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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, 2000.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 333-02491*.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in charter)
ILLINOIS 36-3050975
(State of Incorporation) (I.R.S. Employer Identification
Number)
1 KEMPER DRIVE 60049
LONG GROVE, ILLINOIS (Zip Code)
(Address of Principal Executive
Offices)
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, 2001, 250,000 shares of Common Stock (all held by an
affiliate, Kemper Corporation) were outstanding. There is no market value for
any such shares. See ITEM 5 of this Form 10-K.
* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-K
also relates to Commission file numbers 333-22389 and 333-32632.
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PART I
Item 1. Business
Corporate structure
Kemper Investors Life Insurance Company, founded in 1947, is incorporated
under the insurance laws of the State of Illinois and is licensed in the
District of Columbia and all states except New York. Kemper Investors Life
Insurance Company and its subsidiaries (collectively, "KILICO", "the Company",
"we", "our" or "us") is a wholly-owned subsidiary of Kemper Corporation
("Kemper"), a non-operating holding company. Kemper is a wholly-owned
subsidiary of Zurich Group Holding ("ZGH" or "Zurich"), a Swiss holding
company, formerly known as Zurich Financial Services. ZGH is wholly-owned by
Zurich Financial Services ("ZFS"), a new Swiss holding company. ZFS was
formerly Zurich Allied AG, which was merged with Allied Zurich p.l.c. in
October 2000.
Strategic initiatives
Our management, operations and strategic directions are integrated with
those of several other Kemper subsidiaries:
. Federal Kemper Life Assurance Company ("FKLA")
. Zurich Life Insurance Company of America ("ZLICA"), and
. Zurich Direct, Inc. ("ZD")
This integration streamlines management, controls costs, improves
profitability, increases operating efficiencies and productivity, and helps to
expand the companies' distribution capabilities. Headquartered in Long Grove,
Illinois, FKLA markets term and interest-sensitive life insurance, as well as
certain annuity products, including non-surrenderable funding agreements,
primarily through brokerage general agents and other independent distributors.
ZLICA primarily 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, we have increased the competitiveness of our
variable annuity products by adding multiple variable subaccount investment
options and investment managers to existing variable annuity products. In
1997, we 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, we introduced a new registered individual
variable annuity product with 37 variable subaccount investment options and
various investment managers.
In 2000, several new products were introduced. We introduced a registered
individual and group variable annuity, a registered flexible premium variable
universal life product, and an individual and group fixed annuity.
In 2000, as part of our plan to sharpen our focus on the group retirement
market, we purchased PMG Securities Corporation, PMG Asset Management, Inc.,
PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively "PMG"), for $5.5
million. PMG is a well-respected broker-dealer in the eastern part of the
country. We own 100% of the stock of PMG.
Also in 2000, we transferred $63.3 million in fixed maturities and cash to
fund the operations of our newly formed subsidiary, Zurich Kemper Life
Insurance Company of New York ("ZKLICONY"). ZKLICONY received its insurance
license from the state of New York in January 2001 and expects to begin
writing business in the second quarter of 2001.
1
Narrative description of business
We offer both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual and
group term life, universal life and individual and group variable (separate
account) life insurance products through various distribution channels. We
offer investment-oriented products, guaranteed returns or a combination of
both, to help policyholders meet multiple insurance and financial objectives.
Financial institutions, securities brokerage firms, insurance agents and
financial planners are important distribution channels for our products. Our
sales mainly consist of deposits received on certain long duration fixed and
variable annuities and variable life insurance contracts.
Our fixed and variable annuities generally have surrender charges that are
a specified percentage of policy values and decline as the policy ages.
General account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, we have increased our emphasis on marketing our existing and new
separate account products. Unlike the fixed-rate annuity business where we
manage spread revenue, such variable products pose minimal investment risk for
us, as policyholders direct their premium to one or more subaccounts that
invest in underlying investment funds that invest in stocks and bonds. We, in
turn, receive administrative fee revenue on such variable products, which
compensates us for providing death benefits potentially in excess of cash
surrender values. In addition, on variable life insurance contracts, cost of
insurance charges compensate us for providing death benefit coverage
substantially in excess of surrender values.
As a result of this strategy, our separate account assets and related sales
of our variable annuity products have increased over the last couple of years.
Our separate account assets and sales were as follows (in millions):
December 31,
---------------------------
2000 1999 1998
--------- -------- --------
Separate account assets...................... $11,179.6 $9,778.1 $7,099.2
========= ======== ========
Year Ended December 31,
---------------------------
2000 1999 1998
--------- -------- --------
Variable annuity sales (1)................... $ 1,160.5 $ 758.6 $ 393.1
Variable life sales.......................... 856.1 1,661.1 1,523.0
--------- -------- --------
Total separate account sales................. $ 2,016.6 $2,419.7 $1,916.1
========= ======== ========
- --------
(1) Includes the fixed account option of the variable contracts totaling
$339.6 million, $289.7 million and $92.7 million in 2000, 1999 and 1998,
respectively. The fixed account option is primarily used for dollar cost
averaging into the separate account investment options. This allows
contractholders the option to allocate amounts to the fixed account option
and authorize pro-rated amounts to be automatically transferred into the
separate account investment options over a specified period of time in
order to reduce the effects of significant market fluctuations.
In 2000, several new products were introduced. Zurich Preferred, a
registered individual and group variable and market value adjusted deferred
annuity, offers investors 27 different variable subaccount investment options
with various investment managers. Zurich Kemper Lifeinvestor, a registered
flexible premium variable universal life product, permits policyholders to
allocate premiums among 31 different subaccount investment options with
various investment managers. We also introduced a new individual and group
fixed annuity, Zurich Classic.
During mid-1998, we introduced DESTINATIONSSM, a registered individual and
group variable, fixed and market value adjusted deferred annuity product.
DESTINATIONSSM currently offers 37 variable subaccount investment options with
various investment managers, ten guarantee periods, a fixed account option,
dollar cost averaging and a guaranteed retirement income benefit option.
2
During mid-1997, we introduced variable BOLI, a group variable life
insurance contract that is primarily marketed to banks and other large
corporate entities. Also in 1997, we issued a series of non-registered
variable individual universal life insurance contracts that are marketed
primarily to high net worth individuals. Significant fluctuations in our sales
of the variable life products are due mainly to the nature of the BOLI
product--high dollar volume per sale, low frequency of sales--and any
potential changes to BOLI's tax advantaged status as proposed in the release
of the Federal government's fiscal budgets.
Investors Brokerage Services, Inc., ("IBS"), our wholly-owned subsidiary,
and our affiliated broker-dealer, BFP Securities, L.L.C., are the principal
underwriters of our registered variable annuity and variable life products.
BFP Securities, L.L.C., is also the primary distributor of our BOLI and high
net worth products.
Current crediting rates, a conservative investment strategy, the interest
rate environment and the equity markets have impacted our fixed annuity sales
over the last several years. Our fixed annuity sales were as follows (in
millions):
Year Ended
December 31,
------------------
2000 1999 1998
------ ----- -----
Fixed annuity sales.................................... $168.6 $96.3 $89.3
====== ===== =====
KILICO's fixed annuity sales increased $72.3 million in 2000, compared with
1999. This increase is primarily a result of investors seeking a more stable
return on their investments during a time of market volatility.
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, 2000, we had three
ratios outside the usual ranges; the change in premium ratio, the change in
product mix ratio and the change in reserving ratio. The results for the
change in the premium ratio and the change in the product mix ratio reflect
the following items:
. Recapture of term life insurance business assumed from FKLA (discussed
below in Reserves and reinsurance)
. Assumption of $100.0 million of funding agreement business from FKLA
(discussed below in Reserves and reinsurance)
. Increased sales of the DESTINATIONSSM product, and
. Decreased BOLI sales
The result for the change in the reserving ratio is primarily caused by the
recapture of the term business assumed from FKLA and the increase in
individual variable universal life renewal premiums in 2000, compared to 1999.
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 our IRIS ratios for 2000 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
3
that assets supporting reserves are adequate to cover liabilities under a
variety of economic scenarios. The focus of risk-based capital rules is a
risk-based formula that applies prescribed factors to various risk elements in
an insurer's business and investments to develop a minimum capital requirement
designed to be proportional to the amount of risk assumed by the insurer. We
have capital levels substantially exceeding any that would mandate action
under the risk-based capital rules and are in compliance with applicable asset
adequacy rules.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification") guidance, which replaces the Accounting Practices
and Procedures manual as the NAIC's primary guidance on statutory accounting
as of January 1, 2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting
in some areas. The Illinois Insurance Department has adopted the Codification
guidance, effective January 1, 2001. Our statutory surplus will be positively
impacted upon adoption as a result of the net effect of recording a deferred
tax asset, of non-admitting non-operating system software and of non-admitting
net affiliated receivables and other changes caused by the Codification.
Reserves and reinsurance
The following table provides a breakdown of our reserves for future policy
benefits by product type (in millions):
December 31, December 31,
2000 1999
------------ ------------
General account annuities....................... $2,635 $2,729
Interest-sensitive life insurance and other..... 643 671
Term life reserves.............................. -- 9
Ceded future policy benefits.................... 310 310
------ ------
Total....................................... $3,588 $3,719
====== ======
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where we insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with 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 issues policies not issued by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 2000 and 1999, our reinsurance reserve credit from FLA relating to these
coinsurance transactions totaled approximately $262.1 million and $309.7
million, respectively. Utilizing FKLA's employees, we are the servicing
company for this coinsured business and we are reimbursed by FLA for the
related servicing expenses.
In 1996, we assumed, on a yearly renewable term basis, approximately $14.4
billion (face amount) of term life insurance from FKLA. Effective September
30, 2000, this reinsurance agreement with FKLA was terminated. Upon
termination, we returned $7.7 million of premiums to FKLA, representing
consideration for the recaptured reserves. Due to the difference in the
generally accepted accounting principles basis and the statutory accounting
basis of the reserves related to this recaptured business, we recorded a
deemed dividend distribution to Kemper of $16.3 million. (See the note
captioned "Reinsurance" in the Notes to Consolidated Financial Statements.)
In the fourth quarter of 2000, we assumed from FKLA $100.0 million in
premium deposits related to a Funding Agreement. Funding Agreements are
insurance contracts similar to structured settlements, immediate annuities and
guaranteed investment contracts ("GICs"). The contracts qualify as insurance
under state laws and are sold as non-surrenderable immediate annuities to
trusts established by a securities firm. The securities firm sold interests in
these trusts to institutional investors. This Funding Agreement had a variable
rate of interest, is an obligation of our general account and is recorded as
future policy benefits. (See the note captioned "Reinsurance" in the Notes to
Consolidated Financial Statements.)
We are party to a funds withheld reinsurance agreement with a Zurich
affiliated company, Zurich Insurance Company, Bermuda Branch ("ZICBB"). Under
the original terms of this agreement, we ceded, on a yearly
4
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 our separate accounts. As
consideration for this reinsurance coverage, we cede separate account fees
(cost of insurance charges) to ZICBB and retain a portion of such funds under
the terms of the reinsurance agreement in a funds withheld account, which is
included as a component of benefits and funds payable in the accompanying
consolidated balance sheets. During 1998, we modified the reinsurance
agreement to increase the reinsurance from 90 percent to 100 percent.
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,
----------------------------
2000 1999 1998
-------- -------- --------
Face amount in force....................... $ 85,358 $ 82,021 $ 66,186
======== ======== ========
Net amount at risk ceded................... $(78,169) $(75,979) $(62,160)
======== ======== ========
Cost of insurance charges ceded............ $ 173.8 $ 166.4 $ 175.5
======== ======== ========
Funds withheld account..................... $ 228.8 $ 263.4 $ 170.9
======== ======== ========
We have 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 Government Bond Division of the KILICO Variable Series
I Separate Account. During 1998, we recorded a $2.5 million increase to the
FWA related to this mark-to-market. In November 1998, to properly match
revenue and expenses, we had also placed assets supporting the FWA in a
segmented portion of the 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, we 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, we 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, we no longer marked-to-market a portion of the FWA
liability and therefore no longer designated the related portion of assets as
"trading". As a result, changes in fair value to the FWA and the assets
supporting the FWA no longer flow through our operating results.
Competition
We are in a highly competitive business. We compete with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with
securities brokerage and investment advisory firms as well as other
institutions that manage assets, produce financial products or market other
types of investment products.
Our principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents.
5
To address our competition, we have adopted certain business strategies.
These include:
. customer segmentation and focus
. continued focus on existing and new variable and fixed annuities and
variable life insurance products
. distribution through diversified channels
. systematic review of investment risk and our capital position, and
. ongoing efforts to continue as a low-cost provider of insurance products
and high-quality services to agents and policyholders through the use of
technology
Rankings and ratings
According to Best's Insurance Reports, 2000, as of December 31, 1999, we
ranked 56th of 1,481 life insurers by admitted assets; 57th of 1,146 by
insurance in force; and 57th of 1,382 by net premiums written.
In 1999, we 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). Our current ratings and their current status are as
follows:
Current
Current Rating 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, 2000, we used the services of approximately 1,152 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
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where we are licensed to do
business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
policy forms and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional
powers to state insurance commissioners to regulate acquisition of and by
domestic insurance companies, to require periodic disclosure of relevant
information and to regulate certain transactions with related companies. These
laws also impose prior approval requirements for certain transactions with
affiliates and generally regulate dividend distributions by an insurance
subsidiary to its holding company parent.
In addition, certain of our variable life insurance and variable annuity
products, and the related separate accounts, are subject to regulation by the
Securities and Exchange Commission (the "SEC").
We believe we are in compliance in all material respects with all
applicable regulations. For information on regulatory and other dividend
restrictions, see ITEM 5(c).
6
Investments
A changing marketplace has affected the life insurance industry. To
accommodate customers' increased preference for safety over higher yields, we
have systematically reduced our investment risk and strengthened our capital
position.
Our cash flow is carefully monitored and our investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For investment securities, portfolio
management is handled by an affiliated company, Zurich Scudder Investments,
Inc. ("ZSI"), formerly Scudder Kemper Investments, Inc., and its subsidiaries
and affiliates. Our real estate-related investments are handled by a majority-
owned Kemper real estate subsidiary. Investment policy is directed by our
board of directors. Our investment strategies take into account the nature of
each annuity and life insurance product, the respective crediting rates and
the estimated future policy benefit maturities.
Forward-looking statements
All statements, trend analyses and other information contained in this
report and elsewhere (such as in other filings by KILICO with the SEC, press
releases, presentations by KILICO or its management or oral statements) about
markets for our products and trends in our operations or financial results, as
well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause actual results
to be materially different from those contemplated by the forward-looking
statements. These factors include, among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the
ability of KILICO to sell its products, the market value of our investments
and the lapse rate and profitability of our contracts
(ii) our ability to achieve anticipated levels of operational
efficiencies through certain cost-saving initiatives
(iii) customer response to new products, distribution channels and
marketing initiatives
(iv) mortality, morbidity, and other factors which may affect the
profitability of our insurance products
(v) changes in the federal income tax laws and regulations which may
affect the relative tax advantages of some of our products
(vi) increasing competition which could affect the sale of our products
(vii) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales
and underwriting of insurance products, regulations of the sale and
underwriting and pricing of insurance products, and
(viii) the risk factors or uncertainties listed from time to time in our
other filings with the SEC
Item 2. Properties
We share 91,279 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 98,066 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
We have been named as defendant in certain lawsuits incidental to our
insurance business. Based upon the advice of legal counsel, our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on our consolidated financial position.
7
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 $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. A cash dividend of $20.0 million was declared and paid
to Kemper on June 29, 2000. No additional dividends have been declared or
paid through the date of filing this Form 10-K. During 2000, we also
reported a deemed dividend distribution of $16.3 million to Kemper.
Restrictions on dividends
Dividend distributions from us to our stockholder are restricted by state
insurance laws. In Illinois, where we are domiciled, if such dividend,
together with other distributions during the 12 preceding months would exceed
the greater of (a) ten percent of the insurer's statutory surplus as regards
policyholders as of the preceding December 31, or (b) the statutorily adjusted
net income for the preceding calendar year, then such proposed dividend must
be reported to the director of insurance at least 30 days prior to the
proposed payment date. The dividend then may be paid only if not disapproved.
The Illinois insurance laws also permit payment of dividends only out of
earned surplus, exclusive of most unrealized capital gains. During 2000, we
paid a dividend to Kemper in the amount of $20.0 million, which was approved
by the Illinois Department of Insurance. The maximum amount of dividends which
can be paid by us without prior approval in 2001 is $20.0 million.
Item 6. Selected Financial Data
The following table sets forth selected financial information for KILICO
for the five years ended December 31, 2000. Such information should be read in
conjunction with our consolidated financial statements and notes thereto
included in ITEM 8 of this Annual Report on Form 10-K. All amounts are shown
in millions.
December 31, December 31, December 31, December 31, December 31,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Total revenue........... $ 360.9 $ 363.4 $ 419.7 $ 425.5 $ 356.2
========= ========= ========= ========= ========
Net income excluding
realized investment
results................ $ 53.7 $ 51.1 $ 31.4 $ 31.9 $ 25.6
========= ========= ========= ========= ========
Net income.............. $ 48.3 $ 44.9 $ 65.1 $ 38.7 $ 34.4
========= ========= ========= ========= ========
Financial summary
Total separate account
assets................. $11,179.6 $ 9,778.1 $ 7,099.2 $ 5,122.0 $2,127.2
========= ========= ========= ========= ========
Total assets............ $16,006.6 $14,655.7 $12,239.7 $10,589.7 $7,717.9
========= ========= ========= ========= ========
Future policy benefits,
net of reinsurance..... $ 3,278.0 $ 3,409.1 $ 3,561.6 $ 3,856.9 $4,256.5
========= ========= ========= ========= ========
Stockholder's equity.... $ 730.1 $ 630.0 $ 853.9 $ 865.6 $ 751.0
========= ========= ========= ========= ========
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
We recorded net income of $48.3 million in 2000, compared with net income
of $44.9 million in 1999 and $65.1 million in 1998. The increase in net income
in 2000, compared with 1999, was due to an increase in operating earnings
before amortization of goodwill and a decrease in net realized investment
losses.
The following table reflects the components of net income:
Net income
(in millions)
Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
Operating earnings before amortization of
goodwill and other intangibles.............. $ 66.8 $ 63.8 $ 44.1
Amortization of goodwill and other
intangibles................................. (13.1) (12.7) (12.7)
Net realized investment gains (losses)....... (5.4) (6.2) 33.7
------- ------- -------
Net income............................... $ 48.3 $ 44.9 $ 65.1
======= ======= =======
Net realized investment results, after tax
(in millions)
Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
Real estate-related gains...................... $ 1.1 $ 2.7 $ 26.9
Fixed maturities and write-downs............... (7.9) (6.3) 1.4
Trading account securities..................... -- (4.7) 1.7
Other gains, net............................... 1.4 2.1 3.7
------- ------- -------
Total...................................... $ (5.4) $ (6.2) $ 33.7
======= ======= =======
Net realized investment losses on fixed maturities in 2000 were primarily
related to other-than-temporary declines in value of certain securities due to
credit-related concerns about a small number of issuers. 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 the 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 real estate-related gains over the last three years reflect the
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.
Trading account securities were used to manage the reinsurance strategy on
the BOLI product. Effective November 1, 1998, the methodology used to
determine the increase to the FWA was changed and a substantial portion of
this liability was marked-to-market based predominately upon the total return
of the Government Bond Division of the KILICO Variable Series I Separate
Account. We also placed assets supporting the FWA in a segmented portfolio and
classified this asset segment as "trading" under Statement of Financial
Standards No. 115 ("FAS 115") at December 31, 1998 and through November 30,
1999. During 1998, a net realized capital gain of $2.8 million was recorded
upon transfer of these assets to the trading portfolio as required by FAS 115.
9
We 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, we no longer marked-to-market a portion
of the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through operating results.
Other realized investment gains, net, relate primarily to distributions
from joint venture capital partnerships in 2000.
Operating earnings before the amortization of goodwill and other
intangibles increased to $66.8 million in 2000, compared with $63.8 million in
1999, primarily due to:
. an increase in spread revenue (net investment income less interest
credited to policyholders)
. an increase in other income
. a decrease in claims incurred and other benefits
. a decrease in taxes, licenses and fees, and
. a decrease in income tax expense, offset by
. a decrease in premium income
. a decrease in separate account fees
. an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs, and
. an increase in the amortization of insurance acquisition costs and value
of business acquired
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
. 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
The following table reflects our sales.
Sales and reinsurance assumed
(in millions)
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- --------
Annuities:
Variable................................... $1,160.5 $ 758.6 $ 393.1
Fixed...................................... 168.6 96.3 89.3
Funding Agreements assumed................. 100.0 -- --
-------- -------- --------
Total annuities.......................... 1,429.1 854.9 482.4
-------- -------- --------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI")................... 819.6 1,622.0 1,501.0
Separate account variable universal life... 36.5 39.1 22.0
Term life.................................. (8.2) 21.9 22.4
Interest-sensitive life.................... 0.6 0.7 0.2
-------- -------- --------
Total life............................... 848.5 1,683.7 1,545.6
-------- -------- --------
Total sales............................ $2,277.6 $2,538.6 $2,028.0
======== ======== ========
10
Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. Variable
annuity deposits, including deposits under the fixed account option, increased
$401.9 million in 2000, compared with 1999. The increase in the variable
annuity deposits is primarily due to continued strong sales of our 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 allocate amounts to the fixed account option and
authorize pro-rated amounts to be automatically transferred into the separate
account investment options over a specified period of time in order to reduce
the effects of significant market fluctuations.
Fixed annuity deposits increased $72.3 million in 2000 when compared with
1999 primarily due to investors seeking a more stable return on their
investments during a time of market volatility.
The $100.0 million Funding Agreement assumed in 2000 resulted from a new
reinsurance agreement with FKLA. (See the note captioned "Reinsurance" in the
Notes to Consolidated Financial Statements.)
Sales of variable annuities increase administrative fees earned. In
addition, they pose minimal investment risk to us, to the extent that
policyholders allocate net premium to one or more subaccounts that invest in
underlying investment funds that invest in stocks or bonds.
Sales of BOLI decreased $802.4 million to $819.6 million in 2000, compared
with $1,622.0 million in 1999. Sales of individual variable universal life
insurance decreased $2.6 million to $36.5 in 2000, compared with $39.1 million
in 1999. BOLI sales decreased primarily due to the nature of the product--high
dollar volume per sale, low frequency of sales. The slight decrease in
individual variable universal life insurance reflected the uncertain market
conditions in 2000. Sales of these separate account variable products, like
variable annuities, pose minimal investment risk as policyholders also direct
their premium to one or more subaccounts that invest in underlying investment
funds which invest in stocks and bonds. We receive premium tax and DAC tax
expense loads from certain contractholders, as well as administrative fees and
cost of insurance charges. These fees and charges are compensation for
providing life insurance coverage to the contractholders potentially in excess
of their cash surrender values. Face amount of new variable universal life
insurance business issued amounted to $3.8 billion in 2000, compared with
$16.6 billion in 1999 and $7.7 billion in 1998. The decrease in face amount
issued in 2000, compared with 1999 is primarily due to the decrease in BOLI
sales.
The following table reflects our assets under management:
Assets under management
(in millions)
2000 1999 1998
--------- --------- ---------
General account............................. $ 3,689.5 $ 3,831.0 $ 4,182.8
Separate account--BOLI...................... 6,905.9 5,750.5 4,104.6
Separate account--non-BOLI.................. 4,273.7 4,027.6 2,994.7
--------- --------- ---------
Total................................... $14,869.1 $13,609.1 $11,282.1
========= ========= =========
Total assets under management have increased over the last few years
primarily reflecting the volume of sales. The level of policyholder
surrenders, withdrawals and death benefits also directly impacts the level of
assets under management from year to year. Total assets under management were
also affected by equity market and interest rate fluctuations. Increases in
the equity markets in 1999 significantly increased non-BOLI separate account
assets, while an equity market downturn in 2000 significantly reduced those
assets.
In 1999 and 1998 we assumed $21.3 million and $21.6 million, respectively,
of term life insurance premiums from FKLA. Effective September 30, 2000, the
reinsurance agreement with FKLA was terminated. Prior to the termination, we
assumed $15.4 million of term life insurance premiums from FKLA. Upon
termination, we returned $7.7 million of premiums to FKLA as consideration for
the recaptured reserves.
11
Excluding the amounts assumed from FKLA, total term life sales, including new
and renewal premiums, amounted to $371 thousand in 2000, compared with $677
thousand in 1999 and $846 thousand in 1998. In the fourth quarter of 2000, the
reinsurance agreement was recaptured by FKLA and resulted in a decrease in
premiums of $13.6 million in 2000, compared with 1999.
Spread revenue increased in 2000, compared with 1999 and 1998, due to a
smaller decrease in investment income than in interest credited to
policyholders. The decrease in investment income in 2000, compared with 1999
and 1998, was primarily due to a decrease in cash and invested assets from the
1999 and 1998 levels, reflecting the surrender and withdrawal activity during
the last three years and the dividends paid to Kemper during 2000, 1999 and
1998. Also contributing to this decrease in cash and invested assets are the
ongoing exchanges from the fixed to the variable option of in-force annuity
policies, primarily reflecting the dollar cost averaging option mentioned
previously. Net investment income was also negatively impacted in 2000 and
1999 by the placement of a real estate-related investment on non-accrual
status effective January 1, 1999. Somewhat mitigating these factors was the
reinvestment of 1999 and 2000 sales proceeds, maturities and prepayments at
higher yields due to funds being directed to higher yielding securities, and
overall increasing interest rate environment during 1999 and the first half of
2000.
The decrease in interest credited in 2000, compared with 1999 and 1998, was
primarily due to a decrease in policyholder liabilities due to surrender,
withdrawal and exchange activity over the last three years and an overall
decrease in crediting rates over the same period.
Investment income was also reduced over the last three years reflecting
purchase accounting adjustments related to the amortization of premiums on
fixed maturity investments. Under purchase accounting, the fair value of the
fixed maturity investments as of January 4, 1996, the date Kemper was acquired
by Zurich, became the new cost basis in the investments. The difference
between the new cost basis and original par is then amortized against
investment income over the remaining effective lives of the fixed maturity
investments. As a result of the interest rate environment as of January 4,
1996, the market value of the fixed maturity investments was approximately
$133.9 million greater than original par. Premium amortization decreased
investment income by approximately $4.5 million in 2000, compared with $7.8
million in 1999 and $14.4 million in 1998.
Separate account fees and charges
(in millions)
2000 1999 1998
------ ------ ------
Separate account fees on non-BOLI variable life
and annuities.................................. $ 62.1 $ 47.0 $ 38.8
BOLI cost of insurance charges and fees--direct. 164.4 168.1 169.9
BOLI cost of insurance charges--ceded........... (173.8) (166.7) (175.5)
BOLI premium tax expense loads.................. 15.6 26.3 28.8
------ ------ ------
Total....................................... $ 68.3 $ 74.7 $ 62.0
====== ====== ======
Included in separate account fees and charges are administrative fees
received from the separate account products of $61.4 million in 2000, compared
with $46.1 million and $38.3 million in 1999 and 1998, 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 $164.4 million, $167.9 million
and $167.6 million in 2000, 1999 and 1998, respectively. Of these COI charges,
$173.8 million, $166.4 million and $175.5 million were ceded, respectively, to
a Zurich affiliated company, Zurich Insurance Company, Bermuda Branch
("ZICBB"). In 2000, COI charges ceded were in excess of 100 percent of the COI
charges received due to appreciation of the BOLI funds withheld account. In
1998, COI charges ceded were in excess of 100 percent of the COI charges
received due to changes to the reinsurance agreement. Separate account fees
and charges in 2000, 1999 and 1998 also include BOLI-related premium tax
expense loads of $15.6 million, $26.3 million and $28.8 million, respectively.
12
Other income increased $23.4 million in 2000, compared with 1999. The
increase is primarily due to an increase in commission revenue from broker-
dealer operations of approximately $20.6 million. This increase was mainly due
to the inclusion of PMG's operating results effective April 1, 2000. (See
discussion of the PMG acquisition in the note captioned "Related-Party
Transactions" in the Notes to Consolidated Financial Statements.) The increase
in broker-dealer commission revenue was substantially offset by an increase in
broker-dealer commission expense. Other income also includes surrender charge
revenue of $6.0 million in 2000, compared with $5.0 million and $4.0 million
in 1999 and 1998, respectively. The increase in surrender charge revenue in
2000, compared with 1999 and 1998, reflects the increased policyholder
surrender and withdrawal activity during 2000, compared with 1999 and 1998.
Policyholder surrenders, withdrawals and death benefits
(in millions)
2000 1999 1998
------ ------ ------
General account...................................... $579.1 $564.2 $645.5
Separate account..................................... 393.3 399.8 260.9
------ ------ ------
Total............................................ $972.4 $964.0 $906.4
====== ====== ======
Reflecting the current interest rate environment and other competitive
market factors, we adjust crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and
withdrawal activity. Spread revenue can also be improved over time by
increasing investment income.
General account surrenders, withdrawals and death benefits increased $14.9
million in 2000, compared with 1999, reflecting an increase in overall
surrenders and withdrawals as investors seek potentially higher returns from
alternative investments and higher death benefits in 2000, compared to 1999.
Separate account surrenders, withdrawals and death benefits decreased $6.5
million in 2000, compared with 1999. Excluding a partial withdrawal of $39.8
million on a BOLI contract in 1999, separate account surrenders, withdrawals
and death benefits increased $33.3 in 2000, compared with 1999. The increase
is primarily due to investors' seeking alternative investments during a period
of market uncertainty.
Claims incurred and other policyholder benefits decreased $4.5 million in
2000, compared with 1999, primarily due to the termination of the assumed term
life reinsurance agreement with FKLA. Claims incurred and other policyholder
benefits decreased in 1999, compared with 1998, primarily due to a decrease in
death benefits.
Taxes, licenses and fees primarily reflect premium taxes on BOLI. Excluding
the taxes due on BOLI, for which we received a corresponding expense load in
separate account fees and other charges, taxes, licenses and fees amounted to
$2.3 million in 2000, compared with $3.4 million in 1999 and $1.5 million in
1998.
Commission expense and the deferral of insurance acquisition costs
increased in 2000, compared with 1999 and 1998, due to the higher level of
sales, excluding BOLI. Commission expense related to broker-dealer operations
increased approximately $17.2 million in 2000, compared with 1999. The
increase is primarily due to the inclusion of PMG's operating results in 2000.
The increase in commission expense and the deferral of insurance acquisition
costs in 1999, compared with 1998, is primarily due to the increase in total
sales, excluding BOLI.
Amortization of insurance acquisition costs increased $17.7 million in
2000, compared with 1999. This increase was primarily due to a recoverability
takedown resulting from management's periodic review of the estimated future
gross profits on annuity contracts. The recoverability takedown increased the
amortization by $10.5 million in 2000. The remaining increase in amortization
of deferred insurance acquisition costs is primarily due to the higher volume
of variable annuity business.
The decrease in the amortization of deferred insurance acquisition costs in
1999 compared with 1998 is primarily due to significant appreciation in the
separate account assets due to rising markets during 1999, as well
13
as realized capital losses on post-purchase investments during 1999.
Appreciation in separate account assets increased estimated future gross
profits and shifted amortization to later years. Realized capital losses on
post-purchase investments decreased current gross profits and deferred
amortization into future periods. The deferred insurance acquisition cost
asset was $240.8 million and $159.7 million at December 31, 2000 and 1999,
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 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.
Operating expenses increased in 2000, to $61.7 million, compared with $45.9
million and $44.6 million in 1999 and 1998, respectively. This increase was
primarily due to an increase in salaries and related benefits, and data
processing expenses in the continued development of infrastructure to support
various new business initiatives. Also contributing to the increase is the
inclusion of PMG's operating expenses of approximately $2.2 million.
The amortization of the value of business acquired increased in 2000,
compared with 1999, primarily as a result of depreciation in the separate
account assets due to the downturn in equity markets in 2000, compared with
1999. The depreciation in the separate account assets decreases estimated
future gross profits and accelerates amortization in the current year.
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 increased
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 difference between Zurich's cost of acquiring us and the net fair value
of the assets and liabilities as of January 4, 1996 was recorded as goodwill.
Goodwill is amortized on a straight-line basis over a twenty-year period.
Other intangible assets in the amount of $4.9 million were recorded in 2000 in
connection with the purchase of PMG. These intangible assets are being
amortized on a straight-line basis over a ten-year period.
Tax expense was favorably impacted in 2000 due to the release of $15.2
million of a valuation allowance related to the ultimate realization of losses
on real estate assets disposed of before December 31, 1995. An additional $4.6
million benefit was realized on the termination of the reinsurance agreement
with FKLA.
Operations by Business Segment
We, along with, FKLA, ZLICA and FLA operate under the trade name Zurich
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
Institutions ("Financial"), Retirement Solutions Group ("RSG") and Direct
SBUs. The SBUs are not managed at the legal entity level, but rather at
14
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 our 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 principal products and markets of the Financial and RSG SBUs are as
follows:
Financial: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and
primarily includes variable and fixed annuities, variable universal life
and 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 (primarily included in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU
markets fixed and variable annuities to K-12 schoolteachers,
administrators, and healthcare workers, along with college professors and
certain employees of selected non-profit organizations. This target market
is eligible for what the IRS designates as retirement-oriented savings or
investment plans that qualify for special tax treatment.
15
INVESTMENTS
Our principal investment strategy is to maintain a balanced, well-
diversified portfolio supporting the insurance contracts written. We make
shifts in our investment portfolio depending on, among other factors:
. our evaluation of risk and return in various markets
. consistency with our business strategy and investment guidelines approved
by the board of directors
. the interest rate environment
. liability durations, and
. changes in market and business conditions
Invested assets and cash
(in millions)
December 31, December 31,
2000 1999
------------ ------------
Cash and short-term
investments.................. $ 50 1.4% $ 54 1.4%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........... 2,080 56.4 2,164 56.5
NAIC(1) Class 2........... 960 26.1 994 25.9
Below investment grade (NAIC
classes 3 through 6):
Performing................ 116 3.2 118 3.1
Non-performing............ 1 -- -- --
Joint venture mortgage loans.. 67 1.8 67 1.8
Third-party mortgage loans.... 64 1.7 64 1.7
Other real estate-related
investments.................. 9 0.2 21 0.5
Policy loans.................. 256 6.9 262 6.8
Equity securities............. 64 1.7 62 1.6
Other......................... 22 0.6 25 0.7
------ ----- ------ -----
Total(2)................ $3,689 100.0% $3,831 100.0%
====== ===== ====== =====
- --------
(1) National Association of Insurance Commissioners ("NAIC").
--Class 1 = A- and above
--Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the Notes to Consolidated Financial Statements.
Fixed maturities
We carry our fixed maturity investment portfolio, which is considered
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized depreciation on fixed maturities was $32.6 million and $121.2
million at December 31, 2000 and 1999, respectively. We do not record tax
benefits related to aggregate unrealized depreciation on investments. Fair
values are sensitive to movements in interest rates and other economic
developments and can be expected to fluctuate, at times significantly, from
period to period.
At December 31, 2000, investment-grade fixed maturities, cash and short-
term investments accounted for 83.9 percent of invested assets and cash,
compared with 83.8 percent at December 31, 1999. Approximately 43.4 percent of
our NAIC Class 1 bonds were rated AAA or equivalent at year-end 2000, compared
with 45.9 percent at December 31, 1999.
16
Approximately 18.9 percent of the investment-grade fixed maturities at
December 31, 2000 were mortgage-backed securities, down from 20.0 percent at
December 31, 1999, due to sales and paydowns during 2000. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. We have not made any investments in interest-only or
other similarly volatile tranches of mortgage-backed securities. Our mortgage-
backed investments are generally of AAA credit quality, and the markets for
these investments have been and are expected to remain liquid. We plan to
continue to reduce our holdings of such investments over time.
Approximately 15.1 percent and 16.8 percent of the investment-grade fixed
maturities at December 31, 2000 and 1999, respectively, consisted of corporate
asset-backed securities. The majority of investments in asset-backed
securities were backed by commercial mortgage-backed securities (26.8%), home
equity loans (26.3%), manufactured housing loans (11.3%), collateralized loan
and bond obligations (11.2%), and other commercial assets (8.9%).
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 the
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, 2000 and 1999, unamortized premiums and discounts related
to mortgage-backed and asset-backed securities were as follows (in millions):
December
31,
----------
2000 1999
---- -----
Unamortized premiums........................................... $9.0 $11.6
==== =====
Unamortized discounts.......................................... $5.2 $ 6.5
==== =====
Amortization of the discount or premium from mortgage-backed and asset-
backed securities is recognized using a level effective yield method. This
method considers the estimated timing and amount of prepayments of the
underlying loans and is adjusted to reflect differences between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of these
securities change as a result of changes in prepayment rates, the adjustment
is also included in net investment income.
The table below provides information about the mortgage-backed and asset-
backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current
interest rate and economic environment.
Expected Maturity Date
-----------------------------------------------
Carrying Fair Value
Value at at
December 31, December 31,
(in millions) 2000 2001 2002 2003 2004 2005 Thereafter 2000
------------- ------------ ----- ----- ------ ------ ----- ---------- ------------
Fixed Maturities:
Mortgage-backed bonds.. $ 575.7 $ 6.5 $39.5 $152.0 $131.9 $77.1 $168.7 $ 575.7
Average yield........ 6.61% 6.61% 6.60% 6.62% 7.18% 7.60% 8.15% 6.61%
Asset-backed bonds..... $ 339.3 $22.5 $37.6 $ 34.2 $ 39.9 $48.0 $157.1 $ 339.3
Average yield........ 7.27% 7.32% 7.30% 7.21% 7.35% 7.57% 7.83% 7.27%
CMBs................... $ 123.9 $ -- $ -- $ -- $ -- $ 5.4 $118.5 $ 123.9
Average yield........ 6.84% 6.84% 6.84% 6.84% 6.84% 6.82% 6.82% 6.84%
-------- --------
$1,038.9 $1,038.9
======== ========
17
Expected Maturity Date
-----------------------------------------------
Carrying Fair Value
Value at 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
======== ========
The current weighted average maturity of the mortgage-backed and asset-
backed securities at December 31, 2000, is 3.95 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 1.15 of a
year.
The weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1999, was 4.50 years. A 200 basis point increase in
interest rates would have extended the weighted average maturity by
approximately .26 of a year, while a 200 basis point decrease in interest
rates would have decreased the weighted average maturity by approximately .93
of a year.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 44 issuers at December 31, 2000, totaled 3.2
percent of cash and invested assets at December 31, 2000 and 3.1 percent at
December 31, 1999. Below investment-grade securities are generally unsecured
and often subordinated to other creditors of the issuers. These issuers may
have relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers. Our strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for higher-
quality investments in the life insurance and annuity marketplace.
Real estate-related investments
The $140.4 million real estate-related portfolio consists of joint venture
and third-party mortgage loans and other real estate-related investments. The
real estate-related portfolio constituted 3.7 percent of cash and invested
assets at December 31, 2000, compared with $151.6 million, or 3.9 percent, at
December 31, 1999. The decrease in real estate-related investments during 2000
was primarily due to sales and loan paydowns.
As reflected in the "Real estate portfolio" table below, we have continued
to fund both existing projects and legal commitments. The future legal
commitments were $29.8 million at December 31, 2000. This amount represented
no change since December 31, 1999. As of December 31, 2000, we expect 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. We
do not currently expect to fund these commitments. The total legal
commitments, along with estimated working capital requirements, are considered
in management's evaluation of reserves and write-downs.
Excluding the $1.0 million of net equity investments in joint ventures,
real estate loans totaled $139.4 million at December 31, 2000, after reserves
and write-downs. Of this amount, $75.1 million are on accrual status with a
weighted average interest rate of approximately 7.85 percent. Of these accrual
loans:
. 15.7 percent have terms requiring current periodic payments of their full
contractual interest
. 84.3 percent require only partial payments or payments to the extent of
borrowers' cash flow.
18
The equity investments in real estate at December 31, 2000 consisted of
other equity investments in joint ventures. These equity investments include
our share of periodic operating results. As an equity owner or affiliate of an
equity owner, we have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
Real estate portfolio
(in millions)
Other Real Estate-
Mortgage Loans Related Investments
-------------- --------------------
Joint Third- Other Equity
Venture Party Loans(2) Investments Total
------- ------ -------- ----------- ------
Balance at December 31, 1999. $67.2 $63.9 $ 19.6 $ 0.9 $151.6(1)
Additions (deductions):
Fundings..................... 0.2 -- -- -- 0.2
Interest added to principal.. -- 0.4 -- -- 0.4
Sales/paydowns/distributions. -- (0.8) (12.3) (0.1) (13.2)
Operating gain............... -- -- -- 0.1 0.1
Net realized investments
gains....................... 0.1 0.3 1.2 0.1 1.7(3)
Other transactions, net...... -- (0.3) (0.1) -- (0.4)(3)
----- ----- ------ ----- ------
Balance at December 31, 2000. $67.5 $63.5 $ 8.4 $ 1.0 $140.4(4)
===== ===== ====== ===== ======
- --------
(1) Net of $23.7 million reserve and write-downs. Excludes $0.6 million of
real estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued generally to provide
financing for Kemper's or our joint ventures for various purposes.
(3) Included in this amount were $0.4 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 $22.4 million reserve and write-downs. Excludes $0.6 million of
real estate-related accrued interest.
Real estate concentrations and outlook
The real estate portfolio is distributed by geographic location and
property type. However, concentration exposures in certain states and in
certain types of properties do exist. In addition to these exposures,
exposures also exist as to certain real estate developers and partnerships.
As a result of our ongoing strategy to reduce exposure to real estate-
related investments, we had investments in three projects that accounted for
approximately 91.0 percent of the $140.4 million real estate-related portfolio
as of December 31, 2000.
The largest of these investments at December 31, 2000 amounted to $63.5
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 the mortgages. These loans are on accrual status.
Loans to a master limited partnership (the "MLP") between subsidiaries of
Kemper and subsidiaries of Lumbermens, amounted to $55.7 million at December
31, 2000. The MLP's underlying investment primarily consists of a water
development project located in California's Sacramento River Valley. On
February 15, 2001, the State of California's State Water Resources Control
Board ("SWRCB") approved the project's water right permit. The SWRCB is
proceeding with the issuance of the permit. Additional permits must be
obtained before development on this project can proceed. These additional
permits are expected to be received during 2001. The
19
final resolution of this permit process will impact the long-term economic
viability of the project. Loans to the MLP were placed on non-accrual status
at the beginning of 1999 to ensure that book value of the MLP did not increase
over net realizable value.
The remaining significant real estate-related investment amounted to $8.5
million at December 31, 2000 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, these real estate-related investments were placed on
nonaccrual status. As of March 12, 2001, all zoned properties have been sold.
We are currently pursuing the zoning of all remaining unzoned 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, it is anticipated
that it could be several additional years until we completely dispose of all
investments in Hawaii.
We evaluate our real estate-related investments (including accrued
interest) using an estimate of the investments' observable market price, net
of estimated selling costs. Because the real estate review process includes
estimates involving changing economic conditions and other factors, there can
be no assurance that current estimates will prove accurate over time. Real
estate-related investments are expected to continue to decline further through
future sales and paydowns. Net income could be reduced in future periods if:
. real estate market conditions worsen in areas where our portfolio is
located
. Kemper's and our plans with respect to certain projects change, or
. necessary construction or zoning permits are not obtained.
Troubled real estate-related investments consisted of loans on nonaccrual
status, before reserves and write-downs, totaling $86.3 million and $98.3
million at December 31, 2000 and 1999, respectively. Interest does not accrue
on real estate-related investments when it is judged that the likelihood of
interest collection is doubtful. Loans on nonaccrual status after reserves and
write-downs amounted to $64.3 million and $76.3 million at December 31, 2000
and 1999, respectively. The decrease in nonaccrual loans in 2000, compared
with 1999, is due to primarily to sales and paydowns in 2000.
Net investment income
Pre-tax net investment income totaled $257.5 million in 2000, compared with
$264.6 million in 1999 and $273.5 million in 1998. This includes our share of
the operating results 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, net investment income in 2000, 1999 and 1998, has been
negatively impacted by purchase accounting adjustments.
Total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
Foregone investment income
(in millions)
Year Ended
December 31,
--------------
2000 1999 1998
---- ---- ----
Fixed maturities.......................................... $-- $-- $0.3
Real estate-related investments........................... 9.1 9.9 3.2
---- ---- ----
Total................................................. $9.1 $9.9 $3.5
==== ==== ====
Foregone investment income is primarily due to certain real estate-related
investments that have been placed on nonaccrual status. Any increase in
nonperforming securities, and either worsening or stagnant real estate
conditions, would increase the expected adverse effect on future investment
income and realized investment results.
20
Realized investment results
Net income reflects after-tax realized investment losses of $5.4 million
and $6.2 million in 2000 and 1999, respectively, and after-tax realized
investment gains of $33.7 million in 1998. Included in the 1999 after-tax
realized investment losses are trading account security losses of $4.7
million. As previously discussed, we segregated a portion of the General
Account investment portfolio in the first eleven months of 1999 into a
"trading" account under 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, we no longer designated a
portion of the General Account investment portfolio as "trading". As a result,
all investments previously designated as "trading" are currently classified as
available for sale and changes in fair value to the FWA and the assets
supporting the FWA no longer flow through operating results.
Unrealized gains and losses on fixed maturity investments that are
available for sale are not reflected in net income. These changes in
unrealized value are recorded as a component of accumulated other
comprehensive income, net of any applicable income taxes. If, and to the
extent, a fixed maturity investment suffers an other-than-temporary decline in
value, however, the security is written down to net realizable value, and the
write-down adversely impacts net income. Pre-tax write-downs due to other-
than-temporary decline in value amounted to $11.4 million, $0.1 million and
$4.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
We regularly monitor our investment portfolio and as part of this process
review the assets for possible impairments of carrying value. Because the
review process includes estimates involving changing economic conditions and
other factors, there can be no assurance that current estimates will prove
accurate over time.
See Note 1, "Summary of Significant Accounting Policies", in the Notes to
Consolidated Financial Statements for information regarding derivative
investments.
Interest rates
During 1998, the Federal Open Market Committee ("FOMC") lowered interest
rates three times. This trend was reversed in 1999 when the FOMC raised rates
three times over the course of the year, resulting in a flatter yield curve
due to higher short-term interest rates. The FOMC continued its tightening
campaign in 2000 by raising rates 100 basis points. The resultant slowing of
the economy, combined with treasury buy back announcements, kept the yield
curve inverted for most of the year. The curve began re-steepening near the
end of the year as rates declined and the market began to price in future FOMC
easings, resulting in a decrease in unrealized fixed maturity investment
losses during 2000.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, we can adjust crediting rates on fixed annuities
and other interest-bearing liabilities. However, competitive conditions and
contractual commitments do not always permit the reduction in crediting rates
to fully or immediately reflect reductions in investment yield. This can
result in narrower spreads.
A rising interest rate environment can increase net investment income as
well as contribute to both realized and unrealized fixed maturity investment
losses. A declining interest rate environment can decrease net investment
income as well as contribute to both realized and unrealized fixed maturity
investment gains. Also, lower renewal crediting rates on annuities, compared
with competitors' higher new money crediting rates, have influenced certain
annuity holders to seek alternative products. We mitigate this risk somewhat
by charging surrender fees, which decrease over time, when annuity holders
withdraw funds prior to maturity on certain annuity products. Approximately 32
percent of the fixed and variable annuity liabilities as of December 31, 2000,
however, were no longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
We carefully monitor cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities
21
establish minimum liquidity and capital standards. The major ongoing sources
of liquidity are deposits for fixed annuities, premium income, investment
income, separate account fees, other operating revenue and cash provided from
maturing or sold investments.
Ratings
Ratings are an important factor in establishing the competitive position of
life insurance companies. Rating organizations continue to review the
financial performance and condition of life insurers and their investment
portfolios. Any reductions in our claims-paying ability or financial strength
ratings could result in our products being less attractive to consumers. Any
reductions in our parent's ratings could also adversely impact our financial
flexibility.
Ratings reductions for Kemper or its subsidiaries and other financial
events can also trigger obligations to fund certain real estate-related
commitments to take out other lenders. In such events, those lenders can be
expected to renegotiate their loan terms, although they are not contractually
obligated to do so.
Each rating is subject to revision or withdrawal at any time by the
assigning organization and should be evaluated independently of any other
rating.
During 1999, we 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 $730.1 million at December 31, 2000, compared
with $630.0 million at December 31, 1999 and $853.9 million at December 31,
1998. The increase in stockholder's equity in 2000 was primarily due to an
increase in accumulated other comprehensive income of $88.1 million and net
income of $48.3 million, offset by dividends of $36.3 million paid to Kemper.
The increase in accumulated other comprehensive income was primarily related
to unrealized appreciation of the fixed maturity investment portfolio due to
declining interest rates during 2000.
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 during 1999. This decrease was
offset by net income of $44.9 million. The decrease in accumulated other
comprehensive income (loss) was primarily related to the unrealized
depreciation of the fixed maturity investment portfolio due to rising interest
rates during 1999.
Emerging issues:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 133, ("SFAS 133") Accounting for
Derivative Instruments and Hedging Activities. Statement of Financial
Accounting Standard 137, Deferral of the Effective Date of FASB Statement No.
133 delayed implementation of SFAS 133 until fiscal years beginning January 1,
2001. Statement of Financial Accounting Standard 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of FASB
Statement No. 133, ("SFAS 138"), further clarified the accounting treatment of
certain derivative instruments. We have adopted SFAS 133 and SFAS 138 in the
fourth quarter of 2000.
22
Item 8. Financial Statements and Supplementary Data
Page(s)
-------
Report of Independent Accountants...................................... 23
Consolidated Balance Sheets, December 31, 2000 and 1999................ 24
Consolidated Statements of Operations, three years ended December 31,
2000.................................................................. 25
Consolidated Statements of Comprehensive Income, three years ended
December 31, 2000..................................................... 26
Consolidated Statements of Stockholder's Equity, three years ended
December 31, 2000..................................................... 27
Consolidated Statements of Cash Flows, three years ended December 31,
2000.................................................................. 28
Notes to Consolidated Financial Statements............................. 29-49
Financial Statement Schedules:
Supplementary Insurance Information.................................. 57
Reinsurance.......................................................... 58
Valuation and Qualifying Accounts.................................... 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Kemper Investors Life Insurance Company and its subsidiaries (the
"Company") at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 23, 2001
23
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December December
31, 2000 31, 1999
----------- -----------
Assets
Fixed maturities, available for sale, at fair value
(amortized cost:
December 31, 2000, $3,189,719; December 31, 1999,
$3,397,188)....................................... $ 3,157,169 $ 3,276,017
Equity securities (cost: December 31, 2000,
$65,473;
December 31, 1999, $65,235)....................... 63,879 61,592
Short-term investments............................. 15,900 42,391
Joint venture mortgage loans....................... 67,473 67,242
Third-party mortgage loans......................... 63,476 63,875
Other real estate-related investments.............. 9,468 20,506
Policy loans....................................... 256,226 261,788
Other invested assets.............................. 21,792 25,621
----------- -----------
Total investments................................ 3,655,383 3,819,032
Cash............................................... 34,101 12,015
Accrued investment income.......................... 134,585 127,219
Goodwill........................................... 191,163 203,907
Value of business acquired......................... 95,621 119,160
Other intangible assets............................ 4,531 --
Deferred insurance acquisition costs............... 240,801 159,667
Deferred income taxes.............................. 120,781 93,502
Reinsurance recoverable............................ 310,183 309,696
Receivable on sales of securities.................. 8,286 3,500
Other assets and receivables....................... 31,569 29,950
Assets held in separate accounts................... 11,179,639 9,778,068
----------- -----------
Total assets..................................... $16,006,643 $14,655,716
=========== ===========
Liabilities
Future policy benefits............................. $ 3,588,140 $ 3,718,833
Other policyholder benefits and funds payable...... 399,585 457,328
Other accounts payable and liabilities............. 109,152 71,482
Liabilities related to separate accounts........... 11,179,639 9,778,068
----------- -----------
Total liabilities................................ 15,276,516 14,025,711
----------- -----------
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 loss............... (32,718) (120,819)
Retained deficit................................... (44,002) (56,023)
----------- -----------
Total stockholder's equity....................... 730,127 630,005
----------- -----------
Total liabilities and stockholder's equity....... $16,006,643 $14,655,716
=========== ===========
See accompanying notes to consolidated financial statements.
24
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenue
Net investment income.......................... $257,470 $264,640 $273,512
Realized investment gains (losses)............. (8,277) (9,549) 51,868
Premium income................................. 8,394 21,990 22,346
Separate account fees and charges.............. 68,293 74,715 61,982
Other income................................... 35,030 11,623 10,031
-------- -------- --------
Total revenue................................ 360,910 363,419 419,739
-------- -------- --------
Benefit and Expenses
Interest credited to policyholders............. 152,289 162,243 176,906
Claims incurred and other policyholder
benefits...................................... 13,718 18,185 28,029
Taxes, licenses and fees....................... 17,861 30,234 30,292
Commissions.................................... 114,162 67,555 39,046
Operating expenses............................. 61,671 45,989 44,575
Deferral of insurance acquisition costs........ (104,608) (69,814) (46,565)
Amortization of insurance acquisition costs.... 23,231 5,524 12,082
Amortization of value of business acquired..... 19,926 12,955 17,677
Amortization of goodwill....................... 12,744 12,744 12,744
Amortization of other intangible assets........ 368 -- --
-------- -------- --------
Total benefits and expenses.................. 311,362 285,615 314,786
-------- -------- --------
Income before income tax expense............... 49,548 77,804 104,953
Income tax expense............................. 1,247 32,864 39,804
-------- -------- --------
Net income................................... $ 48,301 $ 44,940 $ 65,149
======== ======== ========
See accompanying notes to consolidated financial statements.
25
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- --------- -------
Net income....................................... $ 48,301 $ 44,940 $65,149
-------- --------- -------
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on
investments arising during period:
Unrealized holding gains (losses) on
investments................................... 61,487 (180,267) 25,372
Adjustment to value of business acquired....... (3,400) 12,811 (9,332)
Adjustment to deferred insurance acquisition
costs......................................... (230) 5,726 (2,862)
-------- --------- -------
Total unrealized holding gains (losses) on
investments arising during period........... 57,857 (161,730) 13,178
-------- --------- -------
Less reclassification adjustments for items
included in net income:
Adjustment for (gains) losses included in
realized investment gains (losses)............ (24,583) 16,651 6,794
Adjustment for amortization of premium on fixed
maturities included in net investment income.. (4,538) (10,533) (17,064)
Adjustment for (gains) losses included in
amortization of value of business acquired.... 214 (454) (7,378)
Adjustment for (gains) losses included in
amortization of insurance acquisition costs... 13 1,892 (463)
-------- --------- -------
Total reclassification adjustments for
items included in net income.............. (28,894) 7,556 (18,111)
-------- --------- -------
Other comprehensive income (loss), before related
income tax expense (benefit).................... 86,751 (169,286) 31,289
Related income tax expense (benefit)............. (1,350) (15,492) 10,952
-------- --------- -------
Other comprehensive income (loss), net of
tax....................................... 88,101 (153,794) 20,337
-------- --------- -------
Comprehensive income (loss)................ $136,402 $(108,854) $85,486
======== ========= =======
See accompanying notes to consolidated financial statements.
26
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
Year Ended December 31,
------------------------------
2000 1999 1998
--------- --------- --------
Capital stock, beginning and end of period..... $ 2,500 $ 2,500 $ 2,500
--------- --------- --------
Additional paid-in capital, beginning of
period........................................ 804,347 804,347 806,538
Capital contributions from parent.............. -- -- 4,261
Adjustment to prior period capital contribution
from parent................................... -- -- (6,452)
--------- --------- --------
End of period................................ 804,347 804,347 804,347
--------- --------- --------
Accumulated other comprehensive income (loss),
beginning of period........................... (120,819) 32,975 12,637
Other comprehensive income (loss), net of tax.. 88,101 (153,794) 20,338
--------- --------- --------
End of period................................ (32,718) (120,819) 32,975
--------- --------- --------
Retained earnings (deficit), beginning of
period........................................ (56,023) 14,037 43,888
Net income..................................... 48,301 44,940 65,149
Dividends to parent............................ (36,280) (115,000) (95,000)
--------- --------- --------
End of period................................ (44,002) (56,023) 14,037
--------- --------- --------
Total stockholder's equity................. $ 730,127 $ 630,005 $853,859
========= ========= ========
See accompanying notes to consolidated financial statements.
27
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------------
2000 1999 1998
--------- ----------- -----------
Cash flows from operating activities
Net income.............................. $ 48,301 $ 44,940 $ 65,149
Reconcilement of net income to net cash
provided:
Realized investment (gains) losses.... 8,277 9,549 (51,868)
Net change in trading account
securities........................... -- (51,239) (6,727)
Interest credited and other charges... 142,344 158,557 173,958
Deferred insurance acquisition costs,
net.................................. (81,377) (64,290) (34,483)
Amortization of value of business
acquired............................. 19,926 12,955 17,677
Amortization of goodwill.............. 12,744 12,744 12,744
Amortization of discount and premium
on investments....................... 4,538 11,157 17,353
Amortization of other intangible
assets............................... 368 -- --
Deferred income taxes................. (25,930) (42,952) (12,469)
Net change in current federal income
taxes................................ (18,593) (10,594) (73,162)
Benefits and premium taxes due related
to separate account bank-owned life
insurance............................ (61,476) 149,477 123,884
Other, net............................ 42,377 (11,901) (41,477)
--------- ----------- -----------
Net cash flow from operating
activities......................... 91,499 218,403 190,579
--------- ----------- -----------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity..... 170,465 335,735 491,699
Fixed maturities sold prior to
maturity............................. 589,933 1,269,290 882,596
Equity securities..................... 1,271 11,379 107,598
Mortgage loans, policy loans and other
invested assets...................... 73,177 75,389 180,316
Cost of investments purchased or loans
originated:
Fixed maturities...................... (569,652) (1,455,496) (1,319,119)
Equity securities..................... (1,264) (8,703) (83,303)
Mortgage loans, policy loans and other
invested assets...................... (47,109) (43,665) (66,331)
Investment in subsidiaries............ (4,899) -- --
Short-term investments, net............. 26,491 15,943 177,723
Net change in receivable and payable for
securities transactions................ (4,786) -- (677)
Net change in other assets.............. (5,141) (2,725) --
--------- ----------- -----------
Net cash from investing activities.. 228,486 197,147 370,502
--------- ----------- -----------
Cash flows from financing activities
Policyholder account balances:
Deposits.............................. 608,363 383,874 180,124
Withdrawals........................... (881,888) (694,848) (649,400)
Capital contributions from parent....... -- -- 4,261
Dividends to parent..................... (36,280) (115,000) (95,000)
Other................................... 11,906 8,953 (11,448)
--------- ----------- -----------
Net cash used in financing
activities......................... (297,899) (417,021) (571,463)
--------- ----------- -----------
Net increase (decrease) in cash..... 22,086 (1,471) (10,382)
Cash, beginning of period................. 12,015 13,486 23,868
--------- ----------- -----------
Cash, end of period....................... $ 34,101 $ 12,015 $ 13,486
========= =========== ===========
See accompanying notes to consolidated financial statements.
28
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 is a wholly-owned
subsidiary of Zurich Group Holding ("ZGH" or "Zurich"), a Swiss holding
company, formerly known as Zurich Financial Services. ZGH is wholly-owned by
Zurich Financial Services ("ZFS"), a new Swiss holding company. ZFS was
formerly Zurich Allied AG, which was merged with Allied Zurich p.l.c. in
October 2000.
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 1999 and
1998 consolidated financial statements in order for them to conform to the
2000 presentation. The accompanying consolidated financial statements of the
Company as of and for the years ended December 31, 2000, 1999 and 1998, have
been prepared in conformity with accounting principles generally accepted in
the United States of America.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that could affect the reported
amounts of assets and liabilities as well as the disclosure of contingent
assets or liabilities at the date of the financial statements. As a result,
actual results reported as revenue and expenses could differ from the
estimates reported in the accompanying financial statements. As further
discussed in the accompanying notes to the consolidated financial statements,
significant estimates and assumptions affect goodwill, deferred insurance
acquisition costs, the value of business acquired, provisions for real estate-
related losses and reserves, other-than-temporary declines in values for fixed
maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
Goodwill and other intangibles
The Company reviews goodwill and other intangibles ("intangible assets") to
determine if events or changes in circumstances may have affected the
recoverability of the outstanding intangible assets as of each reporting
period. In the event that the Company determines that the intangible assets
are not recoverable, it would amortize such amounts as additional amortization
expense in the accompanying financial statements. As of December 31, 2000, the
Company believes that no such adjustment is necessary.
The difference between Zurich's cost of acquiring the Company and the net
fair value of the assets and liabilities as of January 4, 1996 was recorded as
goodwill. Goodwill is amortized on a straight-line basis over a twenty-year
period. Other intangible assets of $4.9 million, recorded in 2000 in
connection with the purchase of PMG, are being amortized on a straight-line
basis over a ten-year period.
Value of business acquired
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition, January 4, 1996. Such value is the present value of the
actuarially determined projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated
gross profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2005 are as follows:
29
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Projected
Accretion
Beginning of Ending
Year Ended December 31, Balance Amortization Interest Balance
----------------------- --------- ------------ --------- --------
(in thousands)
1998 (actual).................. $143,744 $(26,807) $9,129 $126,066
1999 (actual).................. 126,066 (20,891) 7,936 113,111
2000 (actual).................. 113,111 (26,805) 6,879 93,185
2001........................... 93,185 (18,664) 5,733 80,254
2002........................... 80,254 (16,249) 4,955 68,960
2003........................... 68,960 (15,765) 4,178 57,373
2004........................... 57,373 (14,646) 3,433 46,160
2005........................... 46,160 (12,868) 2,753 36,045
The projected ending balance of the value of business acquired will be
further adjusted to reflect the impact of unrealized gains or losses on fixed
maturities held as available for sale in the investment portfolio. Such
adjustments are not recorded in the Company's net income but rather are
recorded as a credit or charge to accumulated other comprehensive income, net
of income tax. This adjustment increased the value of business acquired by
$2.4 million and $6.0 million as of December 31, 2000 and 1999, respectively.
Accumulated other comprehensive income increased by approximately $1.6 million
and $3.9 million as of December 31, 2000 and 1999, respectively, due to this
adjustment.
Life insurance revenue and expenses
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes
on certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits
for such policies are recognized over the duration of the insurance policies
by matching benefits and expenses to premium income.
Reinsurance
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to
certain blocks of fixed-rate annuities and to individual death claims. The
Company generally cedes 100 percent of the related annuity liabilities under
the terms of the reinsurance agreements for these certain blocks of fixed-rate
annuities. Although these reinsurance agreements contractually obligate the
reinsurers to reimburse the Company, they do not discharge the Company from
its primary liabilities and obligations to policyholders. As such, these
amounts paid or deemed to have been paid are recorded on the Company's
consolidated balance sheet as reinsurance recoverables and ceded future policy
benefits.
Deferred insurance acquisition costs
The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for
annuities, separate account business and interest-sensitive life insurance
products are being amortized over the estimated contract life in relation to
the present value of estimated gross profits. Deferred insurance acquisition
costs related to such interest-sensitive products also reflect the estimated
impact of unrealized gains or losses on fixed maturities held
30
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as available for sale in the investment portfolio, through a charge or credit
to accumulated other comprehensive income, net of income tax. The deferred
insurance acquisition costs for term-life insurance products are being
amortized over the premium paying period of the policies.
Future policy benefits
Liabilities for future policy benefits related to annuities and interest-
sensitive life contracts reflect net premiums received plus interest credited
during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 10.0
percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.0
percent. For contracts that have annuitized, interest rates used in
determining the present value of future payments range principally from 2.5
percent to 12.0 percent.
Liabilities for future term life policy benefits have been computed
principally by a net level premium method. Anticipated rates of mortality are
based on the 1975-1980 Select and Ultimate Table modified by Company
experience, including withdrawals. Assumed investment yields are by policy
duration and range from 7.3 percent to 6.0 percent over 20 years.
Guaranty fund assessments
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
2000 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well
as an estimate of amounts (net of estimated future premium tax recoveries)
that the Company believes it will be assessed in the future for which the life
insurance industry has estimated the cost to cover losses to policyholders.
Invested assets and related income
Investments in fixed maturities and equity securities are carried at fair
value. Short-term investments are carried at cost, which approximates fair
value.
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of mortgage-
backed and asset-backed securities, over the estimated life of the security.
Such amortization is included in net investment income. Amortization of the
discount or premium from mortgage-backed and asset-backed securities is
recognized using a level effective yield method which considers the estimated
timing and amount of prepayments of the underlying loans and is adjusted to
reflect differences which arise between the prepayments originally anticipated
and the actual prepayments received and currently anticipated. To the extent
that the estimated lives of such securities change as a result of changes in
prepayment rates, the adjustment is also included in net investment income.
The Company does not accrue interest income on fixed maturities deemed to be
impaired on an other-than-temporary basis, or on mortgage loans and other real
estate loans where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. Real
estate reserves are established when declines in collateral values, estimated
in light of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily
of venture capital investments and a leveraged lease, are carried primarily at
cost.
31
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Net
unrealized gains or losses on revaluation of investments are credited or
charged to accumulated other comprehensive income (loss). Such unrealized
gains are recorded net of deferred income tax expense, while unrealized losses
are not tax benefited.
Derivative instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 133, ("SFAS 133") Accounting for
Derivative Instruments and Hedging Activities. Statement of Financial
Accounting Standard 137, Deferral of the Effective Date of FASB Statement No.
133 delayed implementation of SFAS 133 until fiscal years beginning January 1,
2001. Statement of Financial Accounting Standard 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of FASB
Statement No. 133, ("SFAS 138"), further clarified the accounting treatment of
certain derivative instruments. The Company has adopted SFAS 133 and SFAS 138
in the fourth quarter of 2000. Up until the fourth quarter of 2000, the
Company held no derivative investments.
In the fourth quarter of 2000, the Company entered into an interest rate
swap with Zurich Capital Markets, Inc. ("ZCM"), an affiliated counterparty, to
alter interest rate exposures arising from mismatches between assets and
liabilities. Under the interest rate swap, an agreement was reached with
another party to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional principal amount. No cash was exchanged at the outset of the
contract and no principal payments are made by either party. A single net
payment is made by the counterparty at each due date.
Exposure exists to credit-related losses in the event of nonperformance by
the counterparty to the financial instrument, but the Company does not expect
the counterparty to fail to meet its obligations given their high credit
ratings. The credit exposure of the interest rate swap is represented by the
fair value (market value) of the contract. At December 31, 2000, an open swap
agreement with a notional value of $100.0 million and an expiration date of
November 2004, had a negative market value of $271,409.
Separate account business
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding
variable annuity and variable life insurance contracts for the exclusive
benefit of variable annuity and variable life insurance contract holders. The
Company receives administrative fees from the separate account and retains
varying amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
Income tax
The Company files a separate Federal income tax return. Deferred taxes are
provided on the temporary differences between the tax and financial statement
basis of assets and liabilities.
(2) Cash Flow Information
The Company defines cash as cash in banks and money market accounts. The
Company paid federal income taxes of $43.9 million, $83.8 million and $126.0
million directly to the United States Treasury Department during 2000, 1999
and 1998, respectively.
32
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Invested Assets and Related Income
The Company is carrying its fixed maturity investment portfolio at
estimated fair value as fixed maturities are considered available for sale.
The carrying value of fixed maturities compared with amortized cost, adjusted
for other-than-temporary declines in value, were as follows:
Estimated
Unrealized
Carrying Amortized -----------------
Value Cost Gains Losses
---------- ---------- ------- ---------
(in thousands)
December 31, 2000
U.S. treasury securities and
obligations of U.S. government
agencies and authorities....... $ 11,823 $ 11,777 $ 69 $ (24)
Obligations of states and
political subdivisions, special
revenue and nonguaranteed...... 24,022 24,207 -- (186)
Debt securities issued by
foreign governments............ 21,811 21,893 90 (171)
Corporate securities............ 2,060,678 2,093,916 12,634 (45,871)
Mortgage and asset-backed
securities..................... 1,038,835 1,037,926 7,495 (6,586)
---------- ---------- ------- ---------
Total fixed maturities........ $3,157,169 $3,189,719 $20,288 $ (52,838)
========== ========== ======= =========
December 31, 1999
U.S. treasury securities and
obligations of U.S. government
agencies and authorities....... $ 6,516 $ 6,631 $ -- $ (115)
Obligations of states and
political subdivisions, special
revenue and nonguaranteed...... 21,656 22,107 -- (451)
Debt securities issued by
foreign governments............ 23,890 24,749 380 (1,239)
Corporate securities............ 2,063,054 2,147,606 2,750 (87,302)
Mortgage and asset-backed
securities..................... 1,160,901 1,196,095 450 (35,644)
---------- ---------- ------- ---------
Total fixed maturities........ $3,276,017 $3,397,188 $ 3,580 $(124,751)
========== ========== ======= =========
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 2000, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
Carrying Amortized
Value Cost
---------- ----------
(in thousands)
One year or less..................................... $ 83,099 $ 86,709
Over one year through five years..................... 868,898 879,011
Over five years through ten years.................... 881,703 891,370
Over ten years....................................... 284,634 294,703
Securities not due at a single maturity date,
primarily mortgage and asset-backed securities(1)... 1,038,835 1,037,926
---------- ----------
Total fixed maturities........................... $3,157,169 $3,189,719
========== ==========
- --------
(1) Weighted average maturity of 4.4 years.
Proceeds from sales of investments in fixed maturities prior to maturity
were $589.9 million, $1,269.3 million and $882.6 million during 2000, 1999 and
1998, respectively. Gross gains of $8.6 million, $7.9 million and $10.1
million and gross losses, including write-downs of fixed maturities for other-
than-temporary declines in value, of $20.8 million, $17.7 million and $8.0
million were realized on sales in 2000, 1999 and 1998,
33
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively. Pre-tax write-downs due to other-than-temporary declines in
value amounted to $11.4 million, $0.1 million and $4.4 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, the Company held a $100.0 million investment in ZSLM
Trust, issued by an affiliate, which exceeded 10 percent of the Company's
stockholder's equity at December 31, 2000. Excluding agencies of the U.S.
government, no other individual investment exceeded 10 percent of the
Company's stockholder's equity at December 31, 2000.
At December 31, 2000, securities carried at approximately $6.3 million were
on deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed
maturity securities, the issue(s) of such issuer would be placed on nonaccrual
status and, since declines in fair value would no longer be considered by the
Company to be temporary, would be analyzed for possible write-down. Any such
issue would be written down to its net realizable value during the fiscal
quarter in which the impairment was determined to have become other than
temporary. Thereafter, each issue on nonaccrual status is regularly reviewed,
and additional write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its
business; the Company's view on the likelihood of success of any proposed
issuer restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $140.4 million real estate portfolio at December 31, 2000
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 2000 and 1999, total impaired real
estate-related loans were as follows:
December 31, December 31,
2000 1999
------------ ------------
(in millions)
Impaired loans without reserves--gross......... $ 62.6 $ 74.9
Impaired loans with reserves--gross............ 23.7 23.4
------ ------
Total gross impaired loans................. 86.3 98.3
Reserves related to impaired loans............. (18.5) (18.5)
Write-downs related to impaired loans.......... (3.5) (3.5)
------ ------
Net impaired loans......................... $ 64.3 $ 76.3
====== ======
Impaired loans without reserves include loans in which the deficit in
equity investments in real estate-related investments is considered in
determining reserves and write-downs. The Company had an average balance of
$90.2 million and $100.0 million in impaired loans for 2000 and 1999,
respectively. Cash payments received on impaired loans are generally applied
to reduce the outstanding loan balance.
At December 31, 2000 and 1999, loans on nonaccrual status, before reserves
and write-downs, amounted to $86.3 million and $98.3 million, respectively.
The Company's nonaccrual loans are generally included in impaired loans.
34
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Investment Income
The sources of net investment income were as follows:
2000 1999 1998
-------- -------- --------
(in thousands)
Interest on fixed maturities.................. $223,964 $231,176 $232,707
Dividends on equity securities................ 4,573 4,618 2,143
Income from short-term investments............ 3,433 3,568 5,391
Income from mortgage loans.................... 6,091 6,296 14,964
Income from policy loans...................... 20,088 20,131 21,096
Income from other real estate-related
investments.................................. 99 155 352
Income from other loans and investments....... 2,455 2,033 2,223
-------- -------- --------
Total investment income................... $260,703 $267,977 $278,876
Investment expense............................ (3,233) (3,337) (5,364)
-------- -------- --------
Net investment income..................... $257,470 $264,640 $273,512
======== ======== ========
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) for the years ended December 31,
2000, 1999 and 1998, were as follows:
2000 1999 1998
------- ------- -------
(in thousands)
Real estate-related.............................. $ 1,711 $ 4,201 $41,362
Fixed maturities................................. (12,185) (9,755) 2,158
Trading account securities--gross gains.......... -- 491 3,254
Trading account securities--gross losses......... -- (7,794) (417)
Trading account securities--holding losses....... -- -- (151)
Equity securities................................ 245 1,039 5,496
Other............................................ 1,952 2,269 166
------- ------- -------
Realized investment gains (losses) before
income tax expense (benefit)................ $(8,277) $(9,549) $51,868
Income tax expense (benefit)..................... (2,897) (3,342) 18,154
------- ------- -------
Net realized investment gains (losses)....... $(5,380) $(6,207) $33,714
======= ======= =======
35
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unrealized gains (losses) are computed below as follows: fixed maturities--
the difference between fair value and amortized cost, adjusted for other-than-
temporary declines in value; equity and other securities--the difference
between fair value and cost. The change in net unrealized investment gains
(losses) by class of investment for the years ended December 31, 2000, 1999
and 1998 were as follows:
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(in thousands)
Fixed maturities..................... $89,421 $(182,456) $36,717
Equity and other securities.......... 1,187 (3,929) (1,075)
Adjustment to deferred insurance
acquisition costs................... (243) 3,834 (2,399)
Adjustment to value of business
acquired............................ (3,614) 13,265 (1,954)
------- --------- -------
Unrealized gain (loss) before
income tax expense (benefit)...... 86,751 (169,286) 31,289
Income tax expense (benefit)......... (1,350) (15,492) 10,952
------- --------- -------
Net unrealized gain (loss) on
investments..................... $88,101 $(153,794) $20,337
======= ========= =======
(4) Unconsolidated Investees
At December 31, 2000 and 1999 the Company, along with other Kemper
subsidiaries, directly held partnership interests in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships.
The Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any
event, major decisions of the partnership must be made jointly by all
partners.
As of December 31, 2000 and 1999, the Company's net equity investment in
unconsolidated investees amounted to $1.0 million and $0.9 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $99 thousand, $155 thousand and $241 thousand in 2000,
1999 and 1998, respectively.
(5) Concentration of Credit Risk
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage
and asset-backed securities and real estate.
Approximately 18.9 percent of the Company's investment-grade fixed
maturities at December 31, 2000 were mortgage-backed securities, down from
20.0 percent at December 31, 1999, due to sales and paydowns during 2000.
These investments consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation
and other investment-grade securities collateralized by mortgage pass-through
securities issued by these entities. The Company has not made any investments
in interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
36
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Approximately 15.1 percent and 16.8 percent of the Company's investment-
grade fixed maturities at December 31, 2000 and 1999, respectively, consisted
of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by commercial mortgage-
backed securities (26.8%), home equity loans (26.3%), manufactured housing
loans (11.3%), collateralized loan and bond obligations (11.2%), and other
commercial assets (8.9%).
The Company's real estate portfolio is distributed by geographic location
and property type. The geographic distribution of a majority of the real
estate portfolio as of December 31, 2000 was as follows: California (40.4%),
Washington (11.9%), Colorado (10.8%) and Illinois (8.4%). The property type
distribution of a majority of the real estate portfolio as of December 31,
2000 was as follows: land (39.6%), hotels (39.5%) and office (9.9%).
To maximize the value of certain land and other projects, additional
development has been proceeding or has been planned. Such development of
existing projects would continue to require funding, either from the Company
or third parties. In the present real estate markets, third-party financing
can require credit enhancing arrangements (e.g., standby financing
arrangements and loan commitments) from the Company. The values of development
projects are dependent on a number of factors, including Kemper's and the
Company's plans with respect thereto, obtaining necessary construction and
zoning permits and market demand for the permitted use of the property. There
can be no assurance that such permits will be obtained as planned or at all,
nor that such expenditures will occur as scheduled, nor that Kemper's and the
Company's plans with respect to such projects may not change substantially.
Slightly more than half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have
taken ownership positions in joint ventures with a small number of partners.
At December 31, 2000, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $63.5 million,
or 45.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 2000, the Company did not have any Nesbitt-related off-
balance-sheet legal funding commitments outstanding.
At December 31, 2000, loans to a master limited partnership (the "MLP")
between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty
Company ("Lumbermens"), a former affiliate, constituted approximately $55.7
million, or 39.7 percent, of the Company's real estate portfolio. Kemper's
interest in the MLP is 75.0 percent at December 31, 2000. Loans to the MLP
were placed on non-accrual status at the beginning of 1999 due to management's
desire not to increase book value of the MLP over net realizable value, as
interest on these loans has historically been added to principal. At December
31, 2000, MLP-related commitments accounted for approximately $0.1 million of
the Company's off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $8.5
million at December 31, 2000 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, these real estate-related investments were placed on
nonaccrual status. As of March 12, 2001, all zoned properties have been sold.
We are currently pursuing the zoning of all remaining unzoned properties.
However, due to the state of Hawaii's economy, which has lagged behind the
economic expansion of most of the rest of the United States, the Company
anticipates that it could be several additional years until it completely
disposes of all of its investments in Hawaii. At December 31, 2000, off-
balance sheet legal commitments related to Hawaiian properties totaled $4.0
million.
37
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 2000.
(6) Income Taxes
Income tax expense (benefit) was as follows for the years ended December
31, 2000, 1999 and 1998:
2000 1999 1998
-------- -------- --------
(in thousands)
Current........................................... $ 28,274 $ 75,816 $ 52,273
Deferred.......................................... (27,027) (42,952) (12,469)
-------- -------- --------
Total......................................... $ 1,247 $ 32,864 $ 39,804
======== ======== ========
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
------- -------- -------
(in thousands)
Unrealized gains and losses on investments.......... $ -- $(21,477) $12,476
Value of business acquired.......................... (1,265) 4,643 (684)
Deferred insurance acquisition costs................ (85) 1,342 (840)
------- -------- -------
Total........................................... $(1,350) $(15,492) $10,952
======= ======== =======
The actual income tax expense for 2000, 1999 and 1998 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 2000, 1999, and 1998 to income before income tax expense.
2000 1999 1998
------- ------- -------
(in thousands)
Computed expected tax expense...................... $17,342 $27,232 $36,734
Difference between "expected" and actual tax
expense:
State taxes...................................... 737 1,608 (434)
Amortization of goodwill and other intangibles... 4,589 4,460 4,460
Dividend received deduction...................... (1,191) -- (540)
Foreign tax credit............................... (214) (306) (250)
Change in valuation allowance.................... (15,201) -- --
Recapture of affiliated reinsurance.............. (4,599) -- --
Other, net....................................... (216) (130) (166)
------- ------- -------
Total actual tax expense....................... $ 1,247 $32,864 $39,804
======= ======= =======
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The $4.6 million tax benefit in 2000 is due to the deferred tax effect
related to the deemed dividend distribution. (See the note captioned "Summary
of Significant Accounting Policies--Reinsurance.") This deferred tax benefit
was recognized in the tax provision under current accounting guidance relating
to the recognition of deferred taxes.
The Company only records deferred tax assets if future realization of the
tax benefit is more likely than not. The Company has established a valuation
allowance to reduce the deferred federal tax asset related to real estate and
unrealized losses on investments to a realizable amount. This amount is based
on the evidence available and
38
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management's judgment. The valuation allowance is subject to future
adjustments based upon, among other items, the Company's estimates of future
operating earnings and capital gains. The decrease in the valuation allowance
in 2000 is related to the ultimate realization of losses on real estate assets
disposed of before December 31, 1995, as well as a change in the amount of
unrealized losses on investments.
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred federal tax assets or liabilities were
as follows:
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(in thousands)
Deferred federal tax assets:
Deferred insurance acquisition costs
("DAC Tax")........................ $131,591 $121,723 $86,332
Unrealized losses on investments.... 12,045 43,758 --
Life policy reserves................ 67,260 43,931 27,240
Unearned revenue.................... 58,200 59,349 42,598
Real estate-related................. 6,515 7,103 13,944
Other investment-related............ 5,330 928 5,770
Other............................... 4,329 3,133 4,923
-------- -------- -------
Total deferred federal tax assets. 285,270 279,925 180,807
Valuation allowance................. (12,045) (58,959) (15,201)
-------- -------- -------
Total deferred federal tax assets
after valuation allowance........ 273,225 220,966 165,606
-------- -------- -------
Deferred federal tax liabilities:
Value of business acquired.......... 33,467 55,884 41,598
Deferred insurance acquisition
costs.............................. 84,280 41,706 32,040
Depreciation and amortization....... 21,799 19,957 19,111
Other investment-related............ 7,973 7,670 14,337
Unrealized gains on investments..... -- -- 21,477
Other............................... 4,925 2,247 1,984
-------- -------- -------
Total deferred federal tax
liabilities...................... 152,444 127,464 130,547
-------- -------- -------
Net deferred federal tax assets....... $120,781 $ 93,502 $35,059
======== ======== =======
The net deferred tax assets relate primarily to unearned revenue and the
DAC Tax associated with a non-registered individual and group variable bank-
owned life insurance contract ("BOLI"). Management believes that it is more
likely than not that the results of future operations will generate sufficient
taxable income over the ten year amortization period of the unearned revenue
and DAC Tax to realize such deferred tax assets.
The tax returns through the year 1993 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the Company's
financial position. The tax returns for the years 1994 through 1996 are
currently under examination by the IRS.
(7) Related-Party Transactions
The Company paid cash dividends of $20.0 million, $115.0 million and $95.0
million to Kemper during 2000, 1999 and 1998, respectively. The Company
received capital contributions from Kemper of $4.3 million during 1998.
39
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has loans to joint ventures, consisting primarily of mortgage
loans on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 2000 and 1999, joint venture mortgage
loans totaled $67.5 million and $67.2 million, respectively, and during 2000,
1999 and 1998, the Company earned interest income on these joint venture loans
of $0.8 million, $0.6 million and $6.8 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life
Assurance Company ("FKLA"), an affiliated company. Expenses are allocated to
the Company for the utilization of FKLA employees and facilities and the
investment management services of Zurich Scudder Investments, Inc. ("ZSI"),
(formerly Scudder Kemper Investments, Inc.), an affiliated company. The
Company paid to SKI investment management fees of $1.6 million, $1.8 million
and $3.1 million during 2000, 1999 and 1998, respectively. In addition,
expenses allocated to the Company from FKLA during 2000, 1999 and 1998
amounted to $23.3 million, $18.3 million and $15.3 million, respectively. The
Company also paid to Kemper real estate subsidiaries fees of $0.6 million,
$1.0 million and $1.5 million in 2000, 1999 and 1998, respectively, related to
the management of the Company's real estate portfolio.
In 2000, the Company purchased PMG Securities Corporation, PMG Asset
Management, Inc., PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively
"PMG"), for $5.5 million. The Company owns 100% of the stock of PMG. Also in
2000, the Company transferred $63.3 million in fixed maturities and cash to
fund the operations of its newly formed subsidiary, Zurich Kemper Life
Insurance Company of New York ("ZKLICONY"). ZKLICONY received its insurance
license from the state of New York in January 2001 and expects to begin
writing business in the second quarter of 2001.
At December 31, 2000, the Company held a $100.0 million investment in ZSLM
Trust, issued by an affiliate.
As previously discussed, the Company entered into an interest rate swap in
2000 with ZCM, an affiliated counterparty. (See the note captioned "Summary of
Significant Accounting Policies--Derivative instruments" above.)
(8) Reinsurance
As of December 31, 2000 and 1999, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate, Fidelity Life
Association ("FLA"), a Mutual Legal Reserve Company, amounted to $262.1
million and $309.7 million, respectively.
The Company cedes 90 percent of all new direct life insurance premiums to
outside reinsurers. Life reserves ceded to outside reinsurers on the Company's
direct business amounted to approximately $2.0 million and $595 thousand as of
December 31, 2000 and 1999, respectively.
The Company is party to a funds withheld reinsurance agreement with a
Zurich affiliated company, Zurich Insurance Company, Bermuda Branch ("ZICBB").
Under the original terms of this agreement, the Company ceded, on a yearly
renewable term basis, 90 percent of the net amount at risk (death benefit
payable to the insured less the insured's separate account cash surrender
value) related to BOLI, which is held in the Company's separate accounts. As
consideration for this reinsurance coverage, the Company cedes separate
account fees (cost of insurance charges) to ZICBB and retains a portion of
such funds under the terms of the reinsurance agreement in a funds withheld
account which is included as a component of benefits and funds payable in the
accompanying consolidated balance sheets. During 1998, the Company modified
the reinsurance agreement to increase the reinsurance from 90 percent to 100
percent.
In the fourth quarter of 2000, the yearly renewable term reinsurance
agreement between the Company and FKLA was terminated. Premiums and reserves
were both reduced by $7.7 million. A difference in the basis of the reserves
between GAAP and statutory accounting resulted in a deemed dividend
distribution to Kemper of $16.3 million.
40
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also in the fourth quarter of 2000, the Company assumed from FKLA $100.0
million in premiums related to a Funding Agreement. Funding Agreements are
insurance contracts similar to structured settlements, immediate annuities and
guaranteed investment contracts ("GICs"). The contracts qualify as insurance
under state laws and are sold as non-surrenderable immediate annuities to a
trust established by a securities firm. The securities firm sold interests in
the trust to institutional investors. This Funding Agreement has a variable
rate of interest based upon LIBOR, is an obligation of the Company's general
account and is recorded as a future policy benefit. As previously discussed,
the Company entered into an interest rate swap in 2000 to exchange the
floating-rate interest payments for fixed interest payments.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Bank Owned Life Insurance (BOLI)
(in millions)
Face amount in force....................... $ 85,358 $ 82,021 $ 66,186
======== ======== ========
Net amount at risk ceded................... $(78,169) $(75,979) $(62,160)
======== ======== ========
Cost of insurance charges ceded............ $ 173.8 $ 166.4 $ 175.5
======== ======== ========
Funds withheld account..................... $ 228.8 $ 263.4 $ 170.9
======== ======== ========
The Company has a funds withheld account ("FWA") supporting reserve credits
on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to
the FWA. A substantial portion of the FWA was marked-to-market based
predominantly upon the total return of the Government Bond Division of the
KILICO Variable Series I Separate Account. During 1998, the Company recorded a
$2.5 million increase to the FWA related to this mark-to-market. In November
1998, to properly match revenue and expenses, the Company had also placed
assets supporting the FWA in a segmented portion of its General Account. This
portfolio was classified as "trading" under Statement of Financial Accounting
Standards No. 115 ("FAS 115") at December 31, 1998 and through November 30,
1999. FAS 115 mandates that assets held in a trading account be valued at fair
value, with changes in fair value flowing through the income statement as
realized capital gains and losses. During 1998, the Company recorded a
realized capital gain of $2.8 million upon transfer of these assets from
"available for sale" to the trading portfolio as required by FAS 115. In
addition, the Company recorded realized capital losses of $7.3 million and
$0.2 million related to the changes in fair value of this portfolio during
1999 and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion
of the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
(9) Postretirement Benefits Other Than Pensions
FKLA sponsors a health and welfare benefit plan that provides insurance
benefits covering substantially all eligible, active and retired employees of
FKLA and their covered dependents and beneficiaries. The Company is allocated
a portion of the costs of providing such benefits. The Company is self insured
with respect to medical benefits, and the plan is not funded except with
respect to certain disability-related medical claims. The medical plan
provides for medical insurance benefits at retirement, with eligibility based
upon age and the participant's
41
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
number of years of participation attained at retirement. The plan is
contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.3 million and $1.2 million at December 31, 2000 and
1999, respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.5 percent and 8.0 percent for 2000 and 1999, respectively.
The assumed health care trend rate used was based on projected experience for
2000, 6.8 percent for 2001, gradually declining to 5.3 percent by the year
2005 and gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 2000 and 1999 by $78 thousand and $190 thousand,
respectively.
(10) Commitments and Contingent Liabilities
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management,
based upon the advice of legal counsel, the resolution of such litigation is
not expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been
identified as a "potentially responsible party" under Federal environmental
guidelines, inherent in the ownership of, or lending to, real estate projects
is the possibility that environmental pollution conditions may exist on or
near or relate to properties owned or previously owned or on properties
securing loans. Where the Company has presently identified remediation costs,
they have been taken into account in determining the cash flows and resulting
valuations of the related real estate assets. Based on the Company's receipt
and review of environmental reports on most of the projects in which it is
involved, the Company believes its environmental exposure would be immaterial
to its consolidated results of operations. However, the Company may be
required in the future to take actions to remedy environmental exposures, and
there can be no assurance that material environmental exposures will not
develop or be identified in the future. The amount of future environmental
costs is impossible to estimate due to, among other factors, the unknown
magnitude of possible exposures, the unknown timing and extent of corrective
actions that may be required, the determination of the Company's liability in
proportion to others and the extent such costs may be covered by insurance or
various environmental indemnification agreements.
(11) Financial Instruments--Off-Balance-Sheet Risk
At December 31, 2000, the Company had future legal loan commitments and
stand-by financing agreements totaling $29.8 million to support the financing
needs of various real estate investments. To the extent these arrangements are
called upon, amounts loaned would be collateralized by assets of the joint
ventures, including first mortgage liens on the real estate. The Company's
criteria in making these arrangements are the same as for its mortgage loans
and other real estate investments. These commitments are included in the
Company's analysis of real estate-related reserves and write-downs. The fair
values of loan commitments and standby financing agreements are estimated in
conjunction with and using the same methodology as the fair value estimates of
mortgage loans and other real estate-related investments.
(12) Fair Value of Financial Instruments
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could
42
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. A significant portion of the Company's
financial instruments are carried at fair value. Fair value estimates for
financial instruments not carried at fair value are generally determined using
discounted cash flow models and assumptions that are based on judgments
regarding current and future economic conditions and the risk characteristics
of the investments. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in assumptions
could significantly affect the estimates and such estimates should be used
with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Fixed maturities and equity securities: Fair values were determined by
using market quotations, or independent pricing services that use prices
provided by market makers or estimates of fair values obtained from yield
data relating to instruments or securities with similar characteristics, or
fair value as determined in good faith by the Company's portfolio manager,
ZSI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
Policy loans: The carrying value of policy loans approximates the fair
value as the Company adjusts the rates to remain competitive.
Mortgage loans and other real estate-related investments: Fair values
were estimated based upon the investments observable market price, net of
estimated costs to sell. The estimates of fair value should be used with
care given the inherent difficulty in estimating the fair value of real
estate due to the lack of a liquid quotable market. Mortgage loans and
other real estate-related investments are stated at their aggregate unpaid
balances, less a valuation allowance of $18.6 million and $19.9 million in
2000 and 1999, respectively. The real estate portfolio is monitored closely
and reserves are adjusted to reflect market conditions. This results in a
carrying value that approximates fair value at December 31, 2000 and 1999.
Other loans and investments: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
The fair values of policy loans were estimated by discounting the expected
future cash flows using an interest rate charged on policy loans for
similar policies currently being issued.
Life policy benefits: For deposit liabilities with defined maturities,
the fair value was based on the discounted value of future cash flows. The
discount rate was based on the rate that would be offered for similar
deposits at the reporting date. For all other deposit liabilities,
primarily deferred annuities and universal life contracts, the fair value
was based on the amount payable on demand at the reporting date.
43
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 2000 and 1999 were as follows:
December 31, 2000 December 31, 1999
--------------------- ---------------------
Carrying Carrying
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(in thousands)
Financial instruments recorded
as assets:
Fixed maturities.............. $3,157,169 $3,157,169 $3,276,017 $3,276,017
Cash and short-term
investments.................. 50,001 50,001 54,406 54,406
Mortgage loans and other real
estate- related assets....... 140,417 140,417 151,623 151,623
Policy loans.................. 256,226 256,226 261,788 261,788
Equity securities............. 63,879 63,879 61,592 61,592
Other invested assets......... 21,792 20,109 25,620 26,226
Financial instruments recorded
as liabilities:
Life policy benefits,
excluding term life reserves. 3,273,573 3,206,501 3,399,299 3,299,254
Funds withheld account........ 228,822 228,822 263,428 263,428
(13) Stockholder's Equity--Retained Earnings
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which
can be paid by the Company without prior approval in 2001 is $20.0 million.
The Company paid cash dividends of $20.0 million, $115.0 million and $95.0
million to Kemper during 2000, 1999 and 1998, respectively. The Company
reported a deemed dividend distribution of $16.3 million during 2000 related
to the recapture of the reinsurance agreement with FKLA.
The Company's net income and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
2000 1999 1998
-------- -------- --------
(in thousands)
Net income....................................... $ 19,975 $ 59,116 $ 64,871
======== ======== ========
Statutory capital and surplus.................... $397,423 $394,966 $455,213
======== ======== ========
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles ("Codification")
guidance, which replaces the Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting as of January 1, 2001. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The Illinois
Insurance Department has adopted the Codification guidance, effective January
1, 2001. The Company's statutory surplus will be positively impacted upon
adoption as a result of the net effect of recording a deferred tax asset, of
non-admitting non-operating system software and of non-admitting net
affiliated receivables and other changes caused by the Codification.
44
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Unaudited Interim Financial Information
The following table sets forth the Company's unaudited quarterly financial
information:
Quarter Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31 Year
-------- -------- ------------ ----------- --------
(in thousands)
2000 Operating Summary
Revenue............... $87,648 $103,446 $94,249 $ 75,567 $360,910
======= ======== ======= ======== ========
Net operating income,
excluding realized
gains (losses)....... $12,031 $ 9,953 $ 8,710 $ 22,987 $ 53,681
Net realized
investment gains
(losses)............. (1,378) (105) 948 (4,845) (5,380)
------- -------- ------- -------- --------
Net income.......... $10,653 $ 9,848 $ 9,658 $ 18,142 $ 48,301
======= ======== ======= ======== ========
1999 Operating Summary
Revenue............... $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income,
excluding realized
gains (losses)....... $11,222 $ 14,385 $11,568 $ 13,972 $ 51,147
Net realized
investment gains
(losses)............. (627) (1,286) (5,098) 804 (6,207)
------- -------- ------- -------- --------
Net income.......... $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
1998 Operating Summary
Revenue............... $98,026 $110,003 $98,752 $112,958 $419,739
======= ======== ======= ======== ========
Net operating income,
excluding realized
gains................ $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435
Net realized
investment gains..... 1,205 10,187 5,818 16,504 33,714
------- -------- ------- -------- --------
Net income.......... $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149
======= ======== ======= ======== ========
45
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Operating Segments and Related Information
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), Disclosures
about Segments of an Enterprise and Related Information. FAS 131 established
standards for how to report information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted FAS 131 as of
December 31, 1998 and the impact of implementation did not affect the
Company's consolidated financial position, results of operations or cash
flows.
The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and
FLA, operate under the trade name Zurich Kemper Life. For purposes of this
operating segment disclosure, Zurich Kemper Life will also include the
operations of Zurich Direct, Inc., an affiliated direct marketing life
insurance agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The
SBU concept employed by ZFS has each SBU concentrate on a specific customer
market. The SBU is the focal point of Zurich Kemper Life, because it is at the
SBU level that Zurich Kemper Life can clearly identify customer segments and
then work to understand and satisfy the needs of each customer. The
contributions of Zurich Kemper Life's SBUs to consolidated revenues, operating
results and certain balance sheet data pertaining thereto, are shown in the
following tables on the basis of accounting principles generally accepted in
the United States.
Zurich Kemper Life is segregated into the Life Brokerage, Financial
Institutions ("Financial"), Retirement Solutions Group ("RSG") and Direct
SBUs. The SBUs are not managed at the legal entity level, but rather at the
Zurich Kemper Life level. Zurich Kemper Life's SBUs cross legal entity lines,
as certain similar products are sold by more than one legal entity. The vast
majority of the Company's business is derived from the Financial and RSG SBUs.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 2000, 1999 and 1998, Zurich Kemper Life did not derive net
revenue from one customer that exceeded 10 percent of the total revenue of
Zurich Kemper Life.
The principal products and markets of Zurich Kemper Life's SBUs are as
follows:
Life Brokerage: The Life Brokerage SBU develops low cost term, universal
life insurance and variable universal life, as well as fixed annuities, to
market through independent agencies and national marketing organizations.
Financial: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and
primarily includes variable and fixed annuities, variable universal life and
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 (primarily included in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
variable annuities to K-12 schoolteachers, administrators, and healthcare
workers, along with college professors and certain employees of selected non-
profit organizations. This target market is eligible for what the IRS
designates as retirement-oriented savings or investment plans that qualify for
special tax treatment.
Direct: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
46
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for ZKL's SBU's is as follows:
As of and for the period ending December 31, 2000:
Income Statement
--------------------------------------------------------
Life
Brokerage Financial RSG Direct Total
(in thousands) ---------- ---------- ---------- ------- -----------
Revenue
Premium income........ $ 96,744 $ 464 $ -- $12,946 $ 110,154
Net investment income. 124,518 198,322 93,299 2,458 418,597
Realized investment
losses............... (4,480) (4,130) (3,356) (88) (12,054)
Fees and other income. 61,976 38,869 60,210 43,916 204,971
---------- ---------- ---------- ------- -----------
Total revenue....... 278,758 233,525 150,153 59,232 721,668
---------- ---------- ---------- ------- -----------
Benefits and Expenses
Policyholder benefits. 118,556 131,552 63,318 1,650 315,076
Intangible asset
amortization......... 55,186 12,782 20,860 -- 88,828
Net deferral of
insurance acquisition
costs................ (35,392) (67,048) (11,416) (43,259) (157,115)
Commissions and taxes,
licenses and fees.... 8,260 84,232 44,431 11,264 148,187
Operating expenses.... 48,166 32,182 29,463 94,635 204,446
---------- ---------- ---------- ------- -----------
Total benefits and
expenses........... 194,776 193,700 146,656 64,290 599,422
---------- ---------- ---------- ------- -----------
Income (loss) before
income tax expense
(benefit).............. 83,982 39,825 3,497 (5,058) 122,246
Income tax expense
(benefit).............. 32,873 7,982 (3,914) (1,762) 35,179
---------- ---------- ---------- ------- -----------
Net income (loss)... $ 51,109 $ 31,843 $ 7,411 $(3,296) $ 87,067
========== ========== ========== ======= ===========
Balance Sheet
Future policy
benefits............. $1,954,307 $2,956,326 $1,365,963 $75,065 $ 6,351,661
========== ========== ========== ======= ===========
Liabilities related to
separate accounts.... $ 23,410 $8,646,454 $2,509,775 $ -- $11,179,639
========== ========== ========== ======= ===========
Liabilities
Net Future Related to
Income Policy Separate
Revenue (Loss) Benefits Accounts
-------- ------- ---------- -----------
Total revenue,
net income,
future policy
benefits and
liabilities
related to
separate
accounts,
respectively,
from above:.. $721,668 $87,067 $6,351,661 $11,179,639
-------- ------- ---------- -----------
Less:
Revenue, net
income and
selected
liabilities
of FKLA.... 268,198 43,922 2,427,185 --
Revenue, net
income and
selected
liabilities
of ZLICA... 48,650 7,212 336,336 --
Revenue, net
loss and
selected
liabilities
of Zurich
Direct..... 43,910 (12,368) -- --
-------- ------- ---------- -----------
Totals per
the
Company's
consolidated
financial
statements$360,910.$48,301 $3,588,140 $11,179,639
======== ======= ========== ===========
47
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of and for the period ending December 31, 1999:
Income Statement
-------------------------------------------------------
Life
Brokerage Financial RSG Direct Total
---------- ---------- ---------- ------- ----------
(in thousands)
Revenue
Premium income........ $ 145,533 $ 410 $ -- $ 8,038 $ 153,981
Net investment income. 137,106 175,590 101,202 1,297 415,195
Realized investment
gains (losses)....... 976 (6,980) (98) -- (6,102)
Fees and other income. 70,477 48,873 35,742 44,528 199,620
---------- ---------- ---------- ------- ----------
Total revenue....... 354,092 217,893 136,846 53,863 762,694
---------- ---------- ---------- ------- ----------
Benefits and Expenses
Policyholder benefits. 200,161 112,869 68,801 3,529 385,360
Intangible asset
amortization......... 54,957 12,053 13,989 -- 80,999
Net deferral of
insurance acquisition
costs................ (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes,
licenses and fees.... 21,881 66,702 26,700 17,411 132,694
Operating expenses.... 56,179 25,101 23,611 71,194 176,085
---------- ---------- ---------- ------- ----------
Total benefits and
expenses........... 295,745 173,061 112,477 50,722 632,005
---------- ---------- ---------- ------- ----------
Income before income tax
expense................ 58,347 44,832 24,369 3,141 130,689
Income tax expense...... 25,707 19,235 10,966 1,114 57,022
---------- ---------- ---------- ------- ----------
Net income.......... $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== ========== ========== ======= ==========
Balance Sheet
Future policy
benefits............. $2,099,940 $2,620,132 $1,577,944 $34,957 $6,332,973
========== ========== ========== ======= ==========
Liabilities related to
separate accounts.... $ 20,552 $6,916,807 $2,840,709 $ -- $9,778,068
========== ========== ========== ======= ==========
Liabilities
Net Future Related to
Income Policy Separate
Revenue (Loss) Benefits Accounts
-------- ------- ---------- -----------
Total revenue,
net income,
future policy
benefits and
liabilities
related to
separate
accounts,
respectively,
from above:.. $762,694 $73,667 $6,332,973 $9,778,068
-------- ------- ---------- ----------
Less:
Revenue, net
income and
selected
liabilities
of FKLA.... 305,334 24,801 2,299,783 --
Revenue, net
income and
selected
liabilities
of ZLICA... 49,460 8,528 314,357 --
Revenue, net
loss and
selected
liabilities
of Zurich
Direct..... 44,481 (4,602) -- --
-------- ------- ---------- ----------
Totals per
the
Company's
consolidated
financial
statements$363,419.$44,940 $3,718,833 $9,778,068
======== ======= ========== ==========
48
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
As of and for the period ending December 31, 1998:
Income Statement
-------------------------------------------------------
Life
Brokerage Financial RSG Direct Total
---------- ---------- ---------- ------- ----------
(in thousands)
Revenue
Premium income........ $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment income. 141,171 180,721 100,695 271 422,858
Realized investment
gains................ 20,335 33,691 15,659 30 69,715
Fees and other income. 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- ------- ----------
Total revenue....... 402,404 254,889 147,428 29,465 834,186
========== ========== ========== ======= ==========
Benefits and Expenses
Policyholder benefits. 243,793 117,742 73,844 2,110 437,489
Intangible asset
amortization......... 58,390 15,669 15,703 -- 89,762
Net deferral of
insurance acquisition
costs................ (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and taxes,
licenses and fees.... 29,539 43,919 22,227 11,707 107,392
Operating expenses.... 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- ------- ----------
Total benefits and
expenses........... 337,812 192,810 109,089 26,645 666,356
========== ========== ========== ======= ==========
Income before income tax
expense................ 64,592 62,079 38,339 2,820 167,830
Income tax expense...... 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- ------- ----------
Net income.......... $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======= ==========
Balance Sheet
Future policy
benefits............. $2,225,727 $2,372,144 $1,648,393 $15,069 $6,261,333
========== ========== ========== ======= ==========
Liabilities related to
separate accounts.... $ 8,497 $4,867,189 $2,223,518 $ -- $7,099,204
========== ========== ========== ======= ==========
Liabilities
Net Future Related to
Income Policy Separate
Revenue (Loss) Benefits Accounts
-------- -------- ---------- -----------
Total revenue,
net income,
future policy
benefits and
liabilities
related to
separate
accounts,
respectively,
from above:.. $834,186 $100,921 $6,261,333 $7,099,204
-------- -------- ---------- ----------
Less:
Revenue, net
income and
selected
liabilities
of FKLA.... 336,841 35,953 2,037,683 --
Revenue, net
loss and
selected
liabilities
of ZLICA... 54,058 (1,066) 317,259 --
Revenue, net
income and
selected
liabilities
of Zurich
Direct..... 23,548 885 -- --
-------- -------- ---------- ----------
Totals per
the
Company's
consolidated
financial
statements$419,739.$ 65,149 $3,906,391 $7,099,204
======== ======== ========== ==========
(16) Subsequent Event
In February 2001, the Company sold to FKLA a $60.0 million group variable
life insurance policy covering all current FKLA employees as of February 14,
2001. The transaction, as business-owned life insurance, will permit FKLA to
indirectly fund certain of its employee benefit obligations.
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Name and Age
Position with Kemper
Investors Life
Insurance Company
("KILICO")
Year of Election Other Business Experience During Past 5 Years or More
-------------------- -----------------------------------------------------
Gale K. Caruso (43) President and Chief Executive Officer of Federal Kemper
President and Chief Life Assurance Company ("FKLA"), Fidelity Life
Executive Officer Association ("FLA") and Zurich Life Insurance Company of
since June 1999. America ("ZLICA"). President and Chief Executive Officer
Director since July of Zurich Direct, Incorporated ("ZD") since April 2000.
1999. Director of FKLA, FLA and ZLICA since July 1999 and of ZD
since March 2000. President and Chief Executive Officer
of Zurich Kemper Life Insurance Company of New York
("ZKLICONY") since April 2000 and Director since October
1999. Chairman and Director of Investors Brokerage
Services, Inc. ("IBS") since May 2000 and of Investors
Brokerage Services Insurance Agency, Inc. ("IBSIA") since
March 2000. Chairman and Director of PMG Asset
Management, Inc. ("PMGAM"), PMG Life Agency Inc.
("PMGLA"), PMG Marketing, Inc. ("PMG Marketing") and PMG
Securities Corporation ("PMG Securities") since March
2000. Executive Vice President and Director of Kemper
Corporation ("Kemper") since February 2000. Chairman,
President and Chief Executive Officer of Scudder Canada
Investor Services, Ltd. from 1995 to June 1999. Managing
Director of Scudder Kemper Investments, Inc. from July
1986 to June 1999.
Eliane C. Frye (53) Executive Vice President of FKLA and FLA since March
Executive Vice 1995. Executive Vice President of ZLICA and ZD since
President since March March 1996. Executive Vice President of ZKLICONY since
1995. Director since April 2000 and Director since October 1999. Director of
May 1998. FLA since December 1997. Director of FKLA and ZLICA since
May 1998. Director of ZD from March 1996 to March 1997.
Director of IBS and IBSIA since 1995.
Frederick L. Blackmon Executive Vice President of FKLA, FLA, ZLICA and ZD since
(49) June 2000. Chief Financial Officer of FKLA since December
Executive Vice 1995. Chief Financial Officer of FLA since January 1996.
President since June Chief Financial Officer of ZLICA and ZD since March 1996.
2000. Chief Financial Senior Vice President and Chief Financial Officer of
Officer since December ZKLICONY since April 2000. Director of FKLA and ZLICA
1995. since January 2001. Senior Vice President of KILICO and
Director since January FKLA from December 1995 to June 2000. Senior Vice
2001. President of FLA from January 1996 to June 2000. Senior
Vice President of ZLICA and ZD from March 1996 to June
2000. Director of FLA since May 1998. Director of ZD from
March 1996 to March 1997 and since January 2001. Chief
Financial Officer of Kemper since January 1996. Treasurer
of Kemper from January 1996 to February 2000.
Russell M. Bostick (43) Executive Vice President of FKLA, FLA, ZLICA and ZD since
Executive Vice June 2000. Chief Information Officer of FKLA, FLA, ZLICA
President since June and ZD since April 1998. Senior Vice President and Chief
2000. Chief Information Officer of ZKLICONY since April 2000. Senior
Information Officer Vice President of FKLA, FLA,
since April 1998.
50
Name and Age
Position with KILICO
Year of Election Other Business Experience During Past 5 Years or More
-------------------- -----------------------------------------------------
ZLICA and ZD from March 1999 to June 2000. Vice President
of FKLA, FLA, KILICO, ZLICA and ZD from April 1998 to
March 1999. Chief Technology Officer of Corporate
Software & Technology from June 1997 to April 1998. Vice
President, Information Technology Department of CNA
Insurance Companies from January 1995 to June 1997.
James C. Harkensee (42) Executive Vice President of FKLA, FLA, ZLICA and ZD since
Executive Vice June 2000. Senior Vice President of ZKLICONY since April
President since June 2000 and Director since October 1999. Senior Vice
2000. President of KILICO, FKLA and FLA from January 1996 to
June 2000. Senior Vice President of ZLICA and ZD from
1995 to June 2000. Director of ZD from April 1993 to
March 1997 and since March 1998.
James E. Hohmann (45) Executive Vice President of FKLA, FLA, ZLICA and ZD since
Executive Vice June 2000. Senior Vice President of ZKLICONY since April
President since June 2000. Senior Vice President of KILICO and FKLA from
2000. December 1995 to June 2000. Chief Actuary of KILICO and
Director since May FKLA from December 1995 to January 1999. Senior Vice
1998. President of FLA from January 1996 to June 2000. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD from March 1996 to June
2000. Chief Actuary of ZLICA and ZD from March 1996 to
January 1999. Director of FLA since June 1997. Director
of FKLA and ZLICA since May 1998. Director of ZD from
March 1996 to March 1997.
Edward K. Loughridge Executive Vice President of FKLA, FLA, ZLICA and ZD since
(46) June 2000. Corporate Development Officer of FKLA and FLA
Executive Vice since January 1996. Corporate Development Officer for
President since June ZLICA and ZD since March 1996. Senior Vice President and
2000. Corporate Corporate Development Officer of ZKLICONY since April
Development Officer 2000. Senior Vice President of KILICO, FKLA and FLA from
since January 1996. January 1996 to June 2000. Senior Vice President of ZLICA
and ZD from March 1996 to June 2000.
Debra P. Rezabek (45) Executive Vice President of FKLA, FLA, ZLICA and ZD since
Executive Vice June 2000. General Counsel of FKLA and FLA since 1992.
President since June General Counsel ZLICA and ZD since March 1996. Corporate
2000. General Counsel Secretary of FKLA and FLA since January 1996. Corporate
since May 1993. Secretary of ZLICA and ZD since March 1996. Director of
Corporate Secretary FKLA and ZLICA since January 2001. Senior Vice President
since January 1996. of KILICO, FKLA, FLA, ZLICA and ZD from March 1996 to
Director since January June 2000. Director of FLA since May 1998. Director of ZD
2001. from March 1996 to March 1997. Senior Vice President,
General Counsel and Corporate Secretary of ZKLICONY since
April 2000. Secretary of IBS and IBSIA since 1993.
Secretary of PMGAM, PMGLA, PMG Marketing and PMG
Securities since March 2000. Director of Government
Affairs of FKLA and FLA from 1992 to April 1997 and of
KILICO from 1993 to April 1997. Assistant Secretary of
Kemper since January 1996.
Edward L. Robbins (61) Executive Vice President of FKLA, FLA, ZLICA and ZD since
Executive Vice June 2000. Chief Actuary of FKLA, FLA, ZLICA and ZD since
President since June March 1999. Senior Vice President and Chief Actuary of
2000. Chief Actuary ZKLICONY since April 2000. Senior Vice President of
since March 1999. KILICO, FKLA, FLA, ZLICA and ZD from March 1999 to June
2000. Senior Actuary of FKLA,
51
Name and Age
Position with KILICO
Year of Election Other Business Experience During Past 5 Years or More
-------------------- -----------------------------------------------------
FLA, KILICO, ZLICA and ZD from July 1998 to March 1999.
Principal of KPMG Peat Marwick LLP from May 1984 to July
1998.
Ivor K. H. Tham (38) Executive Vice President of FKLA, FLA and ZLICA since
Executive Vice September 2000 and of ZD since January 2001. Vice
President since President of Mass Mutual Financial from 1999 to September
September 2000. 2000. Assistant Vice President of Times Publishing Ltd.
from 1994 to 1999.
George Vlaisavljevich Executive Vice President of FKLA, FLA, ZLICA and ZD since
(58) June 2000. Senior Vice President of KILICO, FKLA, FLA and
Executive Vice ZLICA since October 1996. Senior Vice President of ZD
President since June since March 1997. Senior Vice President of ZKLICONY since
2000. April 2000. Director of IBS and IBSIA since October 1996.
Director of PMGAM, PMGLA, PMG Marketing and PMG
Securities since March 2000. Executive Vice President of
The Copeland Companies from April 1983 to September 1996.
Martin D. Feinstein (52) Chairman of the Board of FKLA, FLA and ZLICA since
Chairman of the Board January 2001. Chairman of the Board of Farmers Group,
since January 2001. Inc. ("FGI") since November 1997 and President since
January 1995. Chief Executive Officer of FGI since
January 1995 and Director since February 1995. Member of
Group Management Board of Zurich Financial Services since
March 1998. Director of Zurich Scudder Investments, Inc.
since January 2001. Director of Farmers New World Life.
Chief Operating Officer of FGI from January 1995 to
January 1997. Director of B.A.T. from January 1997 to
September 1998.
52
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
--------------------- --------------
Other Long Term
Annual Incentive Plan All Other
Name and Principal Compensation Payouts Compensation
Position Year Salary($) Bonus($)(2) ($)(3) ($)(2) ($)(4)
- ------------------ ---- --------- ----------- ------------ -------------- ------------
Gale K. Caruso......... 2000 $179,500 $ -- $10,866 $ -- $14,094
Chief Executive
Officer(1) 1999 91,636 93,840 23,088 117,600 4,800
Frederick L. Blackmon.. 2000 109,760 -- 7,060 -- 11,637
Executive Vice
President and 1999 113,420 62,805 20,545 90,630 13,640
Chief Financial
Officer(1) 1998 94,160 63,800 -- 78,540 8,977
George Vlaisavljevich.. 2000 260,000 -- 17,493 -- 30,750
Executive Vice
President(1) 1999 260,000 152,500 -- 208,000 30,600
1998 260,000 146,000 -- 216,600 23,236
James E. Hohmann....... 2000 252,200 -- 15,105 -- 29,197
Executive Vice
President(1) 1999 237,650 141,620 -- 190,120 31,767
1998 88,400 71,175 -- 79,560 7,823
Edward Robbins......... 2000 110,250 -- 6,382 -- 11,937
Executive Vice
President and 1999 90,000 -- 4,575 -- 4,625
Chief Actuary(1) 1998 29,538 -- -- -- --
- --------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of
the time devoted to duties as executive officer of KILICO has been made.
All compensation items reported in the Summary Compensation Table reflect
this allocation.
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses and long-term compensation awards earned in 2000 for all
officers were not available as of the date of this filing.
(3) The amounts disclosed in this column include:
(a) The taxable benefit from personal use of an employer-provided
automobile and certain estate planning services facilitated for executives.
(b) Relocation expense reimbursements of $18,574 in 1999 for Ms. Caruso.
(4) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of March 1, 2001, 100% of the outstanding shares of KILICO were
owned by Kemper Corporation, 1 Kemper Drive, Long Grove, Illinois 60049.
(b) Not applicable.
(c) Not applicable.
53
Item 13. Certain Relationships and Related Transactions
(a) Transactions with management and others--none.
(b) Certain business relationships--not applicable.
(c) Indebtedness of management--not applicable.
(d) Transactions with promoters--not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements.
A listing of all financial statements filed as part of this Annual
Report on Form 10-K is included on page 23 in ITEM 8.
(a)(2) Schedules.
The following schedules are supplemental to the financial statements of
KILICO and its subsidiaries for 2000 and are included in this Form 10-K on
the pages indicated below. All other schedules are omitted because the
information required to be stated therein is included in the financial
statements or notes thereto or because they are not applicable.
Schedule Title Page
-------- ----- ----
Supplementary insurance information at December 31, 2000
III and 1999................................................... 57
IV Reinsurance, for the year ended December 31, 2000*......... 58
Valuation and qualifying accounts, for the year ended
V December 31, 2000*......................................... 59
- --------
* This schedule for the years ended December 31, 1999 and 1998 is
incorporated by reference to KILICO's Form 10-K filed on March 28, 2000
and on March 26, 1999, respectively.
(a)(3) Exhibits.
The exhibits required to be filed by Item 601 of Regulation S-K are
listed under the caption "Exhibits" in Item 14(c).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 2000.
(c) Exhibits.
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation are incorporated herein by reference
to Exhibits filed with Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.
3(b) Bylaws are incorporated herein by reference to Exhibits filed
with Registration Statement on Form S-1 (File No. 333-02491)
filed on or about April 12, 1996.
4(a) Form of Variable and Market Value Adjusted Deferred Annuity
Contract is incorporated herein by reference to Exhibits filed
with Registration Statement on Form S-1 (File No. 33-43462)
filed October 23, 1991.
4(b) Form of Certificate to Variable and Market Value Adjusted
Deferred Annuity Contract and Enrollment Application is
incorporated herein by reference to Exhibits filed with
Registration Statement on Form S-1 (File No. 33-43462) filed
October 23, 1991.
4(c) Form of Individual Variable and Market Value Adjusted Annuity
Contract and Enrollment Application is incorporated herein by
reference to Exhibits filed with Post-Effective Amendment No.
4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed
November 19, 1993.
4(d) Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract is incorporated herein by reference
to Exhibits filed with Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 for KILICO Variable Annuity
Separate Account (File No. 33-43501) filed November 19, 1993.
54
Exhibit No. Description
----------- -----------
4(e) Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract is incorporated
herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4 for
KILICO Variable Annuity Separate Account (File No. 33-43501)
filed November 19, 1993.
4(f) Form of Revised Variable and Market Value Adjusted Deferred
Annuity Contract is incorporated herein by reference to
Exhibits filed with Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 for KILICO Variable Annuity
Separate Account (File No. 33-43501) filed November 19, 1993.
4(g) Form of Revised Certificate to Variable and Market Value
Adjusted Deferred Annuity Contract is incorporated herein by
reference to Exhibits filed with Post-Effective Amendment No.
4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed
November 19, 1993.
10(a) Distribution Agreement between Kemper Investors Life Insurance
Company and Investors Brokerage Services, Inc. is incorporated
herein by reference to Exhibits filed with Amendment No. 4 to
Registration Statement on Form S-1 (File No. 33-43462) filed
on April 14, 1995.
24 Power of Attorney (filed herewith)
55
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Kemper Investors Life Insurance Company has duly caused this Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Long Grove, State of Illinois, on the 28th day of March, 2001.
Kemper Investors Life Insurance
Company
/s/ Gale K. Caruso*
By: _________________________________
Gale K. Caruso
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 has
been signed below by the following persons on behalf of Kemper Investors Life
Insurance Company in the capacities indicated on the 28th day of March, 2001.
Signature Title
--------- -----
/s/ Martin D. Feinstein* Chairman of the Board
___________________________________________
Martin D. Feinstein
/s/ Gale K. Caruso* President, Chief Executive Officer and
___________________________________________ Director
Gale K. Caruso
/s/ Frederick L. Blackmon* Executive Vice President and Chief
___________________________________________ Financial Officer
Frederick L. Blackmon
/s/ Eliane C. Frye* Director
___________________________________________
Eliane C. Frye
/s/ David S. Jorgensen Senior Vice President, Controller
*By: ________________________________ and Treasurer
David S. Jorgensen,
Pursuant to a Power of Attorney
56
SCHEDULE III
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
December 31, 2000
(in thousands)
Other
Future Policyholder
Deferred Policy Policy Benefits and
Segment Acquisition Cost Benefits Funds Payable
- ------- ---------------- ---------- -------------
Life Brokerage Strategic Business
Unit ("SBU")........................ $294,387 $1,954,307 $338,686
Financial Institutions SBU........... 133,785 2,956,326 121,178
Retirement Solutions Group ("RSG")
SBU................................. 84,822 1,365,963 55,300
Direct SBU........................... 110,893 75,065 50,354
-------- ---------- --------
Subtotal............................. 623,887 6,351,661 565,518
Deduct:
Zurich Life Insurance Company of
America ("ZLICA")................... 140,732 336,336 2,590
Federal Kemper Life Assurance Company
("FKLA")............................ 242,354 2,427,185 163,343
Zurich Direct........................ -- -- --
-------- ---------- --------
383,086 2,763,521 165,933
-------- ---------- --------
Net KILICO........................... $240,801 $3,588,140 $399,585
======== ========== ========
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
December 31, 1999
(in thousands)
Other
Future Policyholder
Deferred Policy Policy Benefits and
Segment Acquisition Cost Benefits Funds Payable
- ------- ---------------- ---------- -------------
Life Brokerage SBU.................... $245,605 $2,099,940 $347,207
Financial Institutions SBU............ 75,324 2,620,132 158,607
RSG SBU............................... 78,709 1,577,944 92,787
Direct SBU............................ 74,312 34,957 81,657
-------- ---------- --------
Subtotal.............................. 473,950 6,332,973 680,258
Deduct:
ZLICA................................. 108,610 314,357 12,370
FKLA.................................. 205,673 2,299,783 210,560
Zurich Direct......................... -- -- --
-------- ---------- --------
314,283 2,614,140 222,930
-------- ---------- --------
Net KILICO............................ $159,667 $3,718,833 $457,328
======== ========== ========
57
SCHEDULE IV
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
Year Ended December 31, 2000
(in thousands)
Assumed From Percentage of
Gross Ceded to Other Net Amount
Description Amount Other(1) Companies(2) Amount Assumed to Net
- ----------- ----------- ------------ ------------ ---------- --------------
Life insurance in force. $88,681,157 $(79,537,477) $ -- $9,143,680 0.0%
=========== ============ ====== ========== =====
Life insurance premiums. $ 806 $ (131) $7,719 $ 8,394 92.0%
=========== ============ ====== ========== =====
- --------
(1) Life insurance in force ceded to other companies was primarily ceded to an
affiliated company, Zurich Insurance Company, Bermuda Branch.
(2) Premiums assumed during 2000 were from an affiliated company, Federal
Kemper Life Assurance Company.
58
SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2000
(in thousands)
Additions
---------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts-- Deductions End of
Description of Period Expenses Describe --Describe Period
- ----------- ---------- ---------- ---------------- ---------- ----------
Asset valuation
reserves:
Joint venture mortgage
loans................ $16,433 $ -- $ -- $ -- $16,433
Third-party mortgage
loans................ -- -- -- -- --
Other real estate-
related investments.. 3,423 -- -- 1,240 2,183
------- ------- ------- ------ -------
Total............... $19,856 $ -- $ -- $1,240(1) $18,616
======= ======= ======= ====== =======
- --------
(1) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.
59
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
24 Power of Attorney
60