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS has each SBU concentrate on a specific customer market.
The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level
that Zurich Kemper Life can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. For purposes of operating
segment disclosure, Zurich Kemper Life includes the operations of Zurich Direct,
Inc., an affiliated direct marketing life insurance agency and excludes FLA, as
it is owned by its policyholders.
Zurich Kemper Life is segregated into the Life Brokerage, Financial, Retirement
Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at the legal
entity level, but rather at the Zurich Kemper Life level. Since Zurich Kemper
Life's SBUs cross legal entity lines, as certain similar products are sold by
more than one legal entity, discussion regarding results of operations in this
Form 10-K relate solely to KILICO. The vast majority of KILICO's business is
derived from the Financial and RSG SBUs. The contributions of Zurich Kemper
Life's SBUs to combined revenues, operating results and certain balance sheet
data pertaining thereto, are shown in the Notes to Consolidated Financial
Statements.
The principle products and markets of the Financial and RSG SBUs are as follows:
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners. Institutional business includes BOLI and funding agreements (included
in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
fixed and variable annuities to K-12 schoolteachers, administrators, and
healthcare workers, along with college professors and certain employees of
selected non-profit organizations. This target market is eligible for what the
IRS designates as retirement-oriented savings or investment plans that qualify
for special tax treatment.
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INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors:
- its evaluation of risk and return in various markets
- consistency with KILICO's business strategy and investment guidelines
approved by the board of directors
- the interest rate environment
- liability durations, and
- changes in market and business conditions
INVESTED ASSETS AND CASH
(in millions)
DECEMBER 31 DECEMBER 31
1999 1998
------------------ ------------------
Cash and short-term investments............................. $ 54 1.4% $ 72 1.7%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........................................ 2,164 56.5 2,663 63.7
NAIC(1) Class 2........................................ 994 25.9 724 17.3
Below investment grade (NAIC classes 3 through 6):
Performing............................................. 118 3.1 96 2.3
Trading account securities.................................. -- -- 102 2.4
Joint venture mortgage loans................................ 67 1.8 66 1.6
Third-party mortgage loans.................................. 64 1.7 76 1.8
Other real estate-related investments....................... 21 0.5 22 0.5
Policy loans................................................ 262 6.8 271 6.5
Equity securities........................................... 62 1.6 67 1.6
Other....................................................... 25 0.7 24 0.6
------ ----- ------ -----
Total(2).......................................... $3,831 100.0% $4,183 100.0%
====== ===== ====== =====
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized depreciation on fixed maturities at December 31, 1999 was $121.2
million, compared with unrealized appreciation of $61.3 million at December 31,
1998. KILICO does not record tax benefits related to aggregate unrealized
depreciation on investments. Fair values are sensitive to movements in interest
rates and other economic developments and can be expected to fluctuate, at times
significantly, from period to period.
At December 31, 1999, investment-grade fixed maturities, cash and short-term
investments accounted for 83.8 percent of KILICO's invested assets and cash,
compared with 82.7 percent at December 31, 1998. Approximately 45.9 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1999,
compared with 53.4 percent at December 31, 1998.
Approximately 20.0 percent of KILICO's investment-grade fixed maturities at
December 31, 1999 were mortgage-backed securities, down from 28.0 percent at
December 31, 1998, due to sales and paydowns during 1999. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
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mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
Approximately 16.8 percent and 15.4 percent of KILICO's investment-grade fixed
maturities at December 31, 1999 and 1998, respectively, consisted of corporate
asset-backed securities. The majority of KILICO's investments in asset-backed
securities were backed by home equity loans (24.0%), commercial mortgage-backed
securities (22.8%), manufactured housing loans (12.5%), other commercial assets
(11.3%), and collateralized loan and bond obligations (10.6%).
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of KILICO's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums. Accelerated
amortization would result in reductions of investment income related to such
securities.
At December 31, 1999 and 1998, KILICO had unamortized premiums and discounts
related to mortgage-backed and asset-backed securities as follows (in millions):
DECEMBER 31
-----------------
1999 1998
----- -----
Unamortized premiums........................................ $11.6 $15.8
===== =====
Unamortized discounts....................................... $ 6.5 $ 4.6
===== =====
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1999 2000 2001 2002 2003 2004 THEREAFTER 1999
------------- ------------ ----- ----- ----- ------ ------ ---------- ------------
Fixed Maturities:
Mortgage-backed bonds..... $ 630.4 $19.6 $21.6 $47.3 $149.5 $135.2 $257.2 $ 630.4
Average yield.......... 6.61% 6.61% 6.63% 6.63% 6.67% 7.09% 7.14% 6.61%
Asset-backed bonds........ $ 409.8 $11.4 $27.0 $33.6 $ 48.8 $ 39.0 $250.0 $ 409.8
Average yield.......... 7.11% 7.17% 7.25% 7.18% 7.16% 7.34% 7.60% 7.11%
CMBs...................... $ 120.7 $ -- $ -- $ -- $ -- $ -- $120.7 $ 120.7
Average yield.......... 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.73% 6.75%
-------- --------
$1,160.9 $1,160.9
======== ========
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ---------------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1998 1999 2000 2001 2002 2003 THEREAFTER 1998
------------- ------------ ------ ----- ----- ----- ------ ---------- ------------
Fixed Maturities:
Mortgage-backed bonds........ $ 946.7 $137.2 $85.7 $48.3 $47.7 $149.6 $478.2 $ 946.7
Average yield............. 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45%
Asset-backed bonds........... $ 407.4 $ 17.9 $36.1 $49.8 $36.1 $ 31.9 $235.6 $ 407.4
Average yield............. 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67%
CMBs......................... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5
Average yield............. 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25%
-------- --------
$1,469.6 $1,469.6
======== ========
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The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1999, is 4.5 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .26
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately .93 of a year.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1998, was 4.0 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately .65 of
a year, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.45 years.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 48 issuers at December 31, 1999, totaled 3.1 percent
of cash and invested assets at December 31, 1999 and 2.3 percent at December 31,
1998. Below investment-grade securities are generally unsecured and often
subordinated to other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers. KILICO's strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for higher-
quality investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $151.6 million real estate-related portfolio held by KILICO, consists of
joint venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1999, compared with $164.4 million, or 3.9
percent, at December 31, 1998. The decrease in real estate-related investments
during 1999 was primarily due to sales and loan paydowns.
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $29.8 million at December 31, 1999. This amount represented a net decrease
of $34.6 million since December 31, 1998, primarily due to the cancellation of
several standby financing commitments in 1999. As of December 31, 1999, KILICO
expects to fund approximately $0.1 million of these legal commitments, along
with providing capital to existing projects. The disparity between total legal
commitments and the amount expected to be funded relates principally to standby
financing arrangements that provide credit enhancements to certain tax-exempt
bonds. KILICO does not currently expect to fund these commitments. The total
legal commitments, along with estimated working capital requirements, are
considered in KILICO's evaluation of reserves and write-downs.
Excluding the $0.9 million of net equity investments in joint ventures, KILICO's
real estate loans totaled $150.7 million at December 31, 1999, after reserves
and write-downs. Of this amount, $74.4 million are on accrual status with a
weighted average interest rate of approximately 7.85 percent. Of these accrual
loans:
- 15.6 percent have terms requiring current periodic payments of their full
contractual interest
- 84.4 percent require only partial payments or payments to the extent of
borrowers' cash flow.
The equity investments in real estate at December 31, 1999 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate of an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain joint ventures.
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REAL ESTATE PORTFOLIO
(in millions)
OTHER REAL ESTATE-
MORTGAGE LOANS RELATED INVESTMENTS
---------------- ----------------------
JOINT THIRD- OTHER EQUITY
VENTURE PARTY LOANS(2) INVESTMENTS TOTAL
------- ------ -------- ----------- ------
Balance at December 31, 1998............................ $65.8 $ 76.5 $20.9 $ 1.2 $164.4(1)
Additions (deductions):
Fundings................................................ 0.3 -- -- -- 0.3
Interest added to principal............................. 3.5 0.4 -- -- 3.9
Sales/paydowns/distributions............................ (2.4) (13.0) (4.2) (0.5) (20.1)
Operating gain.......................................... -- -- -- 0.1 0.1
Net realized investments gains.......................... 0.8 3.3 -- 0.1 4.2(3)
Other transactions, net................................. (0.8) (3.3) 2.9 -- (1.2)(3)
----- ------ ----- ----- ------
Balance at December 31, 1999............................ $67.2 $ 63.9 $19.6 $ 0.9 $151.6(4)
===== ====== ===== ===== ======
- ---------------
(1) Net of $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Included in this amount is $2.9 million of contingent interest payments
related to a 1995 real estate sale. These payments were recorded as realized
investment gains and then deducted from other transactions because they did
not affect the carrying value.
(4) Net of $23.7 million reserve and write-downs. Excludes $0.6 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships.
As a result of KILICO's ongoing strategy to reduce its exposure to real
estate-related investments, as of December 31, 1999, KILICO had investments in
three projects that accounted for approximately 92.3 percent of KILICO's $151.6
million real estate-related portfolio.
The largest of these investments at December 31, 1999 amounted to $63.9 million
and consisted of second mortgages on nine hotel properties, one office building,
and one retail property. Patrick M. Nesbitt or his affiliates, a third-party
real estate developer, have ownership interests in these properties. These
properties are geographically dispersed and the current market values of the
underlying properties substantially exceed the balances due on KILICO's
mortgages. These loans are on accrual status.
KILICO's loans to a master limited partnership (the "MLP") between subsidiaries
of Kemper and subsidiaries of Lumbermens, amounted to $55.4 million at December
31, 1999. The MLP's underlying investment primarily consists of a water
development project located in California's Sacramento River Valley. This
project is currently in the final stages of a permit process with various
Federal and California State agencies which will impact the long-term economic
viability of the project. Loans to the MLP were placed on non-accrual status at
the beginning of 1999 to ensure that book value of the MLP did not increase over
net realizable value.
The remaining significant real estate-related investment amounted to $20.7
million at December 31, 1999 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, KILICO has placed these real estate-related investments on nonaccrual
status. KILICO is currently pursuing the zoning of all remaining unzoned
properties, as well as pursuing steps to sell all remaining zoned properties.
However, due to the state of Hawaii's economy, which has lagged behind the
economic expansion of most of the rest of the United States, KILICO anticipates
that it could be several additional years until it completely disposes of all
investments in Hawaii.
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments observable market price, net of
estimated selling costs. Because KILICO's real estate review process includes
estimates involving changing economic conditions and other factors, there can be
no assurance that current estimates will prove
16
18
accurate over time. KILICO's real estate-related investments are expected to
continue to decline further through future sales and paydowns. KILICO's net
income could be reduced in future periods if:
- real estate market conditions worsen in areas where KILICO's portfolio is
located
- Kemper's and KILICO's plans with respect to certain projects change, or
- necessary construction or zoning permits are not obtained.
KILICO's only troubled real estate-related investments were loans on nonaccrual
status, before reserves and write-downs, totaling $98.3 million and $37.4
million at December 31, 1999 and 1998, respectively. KILICO does not accrue
interest on real estate-related investments when it judges that the likelihood
of interest collection is doubtful. Loans on nonaccrual status after reserves
and write-downs amounted to $76.3 million and $31.8 million at December 31, 1999
and 1998, respectively. The increase in nonaccrual loans in 1999, compared with
1998, is due to the previously discussed placement of loans to the MLP on
nonaccrual status at the beginning of 1999.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $264.6 million in 1999, compared
with $273.5 million in 1998 and $296.2 million in 1997. This includes KILICO's
share of the operating losses from equity investments in real estate consisting
of other income less depreciation, interest and other expenses. Such operating
results exclude interest expense on loans that are on nonaccrual status. As
previously discussed, KILICO's net investment income in 1999, 1998 and 1997, has
been negatively impacted by purchase accounting adjustments.
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
---- ---- ----
Fixed maturities...................................... $-- $0.3 $0.5
Real estate-related investments....................... 9.9 3.2 3.9
---- ---- ----
Total.......................................... $9.9 $3.5 $4.4
==== ==== ====
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Any increase in
nonperforming securities, and either worsening or stagnant real estate
conditions, would increase the expected adverse effect on KILICO's future
investment income and realized investment results.
REALIZED INVESTMENT RESULTS
Net income reflects after-tax realized investment losses of $6.2 million in
1999, and after-tax realized investment gains of $33.7 million and $6.8 million
in 1998 and 1997, respectively. Included in the after-tax realized investment
losses are trading account security losses of $4.7 million in 1999. As
previously discussed, KILICO segregated a portion of its General Account
investment portfolio in the first eleven months of 1999 into a "trading" account
under FAS 115. FAS 115 mandates that assets held in a trading account be valued
at fair value, with changes in fair value flowing through the income statement
as realized capital gains and losses. Also, as previously discussed, effective
December 1, 1999, KILICO no longer segregated its General Account investment
portfolio as "trading". As a result, all investments previously designated as
"trading" are currently classified as available for sale and changes in fair
value to the FWA and the assets supporting the FWA no longer flow through
KILICO's operating results.
Unrealized gains and losses on fixed maturity investments that are available for
sale are not reflected in KILICO's net income. These changes in unrealized value
are recorded as a component of accumulated other comprehensive income, net of
any applicable income taxes. If, and to the extent, a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates involving changing economic conditions and
other factors, there can be no assurance that current estimates will prove
accurate over time.
17
19
A valuation allowance has been established to reduce the deferred tax asset for
investment losses to a net realizable amount. The valuation allowance is
evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1997, before declining in 1998.
During 1998, the Federal Open Market Committee lowered interest rates three
times. This trend was reversed in 1999 when the Federal Open Market Committee
raised rates three times over the course of the year, resulting in a flatter
yield curve due to higher short-term interest rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield.
This can result in narrower spreads.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses. A
declining interest rate environment can decrease net investment income as well
as contribute to both realized and unrealized fixed maturity investment gains.
Also, lower renewal crediting rates on annuities, compared with competitors'
higher new money crediting rates, have influenced certain annuity holders to
seek alternative products. KILICO mitigates this risk somewhat by charging
surrender fees, which decrease over time, when annuity holders withdraw funds
prior to maturity on certain annuity products. Approximately 36 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1999,
however, were no longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
During 1999, KILICO received rating upgrades from both A.M. Best and Standard &
Poor's, primarily due to the perceived long-term strategic benefit of the merger
and the increased financial strength of Zurich and Zurich Kemper Life.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $630.0 million at December 31, 1999, compared with
$853.9 million at December 31, 1998 and $865.6 million at December 31, 1997. The
decrease in stockholder's equity in 1999 was primarily due to a decrease in
accumulated other comprehensive income (loss) of $153.8 million and dividends of
$115.0 million paid to Kemper, offset by net income of $44.9 million. The
decrease in accumulated other comprehensive income (loss) was primarily related
to unrealized depreciation of KILICO's fixed maturity investment portfolio due
to rising interest rates during 1999. The decrease in stockholder's equity in
1998 was primarily due to dividends of $95.0 million paid to Kemper during 1998.
This decrease was offset by 1998 net income of $65.1 million and an increase of
$20.3 million in accumulated other comprehensive income. The increase in
accumulated other comprehensive income was primarily related to the increase in
unrealized appreciation of KILICO's fixed maturity investment portfolio due to
falling interest rates during 1998.
18
20
EMERGING ISSUE
In June 1998, the FASB issued Statement of Financial Accounting Standard 133,
("FAS 133") ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In
June 1999, the FASB issued Statement of Financial Accounting Standard 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133. This statement defers the effective
date of FAS 133 to fiscal quarters of fiscal years beginning after June 15,
2000. KILICO has not determined the impact that implementation of FAS 133 would
have on its results of operations or financial position, however, the impact of
implementation is not expected to be material.
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE(S)
-------
Reports of Independent Public Accountants................... 20
Consolidated Balance Sheets, December 31, 1999 and 1998..... 21
Consolidated Statements of Operations, three years ended
December 31, 1999......................................... 22
Consolidated Statements of Comprehensive Income, three years
ended December 31, 1999................................... 23
Consolidated Statements of Stockholder's Equity, three years
ended December 31, 1999................................... 24
Consolidated Statements of Cash Flows, three years ended
December 31, 1999......................................... 25
Notes to Consolidated Financial Statements.................. 26-42
Financial Statement Schedules:
Supplementary Insurance Information....................... 49
Reinsurance............................................... 50
Valuation and Qualifying Accounts......................... 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kemper Investors Life Insurance Company and subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 2000
20
22
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1999, $3,397,188, December
31, 1998, $3,421,535)..................................... $3,276,017 $ 3,482,820
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... -- 101,781
Equity securities (cost: December 31, 1999, $65,235;
December 31, 1998,
$66,776).................................................. 61,592 66,854
Short-term investments...................................... 42,391 58,334
Joint venture mortgage loans................................ 67,242 65,806
Third-party mortgage loans.................................. 63,875 76,520
Other real estate-related investments....................... 20,506 22,049
Policy loans................................................ 261,788 271,540
Other invested assets....................................... 25,621 23,645
----------- -----------
Total investments................................. 3,819,032 4,169,349
Cash........................................................ 12,015 13,486
Accrued investment income................................... 127,219 124,213
Goodwill.................................................... 203,907 216,651
Value of business acquired.................................. 119,160 118,850
Deferred insurance acquisition costs........................ 159,667 91,543
Deferred income taxes....................................... 93,502 35,059
Reinsurance recoverable..................................... 309,696 344,837
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 29,950 23,029
Assets held in separate accounts............................ 9,778,068 7,099,204
----------- -----------
Total assets...................................... $.14,655,716 $12,239,721
=========== ===========
LIABILITIES
Future policy benefits...................................... $3,718,833 $ 3,906,391
Other policyholder benefits and funds payable............... 457,328 318,369
Other accounts payable and liabilities...................... 71,482 61,898
Liabilities related to separate accounts.................... 9,778,068 7,099,204
----------- -----------
Total liabilities................................. 14,025,711 11,385,862
----------- -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares..... 2,500 2,500
Additional paid-in capital.................................. 804,347 804,347
Accumulated other comprehensive income (loss)............... (120,819) 32,975
Retained earnings (deficit)................................. (56,023) 14,037
----------- -----------
Total stockholder's equity........................ 630,005 853,859
----------- -----------
Total liabilities and stockholder's equity........ $14,655,716 $12,239,721
=========== ===========
See accompanying notes to consolidated financial statements.
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23
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
REVENUE
Net investment income....................................... $264,640 $273,512 $296,195
Realized investment gains (losses).......................... (9,549) 51,868 10,546
Premium income.............................................. 21,990 22,346 22,239
Separate account fees and charges........................... 74,715 61,982 85,413
Other income................................................ 11,623 10,031 11,087
-------- -------- --------
Total revenue..................................... 363,419 419,739 425,480
-------- -------- --------
BENEFIT AND EXPENSES
Interest credited to policyholders.......................... 162,243 176,906 199,782
Claims incurred and other policyholder benefits............. 18,185 28,029 28,372
Taxes, licenses and fees.................................... 30,234 30,292 52,608
Commissions................................................. 67,555 39,046 32,602
Operating expenses.......................................... 45,989 44,575 36,837
Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177)
Amortization of insurance acquisition costs................. 5,524 12,082 3,204
Amortization of value of business acquired.................. 12,955 17,677 24,948
Amortization of goodwill.................................... 12,744 12,744 15,295
-------- -------- --------
Total benefits and expenses....................... 285,615 314,786 355,471
-------- -------- --------
Income before income tax expense............................ 77,804 104,953 70,009
Income tax expense.......................................... 32,864 39,804 31,292
-------- -------- --------
Net income........................................ $ 44,940 $ 65,149 $ 38,717
======== ======== ========
See accompanying notes to consolidated financial statements.
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24
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717
--------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802
Adjustment to value of business acquired.................. 12,811 (9,332) (28,562)
Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680)
--------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... (161,730) 13,178 29,560
--------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................. 16,651 6,794 (9,016)
Adjustment for amortization of premium on fixed
maturities included in net investment income.......... (10,533) (17,064) (17,866)
Adjustment for (gains) losses included in amortization
of value of business acquired......................... (454) (7,378) (2,353)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs........................ 1,892 (463) (355)
--------- -------- --------
Total reclassification adjustments for items
included in net income.......................... 7,556 (18,111) (29,590)
--------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... (169,286) 31,289 59,150
Related income tax expense (benefit)........................ (15,492) 10,952 (985)
--------- -------- --------
Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135
--------- -------- --------
Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852
========= ======== ========
See accompanying notes to consolidated financial statements.
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25
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
DECEMBER 31
-----------------------------------
1999 1998 1997
--------- -------- --------
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538
Capital contributions from parent........................... -- 4,261 45,000
Adjustment to prior period capital contribution from
parent.................................................... -- (6,452) --
--------- -------- --------
End of period..................................... 804,347 804,347 806,538
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 32,975 12,637 (47,498)
Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135
--------- -------- --------
End of period..................................... (120,819) 32,975 12,637
--------- -------- --------
RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421
Net income.................................................. 44,940 65,149 38,717
Dividends to parent......................................... (115,000) (95,000) (29,250)
--------- -------- --------
End of period..................................... (56,023) 14,037 43,888
--------- -------- --------
Total stockholder's equity........................ $ 630,005 $853,859 $865,563
========= ======== ========
See accompanying notes to consolidated financial statements.
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26
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
----------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 44,940 $ 65,149 $ 38,717
Reconcilement of net income to net cash provided:
Realized investment (gains) losses..................... 9,549 (51,868) (10,546)
Net change in trading account securities............... (51,239) (6,727) --
Interest credited and other charges.................... 158,557 173,958 198,206
Deferred insurance acquisition costs, net.............. (64,290) (34,483) (34,973)
Amortization of value of business acquired............. 12,955 17,677 24,948
Amortization of goodwill............................... 12,744 12,744 15,295
Amortization of discount and premium on investments.... 11,157 17,353 17,866
Deferred income taxes.................................. (42,952) (12,469) (99,370)
Net change in current federal income taxes............. (10,594) (73,162) 97,386
Benefits and premium taxes due related to separate
account bank-owned life insurance..................... 149,477 123,884 180,546
Other, net (11,901) (41,477) 17,168
----------- ----------- ---------
Net cash provided from operating activities....... 218,403 190,579 445,243
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 335,735 491,699 229,208
Fixed maturities sold prior to maturity................ 1,269,290 882,596 633,872
Equity securities...................................... 11,379 107,598 --
Mortgage loans, policy loans and other invested
assets................................................ 75,389 180,316 131,866
Cost of investments purchased or loans originated:
Fixed maturities....................................... (1,455,496) (1,319,119) (606,028)
Equity securities...................................... (8,703) (83,303) --
Mortgage loans, policy loans and other invested
assets................................................ (43,665) (66,331) (76,350)
Short-term investments, net............................... 15,943 177,723 (164,361)
Net change in receivable and payable for securities
transactions........................................... -- (677) 29,746
Net change in other assets................................ (2,725) -- 244
----------- ----------- ---------
Net cash provided from investing activities....... 197,147 370,502 178,197
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 383,874 180,124 145,687
Withdrawals............................................ (694,848) (649,400) (745,510)
Capital contributions from parent......................... -- 4,261 45,000
Dividends to parent....................................... (115,000) (95,000) (29,250)
Other..................................................... 8,953 (11,448) (18,275)
----------- ----------- ---------
Net cash used in financing activities............. (417,021) (571,463) (602,348)
----------- ----------- ---------
Net increase (decrease) in cash.............. (1,471) (10,382) 21,092
CASH, beginning of period................................... 13,486 23,868 2,776
----------- ----------- ---------
CASH, end of period......................................... $ 12,015 $ 13,486 $ 23,868
=========== =========== =========
See accompanying notes to consolidated financial statements.
25
27
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). Kemper and the Company are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG
and Allied Zurich p.l.c., fifty-seven percent and forty-three percent,
respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied
Zurich p.l.c. is included in the FTSE-100 Share Index in London.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements in order for them to conform to the 1999
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 1999, 1998 and 1997, have been
prepared in conformity with accounting principles generally accepted in the
United States.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that could affect the reported amounts of assets and liabilities
as well as the disclosure of contingent assets or liabilities at the date of the
financial statements. As a result, actual results reported as revenue and
expenses could differ from the estimates reported in the accompanying financial
statements. As further discussed in the accompanying notes to the consolidated
financial statements, significant estimates and assumptions affect goodwill,
deferred insurance acquisition costs, the value of business acquired, provisions
for real estate-related losses and reserves, other-than-temporary declines in
values for fixed maturities, the valuation allowance for deferred income taxes
and the calculation of fair value disclosures for certain financial instruments.
GOODWILL
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1999, the Company
believes that no such adjustment is necessary.
In December of 1997, the Company changed its amortization period from
twenty-five years to twenty years in order to conform to Zurich's accounting
practices and policies. As a result of the change in amortization periods, the
Company recorded an increase in goodwill amortization expense of $5.1 million
during 1997.
VALUE OF BUSINESS ACQUIRED
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or
26
28
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract rate on the value of business acquired. The estimated amortization and
accretion of interest for the value of business acquired for each of the years
through December 31, 2004 are as follows:
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ------------