UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1994
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from N/A to N/A
Commission file number: 1-10242
KEMPER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-6169781
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
One Kemper Drive
Long Grove, Illinois 60049-0001
(Address of principal executive offices) (Zip Code)
</TABLE>
708-320-4700
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of November 1, 1994, 34,200,892 shares of Kemper Corporation Common
Stock, $5 par value, were outstanding.
Exhibit Index on page 42
KEMPER CORPORATION
THIRD-QUARTER 1994
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheet -
September 30, 1994 and December 31, 1993...................... 3
Consolidated Statement of Operations -
Three months and nine months ended September 30, 1994 and 1993 4
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1994 and 1993................. 5
Notes to Consolidated Financial Statements....................... 6
Management's Discussion and Analysis -
Results of Operations and Financial Condition................. 9
Investments (continuing operations)........................... 24
Liquidity and Capital Resources............................... 35
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................... 39
ITEM 5. Other Information...................................... 39
ITEM 6. Exhibits and Reports on Form 8-K....................... 42
Signatures....................................................... 43
Exhibit 27....................................................... 44
</TABLE>
- 2 -
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1994, $5,815,131; 1993, $5,147,592) $ 5,583,914 $ 5,333,175
Equity securities, at market (cost 1994, $29,558; 1993, $53,366) 35,944 98,968
Short-term investments 441,450 713,401
Joint venture mortgage loans 938,462 1,053,403
Third-party mortgage loans 145,444 153,880
Other real estate-related investments 276,076 272,188
Other loans and investments 451,795 446,717
----------- -----------
Total investments 7,873,085 8,071,732
Cash (restricted 1994, $430; 1993, $470) 244,944 253,105
Securities purchased under resale agreements 236,771 204,467
Securities held by brokerage firm subsidiaries, at market 178,036 285,695
Accounts receivable from brokerage firms and customers 781,316 776,971
Other accounts and notes receivable 776,182 617,458
Reinsurance recoverable 775,962 835,975
Deferred insurance acquisition costs 666,895 622,592
Deferred investment product sales costs 174,954 186,931
Other assets 274,236 299,543
Assets of separate accounts 1,895,048 1,883,656
----------- -----------
Total assets $13,877,429 $14,038,125
=========== ===========
LIABILITIES
Life policy benefits $ 7,244,897 $ 7,380,787
Ceded life policy benefits 775,962 835,975
Securities sold under repurchase agreements 210,025 181,879
Securities sold, not yet purchased, at market 75,716 77,023
Accounts payable to brokerage firms and customers 324,821 354,998
Other accounts payable and liabilities 1,226,380 915,954
Notes payable 338,226 349,237
Long-term debt 389,939 393,978
Convertible debentures of subsidiary 38,401 45,651
Liabilities of separate accounts 1,895,048 1,883,656
----------- -----------
Total liabilities 12,519,415 12,419,138
----------- -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock-no par value (outstanding 1994, 6,681,165; 1993, 6,690,637 shares) 360,363 360,600
Common stock-$5.00 par value (issued 1994, 65,969,796; 1993, 64,620,863 shares) 329,849 323,104
Additional paid-in capital 358,198 313,531
Unrealized loss on foreign currency translations (39,627) (56,878)
Unrealized gain (loss) on investments (225,828) 155,004
Retained earnings 1,603,894 1,549,580
Treasury shares, at cost (1994, 31,812,493; 1993, 31,717,505 shares) (1,028,835) (1,025,954)
----------- -----------
Total stockholders' equity 1,358,014 1,618,987
----------- -----------
Total liabilities and stockholders' equity $13,877,429 $14,038,125
=========== ===========
<F1>
See accompanying notes to consolidated financial statements.
</TABLE>
- 3 -
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------- ------------------
1994 1993 1994 1993
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Revenue
Asset management income $ 341,246 $ 374,010 $110,761 $ 125,862
Net investment income 356,099 316,294 133,497 101,825
Insurance premium income 113,248 115,907 38,077 40,694
Securities brokerage income 379,915 483,394 112,507 158,046
Realized investment loss (21,789) (302,085) (46,541) (205,559)
Other income 72,650 59,050 23,119 21,511
---------- --------- -------- ---------
Total 1,241,369 1,046,570 371,420 242,379
---------- --------- -------- ---------
Benefits and expenses
Asset management expenses 193,596 222,216 64,851 79,065
Amortized investment product sales costs 42,020 35,123 14,525 12,575
Insurance claim costs and policyholder benefits 357,302 390,684 121,017 126,394
Amortized policy acquisition costs 49,608 41,508 8,890 12,619
Securities brokerage expenses 373,241 471,079 114,114 147,789
Interest expense 55,343 55,397 17,703 18,268
Other expenses 30,804 36,062 9,900 10,793
---------- ---------- -------- ---------
Total 1,101,914 1,252,069 351,000 407,503
---------- ---------- -------- ---------
Earnings (loss) from continuing operations before income tax 139,455 (205,499) 20,420 (165,124)
---------- ---------- -------- ---------
Income tax (benefit)
Current 17,111 51,663 (21,337) (6,406)
Deferred 32,985 (108,724) 27,486 (39,894)
---------- ---------- -------- ---------
Total income tax (benefit) 50,096 (57,061) 6,149 (46,300)
---------- ---------- -------- ---------
Income (loss) from continuing operations 89,359 (148,438) 14,271 (118,824)
Income from discontinued operations, net of tax - 24,905 - 12,196
Gain (loss) on sale of discontinued operations to related
party, net of tax (576) 186,059 - 186,059
Gain on sales of discontinued operations, net of tax 6,303 82,927 3,250 82,927
---------- ---------- -------- ---------
Income before cumulative effect of a change in
accounting principle 95,086 145,453 17,521 162,358
Cumulative effect of a change in accounting principle, net of tax - 2,545 - -
---------- ---------- -------- ---------
Net income $ 95,086 $ 147,998 $ 17,521 $ 162,358
========== ========== ======== =========
Net income applicable to common stockholders $ 77,403 $ 135,237 $ 11,630 $ 156,308
========== ========== ======== =========
Net income (loss) per share:
Primary
Income (loss) from continuing operations $ 2.09 $ (3.52) $ .24 $ (3.24)
Income from discontinued operations .17 6.41 .10 7.29
-------- ---------- -------- ---------
Income before cumulative effect of a change in
accounting principle 2.26 2.89 .34 4.05
Cumulative effect of a change in accounting principle, net of tax - .06 - -
-------- ---------- -------- ---------
Net income per share $ 2.26 $ 2.95 $ .34 $ 4.05
======== ========== ======== =========
Fully diluted
Income (loss) from continuing operations $ 2.08 $ (3.17) $ .24 $ (2.74)
Income from discontinued operations .14 6.01 .10 6.37
-------- ---------- -------- ---------
Income before cumulative effect of a change in
accounting principle 2.22 2.84 .34 3.63
Cumulative effect of a change in accounting principle, net of tax - .05 - -
-------- ---------- -------- ---------
Net income per share $ 2.22 $ 2.89 $ .34 $ 3.63
======== ========== ======== =========
Cash dividends declared per common share $ .69 $ .92 $ .23 $ .46
======== ========== ======== =========
Cash dividends paid per common share $ .69 $ .69 $ .23 $ .23
======== ========== ======== =========
<F1>
See accompanying notes to consolidated financial statements.
</TABLE>
- 4 -
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1994 1993
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 95,086 $ 147,998
Reconcilement of net income to net cash provided:
Realized investment loss 21,789 302,085
Gains from sales of discontinued operations (5,728) (268,986)
Life policy benefits 277,142 317,623
Accounts payable to brokerage firms and customers (30,177) (201,966)
Deferred federal income tax 78,086 (77,408)
Brokerage firm portfolios 102,193 (68,571)
Accounts receivable from brokerage firms and customers (4,345) 27,904
Deferred insurance acquisition costs (44,303) (35,018)
Deferred investment product sales costs 11,977 (22,916)
Amortization on investments 15,070 763
Other accounts and notes receivable 26,851 26,090
Other accounts payable and liabilities (111,099) 100,725
Equity income from affiliates 32,356 57,011
Other (58,987) 74,394
----------- ----------
Net cash provided from operating activities 405,911 379,728
----------- ----------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 141,236 180,497
Fixed maturities sold prior to maturity 1,526,303 1,944,452
Equity securities 63,353 45,620
Mortgage loans, other loans and investments 513,051 164,950
Cost of investments purchased:
Fixed maturities (2,396,007) (2,630,702)
Equity securities (469) (5,830)
Mortgage loans, other loans and investments (289,033) (405,998)
Short-term investments, net 284,109 (421,906)
Unsettled investment transactions, net 284,265 179,283
Sale of discontinued operations - 285,074
Other (67,338) (3,676)
----------- ----------
Net cash provided from (used in) investing activities 59,470 (668,236)
----------- ----------
Cash flows from financing activities
Policyholder account balances:
Deposits 297,320 323,260
Withdrawals (710,352) (587,598)
Issuance of long-term debt - 202,600
Reduction of long-term debt (909) (1,973)
Issuance of preferred stock - 251,920
Treasury shares acquired (6,715) (1,733)
Dividends paid to stockholders (40,772) (50,542)
Notes payable, net (14,141) 58,970
Other 2,027 41,633
----------- ----------
Net cash provided from (used in) financing activities (473,542) 236,537
----------- ----------
Net decrease in cash (8,161) (51,971)
Cash, beginning of period 253,105 246,040
----------- ----------
Cash, end of period $ 244,944 $ 194,069
=========== ==========
<F1>
See accompanying notes to consolidated financial statements.
</TABLE>
- 5 -
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management, all necessary adjustments consisting of
normal recurring accruals have been made for a fair statement of
operations for the periods included in these financial statements.
These financial statements should be read in conjunction with the
financial statements and related notes in the 1993 Annual Report.
Certain reclassifications have been made in these financial statements
for 1993 to conform to the 1994 presentation.
2. Net income per share is based on the weighted average number of common
shares and common share equivalents outstanding during the periods. Net
income per share reflects the effect of employee interests in Kemper
Financial Companies, Inc. on a fully converted basis. The calculation
of primary net income per share is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
----------------- ------------------
(in thousands, except per share data) 1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income reported $ 95,086 $147,998 $17,521 $162,358
Add back:
Dividends on redeemable securities of subsidiary * * * *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax * * * *
Deduct:
Employee interests in subsidiary, assuming full conversion * * * *
Dividends on preferred stock 17,683 12,761 5,891 6,050
------- -------- ------- --------
Total $77,403 $135,237 $11,630 $156,308
======= ======== ======= ========
Average common and equivalent shares outstanding 34,256 45,837 34,625 38,557
======= ======== ======= ========
Net income per share $ 2.26 $ 2.95 $ .34 $ 4.05
======= ======== ======= ========
</TABLE>
The calculation of net income per share on a fully diluted basis is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
----------------- ------------------
(in thousands, except per share data) 1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income reported $95,086 $147,998 $17,521 $162,358
Add back:
Dividends on redeemable securities of subsidiary * * * *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax * * * *
Deduct:
Employee interests in subsidiary, assuming full conversion * * * *
Dividends on preferred stock 6,563 6,563 2,186 2,188
------- -------- ------- --------
Total $88,523 $141,435 $15,335 $160,170
======= ======== ======= ========
Average common and equivalent shares outstanding 39,804 48,902 40,048 44,119
======= ======== ======= ========
Net income per share $ 2.22 $ 2.89 $ ** $ 3.63
======= ======== ======= ========
<F1>
* The effect of employee interests in Kemper Financial Companies, Inc. is anti-dilutive for the period;
accordingly, net income is not adjusted.
<F2>
** Net income per share on a fully diluted basis is anti-dilutive; accordingly, net income per share
is not adjusted.
</TABLE>
- 6 -
3. The unrealized gains (losses), net of applicable taxes, on fixed
maturity investments and equity securities not reflected in net income
were $(380.8) million and $116.9 million for the nine months ended
September 30, 1994 and 1993, respectively.
4. At September 30, 1994, there were 20 million authorized shares of
preferred stock with 14.5 thousand shares of Series A Cumulative
Convertible Preferred Stock issued and outstanding, 2.0 million shares
of Series C Cumulative Preferred Stock issued and outstanding, 66.6
thousand shares of Series D Index Exchangeable Preferred Stock issued
and outstanding, and 4.6 million shares of Series E Convertible
Preferred Stock issued and outstanding. Of the 200 million shares of
authorized common stock, there were 66.0 million issued, 31.8 million in
treasury and 34.2 million outstanding at September 30, 1994.
5. Kemper Corporation (the "Company") defines cash as cash, money market
accounts and certain short-term investments with original maturities of
three months or less. Federal income tax paid for the nine months ended
September 30, 1994 was $28.1 million, compared with $33.5 million in the
same period of 1993. Interest payments totaled $55.6 million and $49.6
million for the nine months ended September 30, 1994 and 1993,
respectively.
6. The Company adopted SFAS 109, "Accounting for Income Taxes," as of
January 1, 1993. SFAS 109 establishes new principles for calculating
and reporting the effects of income taxes in financial statements. SFAS
109 replaced the income statement orientation inherent in the prior
income tax accounting standard with a balance sheet approach. Under the
new approach, deferred tax assets and liabilities are generally
determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. SFAS 109
allows recognition of deferred tax assets if future realization of the
tax benefit is more likely than not, with a valuation allowance for the
portion that is not likely to be realized.
The implementation of SFAS 109 resulted in a one-time increase to
earnings of $2.5 million in the first quarter of 1993. The cumulative
effect on continuing operations was an expense of $11.9 million and on
discontinued operations a benefit of $14.4 million. Financial
statements prior to 1993 have not been restated to apply the provisions
of SFAS 109.
Upon adoption of SFAS 109, a valuation allowance was established to
reduce the deferred federal tax asset related to real estate and other
investments to the amount that, based upon available evidence, is, in
management's judgment, more likely than not to be realized. Any
reversals of the valuation allowance are contingent upon the recognition
of future capital gains in the Company's federal income tax return or a
change in circumstances which causes the recognition of the benefits to
become more likely than not. During the first nine months of 1994, the
valuation allowance was increased by $79.0 million. This increase in
the valuation allowance solely relates to the increase in the net
deferred federal tax asset from unrealized losses on investments.
- 7 -
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred federal tax asset from continuing
operations are as follows:
<TABLE>
<CAPTION>
September 30 December 31
(in thousands) 1994 1993
------------ -----------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related $ 268,326 $ 268,699
Life policy reserves 131,878 134,274
Unrealized losses on investments 78,986 -
Accrued expenses 36,511 50,359
Accrued employee benefits 26,902 26,663
Other investment-related 16,989 22,071
Tax capitalization of deferred acquisition costs 22,432 18,100
Other 17,854 17,436
--------- ---------
Total deferred federal tax assets 599,878 537,602
Valuation allowance (130,489) (51,503)
--------- ---------
Total deferred federal tax assets after valuation
allowance 469,389 486,099
--------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 233,413 217,907
Unrealized gains on investments - 81,065
Deferred investment product sales costs 61,234 65,426
Depreciation and amortization 34,816 33,754
Partnerships 9,099 4,606
Other investment-related 9,191 4,673
Other 12,850 18,112
--------- ---------
Total deferred federal tax liabilities 360,603 425,543
--------- ---------
Net deferred federal tax asset $ 108,786 $ 60,556
========= =========
</TABLE>
The valuation allowance of $130.5 million is subject to future
adjustments, based on, among other items, the Company's estimates of
future operating earnings and capital gains.
The tax returns through the year 1986 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the
Company's financial position. The tax returns for the years 1987
through 1990 are currently under examination by the IRS.
7. Effective with first-quarter 1994, the Company adopted SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." As
the Company had previously classified its fixed maturities as "available
for sale", no adjustment to the Company's financial statements was
required.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Recent Development
As previously reported, on June 26, 1994, Kemper Corporation ("Kemper")
signed a definitive merger agreement with Conseco, Inc. ("Conseco"). The
transaction is subject to, among other conditions, financing and certain
approvals by state insurance regulators, mutual fund boards and
shareholders and the stockholders of both Kemper and Conseco. The
transaction is not expected to close prior to 1995. (See Part II, ITEM 5
of this Form 10-Q.)
Total operations
Kemper Corporation and its subsidiaries (the "Company") reported net income
(including discontinued operations) of $95.1 million for the first nine
months of 1994, compared with $148.0 million for the same period of 1993.
The after-tax results for the first nine months of 1994 included realized
investment losses of $8.6 million, compared with realized investment gains
of $72.4 million in the same period of 1993. Net income for the third
quarter of 1994 totaled $17.5 million, compared with $162.4 million in
third-quarter 1993. Third-quarter 1994 included realized investment losses
of $27.0 million, compared with gains of $127.0 million in the same period
of 1993. Net income per share for the nine-month period of 1994 was $2.26
primary ($2.22 fully diluted), compared with net income per share of $2.95
primary ($2.89 fully diluted) for the same period in 1993. Net income per
share for the third quarter of 1994 was $.34 (both primary and fully
diluted), compared with net income of $4.05 per share (both primary and
fully diluted) in third-quarter 1993.
Discontinued operations reported net income of $5.7 million in the first
nine months of 1994, compared with $308.3 million in the first nine months
of 1993. In the third quarter of 1994, discontinued operations reported
net income of $3.2 million, compared with net income of $281.2 million in
third-quarter 1993.
- 9 -
Summary of Income (Loss) by Category
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30
---------------------------------------------------------------------------
1994 1993
--------------------------------- -------------------------------------
Operating
Realized Net earnings(1) Realized Net
Operating Investment Income before SFAS Investment Income
earnings(1) Results(2) (Loss) SFAS 109 109(3) Results(2) (Loss)
----------- --------- ------ ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset management $ 57.4 $ - $ 57.4 $ 67.6 $ .9 $ - $ 68.5
Life insurance 101.7 (38.5) 63.2 60.3 2.7 (31.9) 31.1
Securities brokerage (3.0) - (3.0) (0.9) (5.5) - (6.4)
Real estate (25.1) 22.6 (2.5) (39.9) (5.7) (185.4) (231.0)
Other operations and
corporate (27.3) 1.6 (25.7) (18.2) (4.3) - (22.5)
------ ------ ------ ------ ----- ------- -------
Continuing operations 103.7 (14.3) 89.4 68.9 (11.9) (217.3) (160.3)
Discontinued operations - 5.7 5.7 4.2 14.4 289.7 308.3
------ ------ ------ ------ ----- ------- -------
Total $103.7 $ (8.6) $ 95.1 $ 73.1 $ 2.5 $ 72.4 $ 148.0
====== ====== ====== ====== ===== ======= =======
<F1>
(1) Net income (loss) excluding realized investment results.
<F2>
(2) See following table for realized investment results.
<F3>
(3) Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards
("SFAS") 109, which changed the method of accounting for deferred income taxes.
</TABLE>
Operating earnings for continuing operations improved to $103.7 million in
the first nine months of 1994, compared with $68.9 million (before the SFAS
109 charge) in the same 1993 period. Operating earnings for the third
quarter of 1994 improved to $44.5 million, compared with $32.8 million in
the same period of 1993. This improvement, in both the nine-month and
third-quarter results, was primarily from improved spreads in the life
insurance segment and reduced joint venture operating losses in the real
estate segment. The first nine months and the third quarter of 1994
included after-tax charges of $9.8 million and $2.9 million, respectively,
primarily in the holding company, principally relating to a now terminated
proxy contest as well as merger-related expenses.
Realized Investment Gain (Loss)
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 Three Months Ended September 30
------------------------------ -------------------------------
1994 1993 1994 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Real estate-related gains (losses):
Decrease (increase) in reserve $ 172.2 $(181.1) $ 151.2 $ (99.6)
Write-downs of real estate-related
investments (244.7) (178.2) (170.4) (128.8)
Realized gains (losses) on sales or
other transfers 87.5 (3.2) 34.2 (3.2)
------- ------- ------- -------
Total real estate-related gains (losses) 15.0 (362.5) 15.0 (231.6)
Fixed maturity write-downs (.2) (25.9) - (3.1)
Other gains and losses, net (36.6) 86.3 (61.6) 29.1
------- ------- ------- -------
Realized investment losses
from continuing operations (21.8) (302.1) (46.6) (205.6)
Income tax expense (benefit) (7.5) 84.8 (16.3) (53.9)
------- ------- ------- -------
Net gain (loss) from continuing
operations (14.3) (217.3) (30.3) $(151.7)
Realized investment gain from discontinued
operations, net of tax - 20.7 - 9.7
Gain on sale of discontinued operations,
net of tax 5.7 269.0 3.3 269.0
------- ------- ------- -------
Total $ (8.6) $ 72.4 $ (27.0) $ 127.0
======= ======= ======= =======
</TABLE>
- 10 -
Revenue from continuing operations totaled $1.24 billion for the first nine
months of 1994, compared with $1.05 billion for the same 1993 period. The
increase was primarily due to the lower level of realized investment losses
totaling $21.8 million in the first nine months of 1994, compared with
realized investment losses of $302.1 million in the first nine months of
1993. Revenue for the real estate segment improved by $323.4 million
primarily due to reduced realized investment losses as well as lower joint
venture operating losses (see "Real Estate" below). Revenue from the
securities brokerage segment decreased $108.3 million in the first nine
months of 1994 (see "Securities Brokerage" below). Asset management
revenue fell $36.9 million primarily due to a decrease in commissions
earned due to reduced new sales and lower management fees reflecting a
decline in assets under management. (see "Asset Management" below).
Book value per share at September 30, 1994 was $29.21, compared with $38.24
at year-end 1993, as the change in unrealized loss on investments of $380.8
million, or $11.15 per share (see "INVESTMENTS" below), in the first nine
months of 1994 more than offset improvements in net income per share.
Net income (loss) per share in the following segment discussions is on a
primary basis.
- 11 -
Asset Management
The asset management segment consists principally of Kemper Financial
Services, Inc. ("KFS") and its subsidiaries, including Kemper Asset
Management Company, Kemper Service Company ("KSvC") and INVEST Financial
Corporation ("INVEST").
Selected Financial Highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
September 30 September 30
---------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Investment management fees $165.2 $177.9 $ 52.9 $ 60.0
Commission income 56.7 77.1 15.8 23.8
Distribution and redemption fees 52.4 56.4 16.2 19.1
Transfer agent revenue 56.5 52.3 18.2 15.6
Investment and other income 21.2 25.2 8.6 8.7
------ ------ ------ ------
Total revenue 352.0 388.9 111.7 127.2
------ ------ ------ ------
Operating expenses 192.6 223.8 61.3 77.0
Commission expense 58.2 91.4 16.1 26.7
Deferral of mutual fund commissions
and sales expense (30.0) (58.0) (7.7) (15.8)
Amortization of deferred mutual fund
commissions and sales expense 42.0 35.1 14.5 12.6
------ ------ ------ ------
Total expenses 262.8 292.3 84.2 100.5
------ ------ ------ ------
Earnings before income tax and
change in accounting principle 89.2 96.6 27.5 26.7
Income tax expense 31.8 29.0 9.6 4.3
------ ------ ------ ------
Net income before change
in accounting principle 57.4 67.6 17.9 22.4
Cumulative effect of
change in accounting principle - .9 - -
------ ------ ------ ------
Net income $ 57.4 $ 68.5 $ 17.9 $ 22.4
====== ====== ====== ======
Net income per share $ 1.68 $ 1.49 $ .52 $ .58
====== ====== ====== ======
</TABLE>
The asset management segment's net income for the first nine months of 1994
was $11.1 million less than the first nine months of 1993. Reduced
management and distribution fees, lower commission income, and higher
amortization of commissions and sales expenses were partially offset by
increased transfer agent revenues and reduced operating and commission
expenses.
Total investment management fees in the first nine months of 1994 decreased
to $165.2 million from $177.9 million in the first nine months of 1993.
Investment management fees on Kemper mutual funds decreased approximately
$3.7 million in the first nine months of 1994, compared with the same
period of 1993, as total average assets of KFS' mutual funds were down $2.3
billion from the same period last year. Investment management fees also
- 12 -
declined approximately $2.1 million due to the loss of fees from funds
managed by Selected Financial Services, Inc. ("Selected"). A new
third-party manager of these funds was appointed effective May 1, 1993. In
addition, beginning January 1, 1994, revenues from real estate management
fees are reported in the real estate segment; these revenues were
approximately $5.4 million through September 30, 1994.
Commission income decreased $20.4 million in the first nine months of 1994,
compared with the first nine months of 1993, due to lower sales of most
products. INVEST is the segment's principal producer of commission
revenues. Commissions on the sale of mutual fund products declined $23.8
million in the first nine months of 1994, compared with the same period
last year, reflecting the generally weaker credit and equity markets in
1994. INVEST's commission revenue on stock, bond, and unit investment
trust transactions declined approximately $2.0 million due to lower sales.
INVEST's commissions on sales of annuity products increased $7.3 million in
the first nine months of 1994, compared with the same period last year, due
to increased sales.
Distribution and redemption fees declined $4.0 million in the first nine
months of 1994, compared with the same period last year. Distribution
fees, based on assets managed in KFS' spread load (contingent deferred
sales charge) mutual funds declined approximately $9.1 million during the
period as spread load assets declined due to market depreciation,
redemptions of mutual fund shares and the implementation of the multiple
class fund structure in the second quarter of 1994. The decline was
partially offset by recognition of contingent deferred sales charges from
redemption activity.
Transfer agent revenue increased $4.2 million in the first nine months of
1994, compared with the first nine months of 1993, primarily due to
increased shareholder transaction volumes on Kemper mutual funds, as well
as from client and account growth at Supervised Service Company ("SSC").
SSC is KSvC's wholly owned subsidiary that provides transfer agent services
to non-affiliated mutual fund groups.
Certain affiliates in the securities brokerage segment reduced their use of
the data communications network of KSvC in late 1993. As a result, other
income in the first nine months of 1994 decreased approximately $5.0
million, compared with the first nine months of 1993. The decrease was
partially offset by a reduction in related operating expenses.
Operating expenses decreased $31.2 million in the first nine months of
1994, compared with the first nine months of 1993. Operating expenses
declined partially due to the above-mentioned KSvC service reductions and
because of the transfer of real estate expenses to the real estate segment.
These real estate expenses totaled approximately $4.1 million in the first
nine months of 1994. Also, expense reductions of approximately $4.8
million were realized with the closing of Selected's operations. Excluding
the above items, expense reductions of approximately $8.0 million occurred
in advertising, literature and sales promotion of mutual fund products, and
personnel expenses decreased approximately $7.3 million primarily due to
the reduction of production-related compensation due to lower sales. In
addition, legal expenses were $11.6 million lower than for the comparable
period last year primarily due to a $10.0 million legal settlement in 1993.
KFS incurred approximately $1.0 million in registration and filing fees for
the implementation of the multiple class fund structure in the second
quarter of 1994. KFS has also incurred expenses of approximately $0.9
million, through the third quarter of 1994, in connection with the proposed
merger with Conseco.
- 13 -
Commission expenses were $58.2 million in the first nine months of 1994,
compared with $91.4 million in the first nine months of 1993, due to lower
sales in 1994. The reduced commission expense was the primary cause of the
$28.0 million decrease in the deferral of mutual fund commissions and sales
expense. Amortization of deferred mutual fund commissions and sales
expense increased $6.9 million primarily due to increased redemption
activity and market value declines of KFS' 12b-1 spread load mutual fund
products, which reduce future revenue streams and accelerate amortization
in the current period.
Assets Under Management (in billions)
<TABLE>
<CAPTION>
9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Mutual funds:
Bond $21.9 $22.9 $23.9 $25.7 $25.7
Stock 9.0 8.7 9.2 9.4 9.4
Money market 12.3 12.2 12.7 12.3 14.3
Investment advisory 5.3 4.5 4.6 4.7 4.6
Kemper Corporation subs 9.9 9.9 10.0 9.8 9.9
Kemper National Insurance
Companies and other 7.0 6.9 7.0 7.4 7.4
----- ----- ----- ----- -----
Total $65.4 $65.1 $67.4 $69.3 $71.3
===== ===== ===== ===== =====
</TABLE>
Bond and stock mutual fund assets under management decreased $4.2 billion
from December 31, 1993 primarily due to net redemptions and market value
declines. Redemptions of stock and bond funds totaled $4.5 billion in the
first nine months of 1994, compared with $3.0 billion for the same period
last year. Bond funds made up 77 percent of the redemption volume in 1994,
largely caused by rising interest rates. Stock and bond funds had asset
depreciation of approximately $1.2 billion in the first nine months of
1994, primarily caused by declines in both the bond and stock markets.
Sales of stock and bond mutual funds in the first nine months of 1994 were
$2.2 billion, compared with $3.9 billion in the first nine months of 1993.
Sales of stock mutual funds represented 44 percent of total stock and bond
sales in the first nine months of 1994, compared with 35 percent in the
first nine months of 1993.
Money market fund assets under management were flat for the first nine
months of 1994, as net sales activity in the first and third quarters of
1994 was offset by net redemption activity in the second quarter.
Investment advisory assets under management increased by $0.6 billion from
December 31, 1993 primarily due to additional cash inflows from the
existing client base.
The asset management industry is becoming increasingly competitive, with a
proliferation of products being offered in the marketplace, including
proprietary products offered by banks and brokerage firms. Individuals are
assuming greater control over their savings and retirement investments and
are placing greater emphasis on asset allocation and controlling risk. The
Company has adopted certain business strategies to address these
competition issues, such as brand name marketing emphasizing long-term
- 14 -
investment performance, distribution through diversified channels, and
expansion of its international investment capabilities. The Company is
continuing to expand its product line to satisfy the needs of its
customers. The Company expects that if interest rates continue to rise,
the segment's earnings will be lower in the fourth quarter of 1994,
compared with the third quarter of 1994.
In the second quarter of 1994, the Kemper mutual fund shareholders approved
and KFS introduced a multiple class structure to provide fund shareholders
with the choice of (i) the traditional front-end load option, (ii) a spread
load option charging annual 12b-1 distribution fees (certain of KFS' funds
already provided a variation of this option), or (iii) a level load option
charging annual service and 12b-1 fees with no advance commission on the
sale. Under this structure, KFS now offers a broad product line with 21
stock and bond funds, each in these three configurations. In addition, KFS
offers for qualifying investors (mainly institutions making large
investments) a no-load and no distribution fee option. The Company
believes this multiple class structure will, among other things, encourage
additional investment in the funds and help maintain the competitive
position of such funds in relation to other funds which may offer such
choices.
On September 27, 1994, KFS signed a definitive agreement to sell its 50
percent share of IFTC Holdings, Inc., which owns Investors Fiduciary Trust
Company, to State Street Boston Corporation ("State Street") for
approximately three million shares of State Street common stock.
Consummation of the transaction is subject to certain regulatory actions
and client approvals.
- 15 -
Life Insurance
The life insurance segment consists of Federal Kemper Life Assurance
Company ("FKLA") and Kemper Investors Life Insurance Company ("KILICO").
Selected financial highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
----------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Investment income $384.1 $372.3 $138.4 $118.5
Premium revenue 113.2 115.9 38.0 40.7
Other income 67.6 58.8 20.6 21.3
Realized investment loss (59.3) (43.6) (61.5) (36.1)
------ ------- ------ ------
Total revenue 505.6 503.4 135.5 144.4
------ ------- ------ ------
Benefits to policyholders 357.3 390.7 121.0 126.4
Commissions, taxes, licenses and fees 49.8 58.1 17.2 19.9
Operating expenses 40.5 38.8 13.0 13.3
Deferral of policy acquisition costs (93.9) (76.5) (32.0) (28.0)
Amortization of deferred policy
acquisition costs 49.6 41.5 8.9 12.6
------ ------- ------ ------
Total benefits and expenses 403.3 452.6 128.1 144.2
------ ------- ------ ------
Earnings before income tax and change
in accounting principle 102.3 50.8 7.4 .2
Income tax expense 39.1 22.4 4.0 2.7
------ ------- ------ ------
Net income (loss) before change in
accounting principle 63.2 28.4 3.4 (2.5)
Cumulative effect of change in
accounting principle - 2.7 - -
------- ------- ------ ------
Net income (loss) $ 63.2 $ 31.1 $ 3.4 $ (2.5)
======= ======= ====== ======
Realized investment loss,
net of tax $ (38.5) $ (31.9) $(39.9) $(25.0)
======= ======= ====== ======
Operating earnings $ 101.7 $ 63.0 $ 43.3 $ 22.5
======= ======= ====== ======
Per share:
Operating earnings $ 2.97 $ 1.37 $ 1.26 $ .58
======= ======= ====== ======
Net income (loss) $ 1.84 $ .68 $ .09 $ (.07)
======= ======= ====== ======
</TABLE>
The life insurance segment reported improved net income in the first nine
months of 1994, compared with the first nine months of 1993. The
improvement in 1994 was primarily the result of increases in spread income,
favorable mortality results, an increase in other income and an increase in
the net deferral of policy acquisition costs.
The segment's after-tax realized investment results included real
estate-related losses of $14.5 million and $67.4 million for the nine
months ended September 30, 1994 and 1993, respectively, write-downs and
restructurings of certain below investment-grade securities totaling $0.1
million and $17.3 million for the nine months ended September 30, 1994 and
1993, respectively, and other net realized investment losses from the sale
of fixed maturity investments of $23.9 million and other net realized
investment gains of $52.8 million for the nine months ended September 30,
1994 and 1993, respectively. Losses generated from the sale of $868.7
million of fixed maturity investments, consisting of lower yielding
investment-grade corporate securities and collateralized mortgage
obligations, for the three months ended September 30, 1994 were related to
- 16 -
the repositioning of the segment's fixed maturity investment portfolio.
The $810.6 million of proceeds from the repositioning of the segment's
investment portfolio, together with $325.0 million of cash and short-term
investments, were reinvested into higher yielding U.S. Government and
Agency guaranteed mortgage pass-through securities issued by the Government
National Mortgage Association and the Federal National Mortgage
Association. (See INVESTMENTS below.)
Operating earnings for the life insurance segment improved in the first
nine months of 1994, compared with the first nine months of 1993, primarily
due to increased spread income and excellent mortality results. Continuing
a strategy implemented during 1992, the life insurance segment continued to
reduce crediting rates on certain existing blocks of fixed annuity and
interest-sensitive life insurance products. Such reductions in crediting
rates occur on a gradual basis and can improve operating earnings over
time. Investment income was positively impacted in the first nine months of
1994, compared with the first nine months of 1993, from the benefits of
$70.0 million of capital contributions in 1993, reductions in the level of
nonperforming real estate-related investments primarily from the sale of
certain real estate-related investments to the Company's real estate
subsidiaries totaling $199.6 million through the first nine months of 1994
and $447.1 million during 1993, rising investment yields on new money
during 1994 and the previously discussed repositioning of the segment's
investment portfolio. Investment income was also positively impacted by
$8.7 million pre-tax as a result of adjustments to the amortization of the
discount or premium on mortgage-backed securities. Investment income for
the nine months ended September 30, 1994 and 1993 remained negatively
impacted by a shift over the last few years to higher-quality, lower
yielding investments and foregone income on nonperforming investments.
Life insurance sales
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
--------------------- --------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuities:
General account $ 213.9 $ 246.6 $ 67.6 $ 75.0
Separate account 202.4 187.9 55.7 55.9
------- ------- ------- -------
Total annuities 416.3 434.5 123.3 130.9
Life insurance:
Term and other 116.3 113.2 39.0 35.9
Interest-sensitive 58.5 58.6 19.6 19.2
------- ------- ------- -------
Total life insurance 174.8 171.8 58.6 55.1
------- ------- ------- -------
Total sales $ 591.1 $ 606.3 $ 181.9 $ 186.0
======= ======= ======= =======
</TABLE>
Sales of term and other life insurance products include both renewal
premiums and new product sales. Despite a slight decline in the average
premium per new policy for term life products, premium revenue increased
during the first nine months of 1994, compared with the first nine months
of 1993, due to increasing renewal premiums. The segment issued new life
insurance business in the first nine months of 1994 of $12.3 billion in
face amount, down slightly from $12.9 billion in the first nine months of
1993, due in part to competitive conditions and uncertainty concerning the
Company's ownership. Total life insurance in force grew to $95.9 billion
at September 30, 1994, compared with $91.3 billion at December 31, 1993.
The decreases in general account (fixed annuity) sales and interest-
- 17 -
sensitive life insurance sales reflect the Company's continuing
strategy to direct its sales efforts toward separate account (variable
annuity) products, which pose minimal investment risk for the Company and
increase administrative fees earned. Reflecting this strategy, separate
account sales for the first nine months of 1994 increased by approximately
7.7 percent, compared with the same period in 1993. The increases in
separate account sales slowed in 1994 due to competitive conditions in the
financial institution distribution channel.
To address its competition, the Company has adopted certain business
strategies. These have included reductions of real estate-related assets,
continued focus on existing and new term and variable annuity products,
distribution through diversified channels, with an emphasis on INVEST's
financial institution clients and Kemper Securities, Inc.'s retail base,
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.
Included in other income are administrative fees received from the
segment's separate account products of $15.6 million in the first nine
months of 1994, compared with $13.1 million in the first nine months of
1993. Administrative fee revenue increased in the first nine months of
1994 due to growth in separate account assets. Other income also included
surrender charge revenue of $9.7 million in the first nine months of 1994,
compared with $8.8 million in the first nine months of 1993. The higher
level of surrender charge revenue reflected an increase in policyholder
withdrawals, primarily as a result of the planned reductions in crediting
rates on fixed annuities.
Commissions, taxes, licenses and fees were lower in the first nine months
of 1994, compared with the first nine months of 1993, primarily reflecting
lower annuity sales. The higher level of deferral of policy acquisition
costs reflects an increase in the amount of imputed interest capitalized
due to improvements in projected future revenue streams as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs increased during the first nine
months of 1994, compared with the first nine months of 1993, primarily as a
result of improved net income during the first nine months of 1994, due in
part to the decrease in the level of nonperforming real estate-related
investments. The amortization of policy acquisition costs was also
favorably impacted by $13.9 million pre-tax during the three months ended
September 30, 1994 as a result of repositioning the segment's investment
portfolio and taking capital losses currently. As such, the segment's
projected future estimated gross profits will increase in later years.
Operating expenses in the first nine months of 1994 increased only
slightly, compared with the first nine months of 1993, as a result of
expense control and the integration of the two life insurance subsidiaries'
operations and management. Overall operating expenses in the life
insurance segment have dropped significantly since 1992.
Since year-end 1990, the Company has taken many steps to improve the
financial strength and competitive marketing position of its life insurance
subsidiaries. These steps included adjustments in crediting rates,
reductions in below investment-grade securities, a strategy not to embark
on new real estate projects, additional provisions for real estate-related
- 18 -
losses, sales of $839.0 million of certain real estate-related investments
to the Company's real estate subsidiaries through September 30, 1994,
third-party sales and refinancings of certain mortgage loans, approximately
$900 million in annuity reinsurance transactions with an affiliated mutual
life insurance company, a parental guarantee of any indebtedness, and
capital contributions of $275.8 million through September 30, 1994. The
statutory surplus ratio for the segment improved to 10.5 percent at
September 30, 1994 from 9.2 percent at December 31, 1993, 7.9 percent at
December 31, 1992 and 1991, and 5.4 percent at year-end 1990.
The following tables reflect selected balance sheet data of the life
insurance segment:
Invested assets and cash
(in millions)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
------------- -------------
<S> <C> <C> <C> <C>
Cash and short-term investments(1) $ 375 4.9% $ 571 7.2%
Fixed maturities:
Investment-grade:
NAIC(2) Class 1 4,146 54.3 3,548 44.6
NAIC(2) Class 2 1,229 16.1 1,557 19.5
Below investment-grade:(3)
Performing 204 2.7 222 2.8
Equity securities 36 .5 98 1.2
Joint venture mortgage loans (4) 806 10.5 993 12.5
Third-party mortgage loans (4) 145 1.9 145 1.8
Other real estate-related investments (4) 264 3.5 405 5.1
Other 430 5.6 424 5.3
------ ----- ------ -----
Total (5) $7,635 100.0% $7,963 100.0%
====== ===== ====== =====
<F1>
(1) Unsettled investment transactions at September 30, 1994 will utilize approximately $284 million of this amount.
<F2>
(2) National Association of Insurance Commissioners ("NAIC")
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F3>
(3) Excludes $72 million, or 0.9%, and $143 million, or 1.8%, at September 30, 1994
and December 31, 1993, respectively, of bonds carried in other real estate-related
investments.
<F4>
(4) See table captioned "Summary of gross and net real estate investments" on page 28 below.
<F5>
(5) See INVESTMENTS below.
</TABLE>
Other selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
------------ -----------
<S> <C> <C>
Deferred insurance acquisition costs $ 667 $ 623
Assets of separate accounts 1,895 1,883
Total assets 11,470 11,577
Life policy benefits (1) 7,245 7,381
Unrealized gain (loss) on investments (226) 153
Stockholders' equity 812 1,136
<F1>
(1) Net of ceded reinsurance
</TABLE>
- 19 -
Securities Brokerage
The securities brokerage segment primarily consists of Kemper Securities,
Inc. ("KSI").
Selected Financial Highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30 Three Months Ended September 30
------------------------------ -------------------------------
1994 1993 1994 1993
-------- ------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Commissions $274.9 $356.2 $ 77.4 $117.0
Interest and dividend income 51.9 56.4 17.3 18.8
Securities gains, net 12.5 34.1 5.8 11.0
Investment banking fees 15.7 17.0 4.8 7.6
Other income 48.1 47.7 14.7 14.4
------ ------ ------ ------
Total revenue 403.1 511.4 120.0 168.8
------ ------ ------ ------
Production-related compensation 156.6 201.0 45.0 67.0
Other operating expenses 221.8 278.5 70.9 84.2
Interest expense 32.1 36.3 11.1 12.0
------ ------ ------ ------
Total expenses 410.5 515.8 127.0 163.2
------ ------ ------ ------
Income (loss) before income tax and
change in accounting principle (7.4) (4.4) (7.0) 5.6
Income tax (benefit) (4.4) (3.5) (3.9) .3
------ ------ ------ ------
Net income (loss) before change
in accounting principle (3.0) (.9) (3.1) 5.3
Cumulative effect of change in
accounting principle - (5.5) - -
------ ------ ------ ------
Net income (loss) $ (3.0) $ (6.4) $ (3.1) $ 5.3
====== ====== ====== ======
Net income (loss) per share $ (.09) $ (.14) $ (.09) $ .14
====== ====== ====== ======
</TABLE>
The securities brokerage segment had a net loss of $3.0 million for the
nine months ended September 30, 1994, compared with a net loss of $6.4
million for the same period in 1993. The 1993 results included a pre-tax
charge of $30.0 million, or $19.8 million after tax, for a supplemental
addition to the segment's legal reserve. The supplemental legal reserve
addition in 1993 was made based on management's evaluation of pending legal
matters at that time. Subsequently, the segment has settled certain
significant litigation matters within established reserves. The 1993
results also include a charge of $5.5 million for the adoption of SFAS
109.
The segment had a net loss of $3.1 million for the third quarter of 1994,
compared with net income of $5.3 million for the same period in 1993. The
third-quarter 1994 loss is attributable to a reduction in revenue as
commissions and securities gains declined by $39.6 million and $5.2
million, respectively, from the third quarter of 1993.
Reflective of general securities industry conditions, total securities
brokerage revenue for the nine months ended September 30, 1994 was $403.1
million, a decrease of $108.3 million from 1993. The weaker credit and
equity markets in 1994 have led to lower than planned production per
investment consultant (registered representative) and significantly lower
revenues related to stock and bond underwriting activities. In addition,
uncertainty surrounding the Company's ownership contributed to reduced
investment consultant head count. Commission revenues decreased $81.3
million to $274.9 million in the first nine months of 1994, from $356.2
million in the first nine months of 1993.
- 20 -
The segment has reconfigured its operating units to focus on key business
opportunities. To increase revenue both for the segment and from sales of
the financial and insurance products of the asset management and life
insurance segments, the Company adopted certain business strategies. In
addition to KSI's ongoing retail focus, these strategies include more
coordination of the Company's distribution functions at both INVEST and
KSI. The Company also plans to increase the number of investment
consultants and to recruit consultants specializing in sales of packaged
products, including mutual funds.
The decline in securities gains revenue of $21.6 million in the first nine
months of 1994, compared with the same period in 1993, reflected the
volatility in the credit markets during the current period as rising interest
rates have caused significant market declines. In contrast, the first nine
months of 1993 saw strong credit markets, in particular within the tax-exempt
and mortgage-backed arena. Investment banking fees decreased by $1.3
million, from $17.0 million in 1993 to $15.7 million in 1994, due primarily
to reduced underwriting activity. Other income remained relatively flat
between the periods. Included in other income for the first nine months of
1994 was an insurance claim settlement of $3.5 million.
A decrease in securities interest and dividend income of $4.5 million for
the first nine months was offset by a decrease in interest expense of $4.2
million. These reductions are attributable primarily to the disposition of
mortgage-backed securities and related bonds in a special purpose
subsidiary which was liquidated in the fourth quarter of 1993.
Excluding the $30 million supplemental addition to the legal reserve in
1993, expenses decreased $75.3 million, from $485.8 million in the first
nine months of 1993 to $410.5 million in the first nine months of 1994,
largely as a result of decreased production-based compensation and
continued focus on cost containment.
Production-related compensation decreased $44.4 million due to lower
commission expense to investment consultants and reduced production-based
compensation accruals. Other operating expenses decreased $56.7 million as
the benefits of cost containment programs have begun to take effect.
Specifically, when comparing the first nine months of 1994 and 1993,
non-production compensation, occupancy and equipment, electronic
communication, professional services and general administrative expenses
have all declined. In addition, other expenses decreased in part due to
lower litigation-related expenses. However, the full impact of expense
reductions from the reconfiguration mentioned above are not expected to be
realized until 1995.
Continued weak markets have had an adverse impact on operating results
since March 1994 and, currently, management expects this trend to continue.
This is viewed as a general condition affecting the brokerage industry. If
this condition persists, this segment could continue to incur operating
losses. The Company is proceeding with its cost control program and
resizing the organization to deal with the lower anticipated revenues, but
there is no assurance that this program will improve operating results in
the near term.
- 21 -
Real Estate
This segment consists of the Company's real estate subsidiaries. These
subsidiaries include companies which act as general or limited partners in and
lenders to various joint ventures. Loans held by these subsidiaries are
subordinate to loans held by the Company's life insurance subsidiaries.
Selected Financial Highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30 Three Months Ended September 30
------------------------------ -------------------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Joint venture operating losses $(36.7) $ (60.3) $(7.3) $ (16.7)
Investment income and other 11.1 4.6 4.0 -
Realized investment gain (loss) 34.8 (258.5) 13.8 (169.4)
------ ------- ----- -------
Total revenue 9.2 (314.2) 10.5 (186.1)
------ ------- ----- -------
Operating expenses 10.7 2.4 3.5 1.0
Interest expense 2.3 3.9 .4 1.5
------ ------- ----- -------
Total expenses 13.0 6.3 3.9 2.5
------ ------- ----- -------
Income (loss) before income tax and
change in accounting principle (3.8) (320.5) 6.6 (188.6)
Income tax (benefit) (1.3) (95.2) 2.3 (50.2)
------ ------- ----- -------
Net income (loss) before change in
accounting principle (2.5) (225.3) 4.3 (138.4)
Cumulative effect of change in
accounting principle - (5.7) - -
------ ------- ----- -------
Net income (loss) $ (2.5) $(231.0) $ 4.3 $(138.4)
====== ======= ===== =======
Realized investment gain (loss),
net of tax expense (benefit) $ 22.6 $(185.4) $ 9.0 $(126.6)
====== ======= ===== =======
Operating loss $(25.1) $ (45.6) $(4.7) $ (11.8)
====== ======= ===== =======
Per share:
Operating loss $ (.73) $ (.99) $(.13) $ (.31)
====== ======= ===== =======
Net income (loss) $ (.07) $ (5.04) $ .13 $ (3.59)
====== ======== ===== =======
</TABLE>
The joint venture operating loss decline in the first nine months of 1994 was
primarily due to sales, refinancings and restructurings completed respecting
certain joint ventures which reduced the level of losses the Company was
required to record. Such sales included real estate investment trust
transactions in the first and third quarters of 1994, and such restructurings
included a third-quarter 1994 transaction in which the interest payment terms
of certain loans by Fidelity Life Association and Lumbermens Mutual Casualty
Company and its affiliates were amended effective January 1, 1994 to make
interest payments contingent on cash being available. The latter transaction
resulted in a $3.9 million after-tax benefit to the real estate segment's
joint venture operating results in the third quarter of 1994. The Company
expects that the segment's operating losses will increase in the fourth
quarter from the third-quarter 1994 level. (See INVESTMENTS below.)
In addition, an increased level of joint venture nonaccrual loans reduced the
Company's share of joint venture interest expense. This in turn reduced the
level of losses recorded by the Company, since the Company makes an adjustment
to its joint venture operating losses to reflect nonaccrual loans on these
same ventures.
Effective January 1, 1994, real estate management fee income and expenses are
- 22 -
recorded in the real estate segment, whereas previously they were included in
the asset management segment.
In the first nine months of 1994, sales and other transfers to third
parties of certain equity investments in real estate, which had negative
carrying values, generated realized gains in excess of the segment's
additions to reserves and write-downs.
The following table reflects selected balance sheet data of the real estate
segment. See INVESTMENTS below.
Selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
------------ -----------
<S> <C> <C>
Cash and short-term investments $ 21 $ 13
Joint venture mortgage loans(1) 133 60
Third-party mortgage loans(1) - 9
Other real estate-related investments(1) 12 (135)
Other 4 4
---- ----
Total invested assets and cash $170 $(49)
==== ====
Net deferred federal tax asset $160 $168
Total assets 395 187
Long-term debt 13 13
Stockholder's equity 341 163
<F1>
(1) See table captioned "Summary of gross and net real estate investments" on page 28 below.
</TABLE>
Other operations and corporate
This category consists of the holding company income and expenses of both
Kemper Corporation and Kemper Financial Companies, Inc., a 96 percent-owned
downstream holding company.
Other operations and corporate reported a net loss of $25.7 million for the
first nine months of 1994, compared with a net loss of $22.5 million for
the same period in 1993. Results for 1993 include a charge of $4.3 million
for the adoption of SFAS 109. Interest income increased primarily due to
higher average short-term investments for the 1994 period. This increase
was substantially offset by increased interest expense and operating
expenses. The increase in interest expense is primarily due to the $200
million in bonds issued in September 1993. Net income for 1994 also
included charges totaling $8.4 million of the total $9.8 million after tax
relating to a now terminated proxy contest as well as merger-related
expenses.
Discontinued operations
Discontinued operations primarily include the Company's former primary
property-casualty insurance, reinsurance and risk management subsidiaries,
all of which were divested in the second half of 1993. The Company had
recorded net income of $308.3 million from these operations in the first
nine months of 1993. Results for 1993 include a benefit of $10.1 million
for the adoption of SFAS 109. In the first quarter and third quarter of
1994, the Company recorded an additional gain on the sales of discontinued
operations of $5.7 million as certain contingent liabilities were settled
and more current information became available to the Company. At September
- 23 -
30, 1994, $25.4 million in reserves remain for other contingent liabilities
related to the dispositions.
- 24 -
INVESTMENTS
(continuing operations)
The Company's invested assets predominately reflect investments of its life
insurance and real estate subsidiaries. The Company's principal investment
strategy is to maintain a balanced, well-diversified portfolio supporting
insurance contracts written by its life insurance subsidiaries. The
Company's subsidiaries make shifts in their investment portfolios depending
on, among other factors, the interest rate environment, liability durations
and changes in market and business conditions.
Invested assets and cash
(in millions)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
------------- -------------
<S> <C> <C> <C> <C>
Cash and short-term investments(1) $ 686 8.5% $ 967 11.6%
Fixed maturities:
Investment-grade:
NAIC(2) Class 1 4,147 51.1 3,548 42.6
NAIC(2) Class 2 1,229 15.1 1,558 18.7
Below investment-grade:(3)
Performing 208 2.6 227 2.7
Equity securities 36 .4 99 1.2
Joint venture mortgage loans(4) 939 11.6 1,053 12.6
Third-party mortgage loans(4) 145 1.8 154 1.8
Other real estate-related investments(4) 276 3.4 272 3.3
Other 452 5.5 447 5.5
------ ----- ------ -----
Total $8,118 100.0% $8,325 100.0%
====== ===== ====== =====
<F1>
(1) Unsettled investment transactions at September 30, 1994 will utilize approximately $263
million of this amount.
<F2>
(2) National Association of Insurance Commissioners ("NAIC")
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F3>
(3) Excludes $185 million, or 2.3%, and $171 million, or 2.0%, at September 30, 1994 and
December 31, 1993, respectively, of bonds carried in other real estate-related investments.
<F4>
(4) See table captioned "Summary of gross and net real estate investments" on page 28 below.
</TABLE>
The Company is carrying its fixed maturity investment portfolio, which it
considers available for sale, at estimated market value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate
component of stockholders' equity, net of any applicable income tax
expense. The aggregate unrealized depreciation on fixed maturities at
September 30, 1994 was $231.2 million, or $6.77 per share, compared with
unrealized appreciation of $120.6 million, net of tax, or $3.67 per share,
at December 31, 1993. The Company does not tax benefit the aggregate
unrealized depreciation on investments. Market 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.
During each of the last three years, the Company repositioned its fixed
maturity investments and increased the relative and absolute levels of
investment-grade fixed maturities and cash and short-term investments held. At
September 30, 1994, investment-grade fixed maturities and cash and short-term
investments accounted for 74.7 percent of the Company's invested assets and
cash, compared with 72.9 percent at December 31, 1993. Approximately 73.9
percent of the Company's NAIC Class 1 bonds were rated AAA or equivalent at
September 30, 1994.
Approximately 53.2 percent of the Company's investment-grade fixed
maturities at September 30, 1994, were mortgage-backed securities. These
investments consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association, the
- 25 -
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 material investments in interest-only or other similarly
volatile tranches of mortgage-backed securities. The Company's
mortgage-backed investments are generally of AAA credit quality.
Markets for the Company's investments in mortgage-backed securities have
been and are expected to remain liquid. Due to the fact that the Company's
investments in mortgage-backed securities predominately date from recent
years, the current rise in interest rates is not expected to cause any
material unanticipated extension of the average maturities of these
investments. With the exception of the Company's September 1994 purchases
of such investments, most of these investments were purchased by the
Company at discounts. Prepayment activity on such securities is not
expected to result in material losses to the Company because such
prepayment would generally accelerate the reporting of the discounts as
investment income. Many of the Company's September 1994 purchases were at
a premium. Prepayments resulting from a decline in interest rates would
accelerate the amortization of premiums on such purchases which would
result in reductions of investment income related to such securities.
Given the credit quality, liquidity and anticipated payment characteristics
of the Company's investments in mortgage-backed securities, as well as the
Company's expectations for interest rates, the Company does not believe
that they present material risks.
Net investment income
The following table shows each segment's contribution to the Company's net
investment income:
Net investment income before taxes
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30 Three Months Ended September 30
------------------------------ -------------------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Life insurance $384.1 $372.3 $138.4 $118.5
Real estate (30.3) (55.7) (4.7) (16.7)
Other and eliminations 2.3 (.3) (.2) -
------ ------ ------ ------
Total $356.1 $316.3 $133.5 $101.8
====== ====== ====== ======
Investment yields:
Life insurance 6.57% 6.37% 7.37% 6.06%
------ ------ ------ ------
Total 5.78% 5.26% 6.73% 5.04%
------ ------ ------ ------
</TABLE>
Included in pre-tax net investment income is the Company's share of the
operating losses from equity investments in real estate. The Company's
share of real estate operating results, which generally has been
50 percent, increased to 100 percent on certain of its equity investments
beginning in 1993. The Company's share of real estate operating losses
(excluding write-downs) totaled $38.4 million and $71.8 million for the
nine months ended September 30, 1994 and 1993, respectively. The operating
results consist of rental and other income less depreciation, interest and
other expenses. Such operating results exclude interest expense on loans
by the Company which are on nonaccrual status.
The Company's pre-tax yields on its average invested assets are net of
- 26 -
foregone investment income equal to 68 and 74 basis points for the first
nine months of 1994 and 1993, respectively. The Company's total foregone
investment income before tax on nonperforming fixed maturity investments in
1993 and nonaccrual real estate-related investments in both periods was
$40.8 million and $43.1 million at September 30, 1994 and 1993,
respectively. Foregone investment income from the nonaccrual of real
estate-related investments is net of the Company's share of interest
expense on those loans excluded from the Company's share of joint venture
operating results. Based on the level of nonaccrual real estate loans at
September 30, 1994, the Company estimates foregone investment income in
1994 will decrease slightly compared with the 1993 level. Any increase in
nonperforming securities, and either worsening or stagnant real estate
conditions, would increase the expected adverse effect on the Company's
1994 investment income and realized investment results.
The Company believes that future net investment income, results of
operations and cash flow can be affected by the Company's current
investment policy emphasizing investment-grade, lower-yielding securities,
as well as by real estate fundings treated as equity investments,
nonaccrual real estate loans and joint venture operating losses. The
Company expects, however, that such adverse effects should be offset to
some extent by certain advantages that it expects to realize over time from
its other investment strategies, its life insurance product mix and its
continuing cost control measures. Other mitigating factors include
marketing advantages that could result from the Company having lower levels
of investment risk and earnings improvements from its life insurance
operations' ability to adjust crediting rates on annuities and
interest-sensitive life products over time.
Realized investment results
Reflected in the results from continuing operations are after-tax realized
investment losses of $14.3 million for the first nine months of 1994,
compared with realized investment losses of $217.3 million for the first
nine months of 1993. The 1994 realized investment losses were primarily
generated by the life insurance segment's third-quarter repositioning of
its fixed maturity portfolio which resulted in an after-tax loss of
approximately $39.7 million. The $810.6 million of proceeds from the
repositioning, along with $325.0 million of cash and short-term
investments, were reinvested primarily in higher yielding U.S. Government
guaranteed mortgage pass-through securities. The nine-month 1993 after-tax
realized investment losses are primarily due to $252.7 million in after-tax
increases in the provision for real estate-related losses and $17.3 million
in after-tax charges for write-downs and restructurings of certain below
investment-grade securities. Fixed maturity write-downs decreased in 1994
due to the increased quality of the Company's fixed maturity portfolio.
Unrealized gains and losses on fixed maturity investments are not reflected
in the Company's results of operations. If and to the extent a fixed
maturity investment suffers an other-than-temporary decline in value,
however, such security is written down to net realizable value, and the
write-down adversely impacts net income.
The Company regularly monitors its investment portfolio and as part of this
process reviews its assets for possible impairments of carrying value.
Because the review process includes estimates, there can be no assurance
- 27 -
that current estimates will prove accurate over time due to changing
economic conditions and other factors.
For mortgage loans and other real estate-related investments, reserves are
established when declines in collateral values, estimated in light of
current economic conditions and calculated in conformity with SFAS 114,
"Accounting by Creditors for Impairment of a Loan," indicate a likelihood
of loss. Changes to the provision for real estate-related losses include
reserves on loans, adjustments to fair value of certain real estate-related
assets and the Company's share of asset valuation adjustments by joint
ventures.
A valuation allowance was established upon adoption of SFAS 109 to reduce
the deferred tax asset for real estate-related and other investment losses
to the amount that, based upon available evidence, is, in management's
judgment, more likely than not to be realized.
Below investment-grade securities
(excluding real estate-related bonds)
At September 30, 1994, below investment-grade securities holdings (NAIC
classes 3 through 6) were 2.6 percent of cash and invested assets, compared
with 2.7 percent at December 31, 1993.
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. Over the last three
years, the Company significantly reduced its exposure to below
investment-grade securities. This strategy takes into account the more
conservative nature of today's consumer and the resulting demand for
higher-quality investments in the life insurance and annuity marketplace.
At September 30, 1994, below investment-grade securities of approximately
14 issuers were held by the Company. Write-downs and restructurings on
below investment-grade securities for the first nine months of 1994 totaled
$0.2 million pre-tax, compared with $25.3 million for the same period in
1993.
Real estate-related investments
The $1.36 billion real estate portfolio held by the Company's continuing
operations constituted 16.8 percent of cash and invested assets at
September 30, 1994, compared with $1.48 billion, or 17.7 percent, at
December 31, 1993. The real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments. The
majority of the Company's real estate loans are on properties or projects
where the Company, Lumbermens Mutual Casualty Company ("Lumbermens") or
their respective affiliates have taken ownership positions in joint
ventures with a small number of partners.
- 28 -
Summary of gross and net real estate investments
(in millions)
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
-------------------------------- -----------------------------
Life Real Life Real
insurance estate insurance estate
Total segment segment Total segment segment
------ ---------- --------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Investments before reserves,
write-downs, foreign currency
translation adjustments and net
joint venture operating losses:
Joint venture mortgage loans $1,080 $ 847 $ 233 $1,306 $1,121 $ 185
Third-party mortgage loans 180 180 - 154 145 9
Other real estate-related
investments 1,097 377 720 1,092 484 608
------ ------ ----- ------ ------ -----
Subtotal 2,357 1,404 953 2,552 1,750 802
Reserves (273) (64) (209) (446) (89) (357)
Write-downs (442) (105) (337) (299) (96) (203)
Foreign currency translation
adjustments (40) - (40) (56) - (56)
Cumulative net operating losses
of joint ventures owned (242) (21) (221) (272) (22) (250)
------ ------ ----- ------ ------ -----
Net real estate investments $1,360 $1,214 $ 146 $1,479 $1,543 $ (64)
====== ====== ===== ====== ====== =====
</TABLE>
As reflected in the table on the following page, the Company has continued
to fund both existing projects and legal commitments. Total future legal
commitments were $572.6 million at September 30, 1994. This amount
represented a net decrease of $64.2 million since December 31, 1993,
largely due to fundings in the first nine months of 1994. As of September
30, 1994, the Company expects to fund approximately $229.3 million of these
legal commitments, along with providing capital to existing projects. The
disparity between total legal commitments and the amount expected to be
funded relates principally to standby financing arrangements that provide
credit enhancements to certain tax-exempt bonds, which the Company does not
presently expect to fund. The total legal commitments, along with
estimated working capital requirements, are considered in the Company's
evaluation of reserves and write-downs.
Generally, at the inception of a real estate loan, the Company anticipated
that it would roll over the loan and reset the interest rate at least one
time in the future, although the Company is not legally committed to do so.
As a result of the current weakness in the real estate markets and fairly
restrictive lending practices by other lenders in this environment, the
Company expects that all or most loans maturing in 1994 will be rolled
over, restructured or foreclosed.
Excluding the $77.4 million of real estate owned and the $107.3 million
deficit in the Company's net equity investments in joint ventures, the
Company's real estate loans (including real estate-related bonds) totaled
$1.39 billion at September 30, 1994, after reserves and write-downs. Of
this amount, $831.2 million are on accrual status. Of these accrual loans,
58.0 percent have terms requiring current periodic payments of their full
contractual interest, 30.2 percent require only partial payments or
payments to the extent of cash flow of the borrowers, and 11.8 percent
defer all interest to maturity.
- 29 -
Real estate portfolio
(in millions)
<TABLE>
<CAPTION>
Mortgage loans Other real estate-related investments
-------------- -------------------------------------
Real
Joint Third Other estate Equity
venture party Bonds loans owned investments Total
-------- ------ ------ ----- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $1,053.4 $153.9 $174.2 $114.5 $78.2 $ (94.7) $1,479.5(1)
Additions (deductions):
Fundings 63.3 3.9 49.2 31.4 14.8 54.9 217.5
Interest added to principal .6 - - .3 - - .9
Sales/Paydowns/Distributions (74.4) (13.4) (56.2) (31.1) (21.3) (42.0) (238.4)
REIT(2) (93.4) - (15.9) (11.7) - (2.4) (123.4)
Maturities (31.9) - (2.1) (52.9) - - (86.9)
Rollovers at maturity:
Principal 31.9 - 2.1 52.9 - - 86.9
Interest 1.7 - - 3.1 - - 4.8
Joint venture operating loss - - - - - (38.4) (38.4)
Transfers to real estate owned (20.0) (19.1) - (32.7) 71.7 - (.1)
Realized investment gain (loss) 6.8 (.7) 32.3 16.1 (40.4) .8 14.9
Other transactions .5 20.8 1.4 31.1 (25.6) 14.5 42.7
------- ------ ------ ------ ----- ------- --------
Balance at September 30, 1994 $ 938.5 $145.4 $185.0 $121.0 $77.4 $(107.3) $1,360.0(3)
======= ====== ====== ====== ===== ======= ========
<F1>
(1) Net of $744.1 million reserve and write-downs. Excludes $80.7 million of real estate-related
accrued interest.
<F2>
(2) Reflects the first-quarter 1994 formation of a real estate investment trust ("REIT") with
Prime Group, Inc.
<F3>
(3) Net of $714.7 million reserve and write-downs. Excludes $64.4 million of real estate-related
accrued interest.
</TABLE>
As disclosed on the preceding table, cash received by the Company from
sales/paydowns/distributions and a REIT in 1994 exceeded the Company's cash
fundings by $144.3 million.
Other real estate-related investments
The Company's real estate-related bonds, all of which are presently rated
below investment-grade, are generally unsecured and were issued to the
Company by real estate finance or development companies generally to
provide financing for the Company's joint ventures for such purposes as
land acquisition, construction/development, refinancing debt, interest and
other operating expenses.
The other real estate loans are notes receivable that provide financing to
joint ventures for purposes similar to those funded by real estate-related
bonds.
The deficit in equity investments in real estate at September 30, 1994,
consists of $74.8 million of loans to Spanish projects (described below),
$53.9 million of unsecured loans to joint ventures treated as equity
investments, a $216.1 million deficit in the Company's net equity
investments in joint ventures and reserves of $19.9 million. The deficit
includes the Company's share of periodic operating results. The deficit is
considered in the Company's evaluation of reserves and write-downs. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain joint ventures.
The Company's real estate owned at September 30, 1994, includes $70.7
million of deeds in lieu of foreclosure and $6.7 million of certain
purchased properties. Real estate owned at September 30, 1994, is net of
$101.2 million of write-downs.
- 30 -
Real estate concentrations
The Company's portfolio is distributed by property type and geographic
location. Real estate markets have been depressed in recent periods in
areas where most of the Company's real estate portfolio is located.
Approximately half of the Company's real estate holdings are in California
and Illinois. In California, real estate market conditions have continued
to be worse than in many other areas of the country.
The Company's real estate portfolio at September 30, 1994, also included
$74.8 million of loans carried as equity investments in real estate (net of
write-downs, foreign currency translations and cumulative operating losses)
related to land for office and retail development and residential projects
located in Spain. Such equity investments in Spain totaled $149.8 million
at December 31, 1993, after accounting for fundings by Company subsidiaries
of $151.3 million during 1993. The Spanish projects accounted for $41.3
million of fundings, $102.0 million of writedowns and $9.1 million of
operating losses during the first nine months of 1994 and represented
approximately 5.5 percent of the Company's real estate portfolio at
September 30, 1994. These investments, which began in the late 1980s,
accounted for $27.0 million of the September 30, 1994, off-balance-sheet
legal commitments, of which the Company expects to fund approximately $21.7
million. By year-end 1994, the Company expects fundings could increase the
carrying value of the Spanish projects to approximately $110.0 million.
Undeveloped land, including the Spanish projects, represented approximately
19.3 percent of the Company's real estate portfolio at September 30, 1994.
To maximize the value of certain land and other projects, additional
development is proceeding or is planned. Such development of existing
projects may continue to require substantial 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
obtaining necessary 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 the Company's plans with respect to such projects may not change
substantially.
At September 30, 1994, the Company's loans to and investments in projects
with the Prime Group, Inc. or its affiliates, based in Chicago, represented
approximately $467.7 million, or 34.4 percent, of the Company's real estate
portfolio (including the previously mentioned Spanish projects, which are
Prime Group-related). This amount includes $142.6 million in fundings
during the first nine months of 1994. The Company also received cash from
Prime Group-related sales/paydowns/distributions and REIT transactions
totaling $199.4 million in the first nine months of 1994. Prime
Group-related commitments accounted for $367.6 million of the
off-balance-sheet legal commitments at September 30, 1994, of which the
Company expects to fund $96.5 million.
Effective January 1, 1993, the Company formed a master limited partnership
(the "MLP") with Lumbermens and its subsidiaries. The assets of the MLP
consist of the equity interests each partner or its subsidiaries previously
- 31 -
owned in projects with Peter B. Bedford or his affiliates ("Bedford"), a
California-based real estate developer. As MLP partners, the Company and
Lumbermens have participated in funding certain cash needs of the MLP
projects. During the first nine months of 1994, the Company provided $48.3
million of fundings to projects in the MLP. During 1993, the Company
provided $103.9 million in fundings to projects in the MLP. The Company
also received cash from MLP-related sales/paydowns/distributions and
refinancings of $115.0 million in the first nine months of 1994 and $215.0
million in 1993. At September 30, 1994, these projects accounted for
$146.0 million of the Company's off-balance-sheet legal commitments, of
which the Company expects to fund $100.7 million. The Company's equity
interests in real estate that were affected by formation of the MLP are
held almost entirely in the Company's real estate segment. The Company
records 50 percent of the operating results of the ventures held by the
partnership. Of the Company's real estate portfolio at September 30, 1994,
approximately $489.5 million, or 36.0 percent, represented loans to and
investments in MLP-owned joint ventures.
Pursuant to agreements entered into in January 1994, Bedford transferred to
the MLP and a Kemper affiliate all of Bedford's ownership interests in
ventures in which Bedford, the Company, Lumbermens and their respective
subsidiaries previously shared ownership interests. Bedford was released
from certain recourse liabilities owed to the MLP, the ventures,
Lumbermens, the Company and certain of their respective subsidiaries.
Because the Company's reserve methodology does not take any credit for such
recourse and because the Company in 1993 had already begun recording 50
percent of the operating results of the related ventures, this transaction,
which simplified the management of the Company's portfolio, does not have
any material adverse impact on the Company's results of operations or
financial condition.
Real estate reserve and troubled real estate
The Company monitors its real estate portfolio and identifies changes in
the relevant real estate marketplaces, the economy and each borrower's
circumstances. The Company establishes its provisions for real
estate-related losses on the basis of its valuations of the related real
estate, estimated in light of current economic conditions and calculated in
conformity with SFAS 114. The adoption of SFAS 114 in 1993 had no material
effect on the Company's financial statements. The Company evaluates its
real estate-related assets (including accrued interest) by estimating the
probabilities of loss utilizing various projections that include several
factors relating to the borrower, property, term of the loan, tenant
composition, rental rates, other supply and demand factors and overall
economic conditions. Because the Company's real estate review process
includes estimates, there can be no assurance that current estimates will
prove accurate over time due to changing economic conditions and other
factors.
The Company increased the net amount of its real estate reserves and
writedowns in the first nine months of 1994, primarily to match the
elimination of negative (the deficit in) carrying values of certain equity
investments in real estate, which investments the Company sold or
transferred to third parties during 1994. As described under "Other real
estate-related investments" above, the Company's deficit in equity
investments in real estate is considered in the Company's evaluation of
- 32 -
reserves and write-downs. While the real estate subsidiaries as equity
owners recognized gains on sales and other transactions during the first
nine months of 1994, the additions to the reserves and increases in
write-downs also affected the life insurance segment where most of the
Company's loans are held. The Company's real estate reserve was allocated
as follows:
Real estate reserve
(in millions)
<TABLE>
<CAPTION>
Joint venture Other real
mortgage estate-related
loans investments Total
------------------ ------------------ ------------------
Life Real Life Real Life Real
insurance estate insurance estate insurance estate
segment segment segment segment segment segment
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at 12/31/93 $ 53.9 $128.6 $ 35.8 $ 227.3 $ 89.7 $ 355.9
Change in reserve (11.9) (28.7) (13.9) (117.7) (25.8) (146.4)
------ ------ ------ ------- ------ -------
Balance at 9/30/94 $ 42.0 $ 99.9 $ 21.9 $ 109.6 $ 63.9 $ 209.5
====== ====== ====== ======= ====== =======
</TABLE>
In addition to the reserve, the Company's provision for real estate-related
losses on assets held at September 30, 1994, included cumulative
write-downs totaling $441.3 million (life insurance segment, $104.6
million; real estate segment, $336.7 million) at September 30, 1994, and
$298.5 million (life insurance segment, $96.0 million; real estate segment,
$202.5 million) at December 31, 1993. The 1994 decrease in reserves was
primarily due to increases in write-downs.
The following table is a summary of the Company's troubled real
estate-related investments:
Troubled real estate-related investments
(before reserves and write-downs)
(in millions)
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1994
-------------------------- --------------------------
Life Real Life Real
insurance estate insurance estate
segment segment Total segment segment Total
--------- ------- ----- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Potential problem loans (1) $ 75.3 $ .1 $ 75.4 $ 20.2 $ - $ 20.2
Past due loans (2) .3 - .3 6.1 - 6.1
Nonaccrual loans (3) 453.8 433.9 887.7 755.8 372.0 1,127.8
Restructured loans (4)
(currently performing) 52.9 .7 53.6 59.1 .4 59.5
Real estate owned (5) 60.2 17.2 77.4 71.1 7.1 78.2
------ ------ ------- ------ ------ --------
Total $642.5 $451.9 $1,094.4(6) $912.3 $379.5 $1,291.8
====== ====== ======== ====== ====== ========
- 33 -
<F1>
(1) These are real estate-related investments where the Company, based on known information, has
serious doubts about the borrowers' abilities to comply with present repayment terms and which
the Company anticipates may go into nonaccrual, past due or restructured status.
<F2>
(2) Interest more than 90 days past due but not on nonaccrual status.
<F3>
(3) The Company does not accrue interest on real estate-related investments when the likelihood of
collection of interest is doubtful.
<F4>
(4) The Company defines a "restructuring" of debt as an event whereby the Company, for economic or
legal reasons related to the debtor's financial difficulties, grants a concession to the debtor
it would not otherwise consider. Such concessions either stem from an agreement between the
Company and the debtor or are imposed by law or a court. By this definition, restructured
loans do not include any loan that, upon the expiration of its term, both repays its principal
and pays interest then due from the proceeds of a new loan that the Company, at its option, may
extend (roll over).
<F5>
(5) Real estate owned is carried at fair value and includes deeds in lieu of foreclosure and
certain purchased property. Cumulative write-downs to fair value were $101.2 million and $29.3
million at September 30, 1994 and December 31, 1993, respectively.
<F6>
(6) Total reserves and cumulative write-downs (excluding fair value adjustments to real estate
owned) are 56.1 percent of total troubled real estate-related investments and 31.1
percent of the Company's total real estate portfolio before reserves and write-downs at
September 30, 1994.
</TABLE>
Real estate outlook
The Company's real estate experience could continue to be adversely
affected by overbuilding and weak economic conditions in certain real
estate markets and by tight lending practices by banks and other lenders.
Stagnant or worsening economic conditions in the areas in which the Company
has made loans, or additional adverse information becoming known to the
Company through its regular reviews or otherwise, could result in higher
levels of problem loans or potential problem loans, reductions in the value
of real estate collateral and adjustments to the real estate reserve. The
Company's net income and stockholders' equity could be materially reduced
in future periods if real estate market conditions remain stagnant or
worsen in areas where the Company's portfolio is located.
Current conditions in the real estate markets are adversely affecting the
financial resources of certain of the Company's joint venture partners.
Every partner, however, remains active in the control of its respective
joint ventures. In evaluating the partner's ability to meet its financial
commitments, the Company considers the amount of all applicable debt and
the value of all properties within that portion of the Company's portfolio
consisting of loans to and investments in joint ventures with such partner.
In 1993, the Company decided to recognize 100 percent of the operating
results of certain joint ventures. The additional operating results are
being recorded primarily by the Company's real estate subsidiaries which
are the equity holders in such ventures.
Based on the increased level of troubled real estate-related investments
the Company experienced in 1993, the Company anticipates additional
foreclosures and deeds in lieu of foreclosure in 1994 and beyond. Any
consolidation accounting resulting from foreclosures would add the related
ventures' assets and senior third-party liabilities to the Company's
balance sheet and eliminate the Company's loans to such ventures.
Due to the adverse real estate environment affecting the Company's
portfolio in recent years, the Company has devoted significant attention to
its real estate portfolio, enhancing monitoring of the portfolio and
formulating specific action plans addressing nonperforming and potential
problem credits. Since 1991, the Company has intensified its attention to
evaluating the asset quality, cash flow and prospects associated with each
of its projects. However, there can be no assurance that such efforts will
- 34 -
result in an improvement in the performance of the Company's real estate
portfolio.
The Company is analyzing various potential transactions designed to reduce
the level of real estate-related investments on the Company's balance
sheet. Specific types of transactions under consideration include loan
sales, property sales, mortgage refinancings and real estate investment
trusts. In the third quarter of 1994, Company subsidiaries recorded $17.1
million of pre-tax income from a transaction in which they sold their
equity investments in certain multifamily residential properties to a newly
formed REIT. With regard to various other potential transactions being
considered, the Company believes that none are so significant or so likely
as to be considered material to its consolidated financial statements or
other disclosures at this time.
Interest rates
Interest rate fluctuations primarily affect the life insurance segment.
The 1993 interest rate environment was characterized by very low short-term
rates and a steeply sloped yield curve while the first nine months of 1994
saw rising short-term and long-term interest rates as the Federal Reserve
Board raised rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, the Company's life insurance subsidiaries can
adjust their crediting rates on fixed annuities and other interest-bearing
liabilities. However, competitive conditions and contractual commitments
do not always permit the reduction in crediting rates to fully or
immediately reflect reductions in investment yield, which can result in
narrower spreads.
The lower interest rate environment contributed both to a reduction in net
investment income of the life insurance segment over the last few years and
to realized losses in 1994. Also, lower crediting rates on annuities have
influenced certain clients to seek alternative products. The Company
mitigates this risk somewhat within its life insurance segment by charging
decreasing surrender fees when annuity holders withdraw funds prior to
maturity on certain annuity products.
As interest rates rose during 1994, the life insurance subsidiaries'
capital resources were adversely impacted by unrealized loss positions from
their fixed maturity investments. The Company believes, however, that this
decline should be offset by a decrease in the present value of the life
insurance subsidiaries' policy liabilities and their sales of fixed-rate
annuity products could increase in a rising interest rate environment.
Should interest rates continue to rise, the Company would expect its asset
management segment's money market product sales to increase and sales of
stock funds to slow, although not necessarily in offsetting amounts.
Rising interest rates also contribute to bond fund redemption increases.
- 35 -
LIQUIDITY AND CAPITAL RESOURCES
Kemper Corporation and each of its subsidiaries carefully monitor cash and
short-term money market investments to maintain adequate balances for
timely payment of claims, expenses and taxes. In addition, regulatory
authorities establish minimum liquidity and capital standards for the asset
management, life insurance and securities brokerage companies. The major
ongoing sources of the Company's liquidity are asset management fees,
securities brokerage commissions, collateralized bank borrowings by the
securities brokerage operations, collections of life insurance premium
revenue, deposits for annuities and interest-sensitive life contracts,
investment income, other operating revenue and cash provided from maturing
or sold investments. (See INVESTMENTS above.) Kemper Corporation also,
from time to time, borrows funds and issues securities for cash. During
1993, the Company also received $380.3 million in cash from the sales of
discontinued property-casualty insurance operations.
Kemper Corporation receives interest on loans, dividends and payments for
federal income tax from its subsidiaries. Distributions to the parent can
be restricted by applicable regulatory restraints.
At September 30, 1994, Kemper Corporation had $85.3 million in cash and
short-term investments. The Company can use its available resources for
dividends to stockholders, corporate interest and other holding company
expenses, consolidated federal income tax payments, common stock
repurchases (treasury stock), acquisitions of subsidiaries and additional
investments in, or asset purchases from, subsidiaries. In the first nine
months of 1994, the Company purchased $200.2 million of certain real
estate-related investments (subordinated loans and equity investments) from
the life insurance subsidiaries and contributed $65.0 million to KILICO's
capital, funded by dividends from FKLA. In 1993, the Company provided
$517.1 million in cash to the life insurance subsidiaries by purchasing
from them $447.1 million of such real estate-related investments and
contributing to KILICO's capital $90.0 million, $20.0 million of which was
a dividend from FKLA. The Company's purchases of such investments from its
life insurance subsidiaries were consummated at the carrying values of such
investments at the dates of the purchases.
Policyholder deposits decreased to $297.3 million for the first nine months
of 1994 from $323.3 million for the first nine months of 1993, and
policyholder withdrawals increased to $710.4 million for the first nine
months of 1994 from $587.6 million for the first nine months of 1993,
primarily due to planned reductions in crediting rates on fixed-rate
annuities as well as increased competition.
Debt
(in millions)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
------------ -----------
<S> <C> <C>
Short-term debt $338.2 $349.2
Long-term debt 389.9 394.0
Convertible debentures
of subsidiary 38.4 45.7
</TABLE>
- 36 -
Short-term debt
The Company has outstanding short-term loans with banks and other creditors
at interest rates that vary with short-term money market rates. Short-term
notes payable by the securities brokerage operations principally consist of
collateralized bank loans which totaled $314.1 million at September 30,
1994, compared with $325.1 million at December 31, 1993. The level of
these borrowings fluctuates daily depending upon market activity and
customer margin activity levels.
The Company had $20.0 million due to banks at September 30, 1994 and
December 31, 1993. The Company renegotiated its committed lines of credit
with certain banks effective October 27, 1994. The lines of credit total
$317.5, million with $155.0 million expiring October 22, 1995 and $162.5
million expiring November 1, 1996. These lines would not be available upon
a change in control of the Company and $110.0 million is reserved for the
sole purpose of funding certain real estate commitments which the Company
does not expect to fund. Interest rates would generally approximate
short-term bank corporate rates.
Long-term debt
Included in long-term debt at September 30, 1994, are $200 million of
6.875% Notes Due 2003, $65.5 million of medium-term notes and $110.75
million of 8.80% Notes Due 1998. The interest rate on the 6.875% notes
increased on March 15, 1994 to 7.375%, but the original rate will be
reinstated if and when the Company effects an exchange of such notes for
publicly registered notes, which the Company plans to occur in the fourth
quarter of 1994.
Long-term debt and insurance company ratings
Ratings have become an increasingly important factor in establishing the
competitive position of life insurance companies. Rating organizations
continue to review the financial performance and condition of life insurers
and their investment portfolios, including those of the Company's life
insurance subsidiaries. Any reductions in the life insurance subsidiaries'
claims-paying ability or financial strength ratings could result in their
products being less attractive to consumers.
Any reductions in Kemper Corporation's senior debt ratings could adversely
impact the Company's financial flexibility by limiting the Company's access
to capital or increasing its cost of borrowings.
Ratings reductions for Kemper Corporation 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. Such circumstances could
accelerate or increase the Company's purchases of real estate-related
assets from its regulated life insurance subsidiaries to further support
their respective statutory capital positions.
In connection with and following the merger agreement signed June 26, 1994
by Kemper Corporation and Conseco, Inc. (see Part II, ITEM 5 below in this
Form 10-Q), Moody's Investors Service placed under review with "possible
- 37 -
downgrade" its Baa2 senior debt rating and Baa3 preferred stock rating of
Kemper Corporation and its Baa1 financial strength ratings of both of the
Company's life insurance subsidiaries; Standard & Poor's Corporation placed
"on CreditWatch with 'negative' implications" its BBB senior debt rating and
BB+ preferred stock rating of Kemper Corporation; Duff & Phelps Credit
Rating Co. placed "on Rating Watch -- Down" Kemper Corporation's A- senior
debt rating, Federal Kemper Life Assurance Company's AA- claims-paying
ability rating and Kemper Investors Life Insurance Company's A+
claims-paying ability rating; and A.M. Best placed under review its "A-"
(Excellent) Best's Ratings of both of the life insurance subsidiaries.
Convertible debentures of subsidiary
Convertible debentures of subsidiary represent employee interests in Kemper
Financial Companies, Inc. ("KFC"). KFC does not plan to issue any
additional securities to its employees. Maturities and employee
terminations during the first nine months of 1994 accounted for the $7.3
million reduction of convertible debentures. The outstanding debentures
bear interest approximating the prime rate.
Common stock
During the first nine months of 1994, the Company received $51.4 million by
issuing common stock through employee stock option plans and the Kemper
Corporation Dividend Reinvestment and Stock Purchase Plan. On June 26,
1994, in conjunction with the signing of the Merger Agreement with Conseco
(see Part II, ITEM 5 of this Form 10-Q), all outstanding employee stock
options became immediately exercisable in full. The Company expects to
continue to receive proceeds from the exercise of employee stock options.
During 1993 and the first nine months of 1994, the quarterly dividend rate
was $.23 per common share. The fourth-quarter 1994 dividend of $.23 per
share was declared in October 1994 and is payable November 30, 1994. The
aggregate common stock dividend payment has been reduced by approximately
35 percent due to the August 1993 acquisition of 17.4 million shares of the
Company's common stock in a stock exchange transaction with Lumbermens.
While the board of directors intends to continue quarterly cash dividends,
future declarations and amounts will depend upon, among other factors, the
earnings of Kemper Corporation, its financial condition, its capital
requirements and general business conditions.
Preferred stock
During 1993 and 1992, Kemper Corporation privately placed preferred stock
in the amounts of $260.0 million and $100.0 million, respectively. At
September 30, 1994, the Company's outstanding preferred stock totaled
$360.6 million. Dividends paid on the preferred stock during the first
nine months of 1994 totaled $17.7 million.
- 38 -
Emerging issues
Effective in 1994, SFAS 112, "Employers' Accounting for Postemployment
Benefits," establishes standards for accounting for benefits provided to
former or inactive employees and their dependents and beneficiaries before
retirement. Benefits covered by SFAS 112 include salary continuation,
severance pay, supplemental unemployment benefits and disability-related
benefits. The impact of implementation is not expected to be material to
the Company.
- 39 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Holding Company
As previously reported, in 1992 the Commission's Staff commenced an
investigation into certain of the Company's real estate-related accounting
practices and related disclosures. The Company has fully cooperated
throughout the Staff's investigation. The Company and the Staff have had
settlement discussions respecting this matter.
Asset Management
As previously reported, on June 23, 1994, in the class action styled
Tabankin, et al. v. Kemper Short-Term Global Income Fund, et al., the
federal court in the Northern District of Illinois entered an order
granting the defendants' motion to dismiss and entering final judgment in
favor of the Company. Plaintiffs have appealed this judgment.
ITEM 5. Other Information
Merger Agreement Update
As previously reported, the Company, Conseco, Inc., an Indiana corporation
("Conseco"), and KC Acquisition, Inc, a Delaware corporation and a
wholly-owned subsidiary of Conseco ("Acquisition"), entered into an
Agreement and Plan of Merger dated as of June 26, 1994 (the "Merger
Agreement"), pursuant to which Acquisition would merge with and into the
Company (the "Merger"), and the Company as the surviving corporation would
thereby become a wholly-owned subsidiary of Conseco.
On October 25, 1994, Conseco announced that it will not complete the Merger
prior to year-end 1994 and that under the Merger Agreement, Conseco has
until March 31, 1995 to complete the transaction. In the same
announcement, Conseco noted that the Merger is not contingent on Conseco's
sales of its equity interests in other life insurance companies, although
it is exploring such sales and any such sales may impact the financing
structure for the Merger.
On November 2, 1994, Conseco announced that it proposed that the Merger
Agreement be revised to provide that each of the issued and outstanding
shares of Kemper Corporation common stock be converted into the right to
receive $56.00 in cash and 0.1087 shares of Conseco common stock instead of
the $56.00 in cash and the fraction (not more than 0.2418 nor less than
0.1982) of a share of Conseco common stock provided for in the Merger
Agreement. Based on the November 1, 1994 closing price of Conseco common
stock, the Conseco proposal would reduce the merger consideration per share
of Kemper Corporation common stock to approximately $60 from almost $65.
Conseco stated that under the revised proposal, Conseco stockholder
approval would not be required in connection with the Merger. Also, on
November 2, 1994, the Company stated that Conseco's proposed change would
be reviewed by the Company's board of directors in due course.
The closing of the Merger is subject to certain conditions set forth in the
Merger Agreement, including but not limited to the approval of the Merger
- 40 -
by the affirmative vote of the common stockholders of the Company entitled
to cast at least a majority of the votes which all common stockholders of
the Company are entitled to cast thereon, the approval of the issuance of
shares of Conseco common stock in the Merger by the affirmative vote of the
holders of a majority of the outstanding shares of Conseco common stock present
or represented by proxy and entitled to vote thereon at a special meeting of
stockholders of Conseco, the receipt of all required governmental and
regulatory consents, the receipt of certain approvals with respect to the
registered investment companies for which any of the Company's subsidiaries
act as investment advisor or sub-advisor, the receipt of certain consents
from the noninvestment company advisory clients of the asset management
subsidiaries of the Company, the obtaining by Conseco of all financing
necessary to pay the aggregate cash consideration payable in connection
with the Merger, and the closing of the Merger by March 31, 1995.
Immediately following the Merger it is anticipated that the Company would
sell its life insurance and real estate subsidiaries to a partnership in
which a wholly owned subsidiary of Conseco is the sole managing general
partner.
Following Conseco's November 2, 1994 announcements, in the purported class
action described under "Certain Legal Proceedings" on page 32 of the
Company's proxy statement dated April 9, 1994 (which description is
incorporated herein by reference), plaintiffs moved to file a further
amended complaint adding Conseco and Acquisition as defendants and
alleging, among other things, that "Conseco's revised offer in essence
constitutes a repudiation of its obligations under the merger agreement"
and that "Thus, the merger agreement and all its terms, including the bust
up fee, are null and void." The complaint seeks, among other things,
equitable relief ordering the individual defendants "to create an active
auction of the Company" and "to take all steps necessary to compel Conseco
to carry out its obligations under the merger agreement." The Company
intends to continue to vigorously contest plaintiffs' legal actions.
- 41 -
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index.
<TABLE>
<CAPTION>
Exhibit Number Page
-------------- ----
<S> <C>
27 Financial Data Schedule........................ 44
</TABLE>
(b) During the three months ended September 30, 1994, the Company
filed one current report on Form 8-K. Filed on July 1, 1994,
this Form 8-K reported, under Item 5 thereof, that on June 26,
1994, the Company had signed the Merger Agreement described
under ITEM 5 of this Form 10-Q.
In the fourth quarter of 1994 through the date of the filing of
this Form 10-Q, the Company filed one current report on Form 8-K.
Filed on October 31, 1994, this Form 8-K reported, under Item 5
thereof, the Company's third-quarter earnings and included, under
Item 7 thereof, pro forma financial information presenting (i)
the Company's results of operations as adjusted to give effect to
the Merger and certain related and other transactions as if they
all occurred on January 1, 1993 and (ii) the Company's financial
position as adjusted to give effect to the Merger and such
related and other transactions as if they all occurred on June
30, 1994. All information contained in the pro forma financial
information relating to Conseco or its merger-related plans and
assumptions was supplied by Conseco, and the Company does not
have independent knowledge of portions of such information.
- 42 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEMPER CORPORATION
(Registrant)
Date: November 14, 1994
/s/J. H. FITZPATRICK
--------------------
J. H. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Date: November 14, 1994
/s/J. R. SITAR
--------------------
J. R. Sitar
Senior Vice President and
Chief Accounting Officer
- 43 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 5,583,914
<DEBT-CARRYING-VALUE> 5,583,914
<DEBT-MARKET-VALUE> 5,583,914
<EQUITIES> 35,944
<MORTGAGE> 1,083,906
<REAL-ESTATE> 276,076
<TOTAL-INVEST> 7,873,085
<CASH> 244,944
<RECOVER-REINSURE> 775,962
<DEFERRED-ACQUISITION> 666,895
<TOTAL-ASSETS> 13,877,429
<POLICY-LOSSES> 8,020,859
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 909
<NOTES-PAYABLE> 728,165
<COMMON> 329,849
0
360,363
<OTHER-SE> 667,802
<TOTAL-LIABILITY-AND-EQUITY> 13,877,429
38,077
<INVESTMENT-INCOME> 133,497
<INVESTMENT-GAINS> (46,541)
<OTHER-INCOME> 23,119
<BENEFITS> 121,017
<UNDERWRITING-AMORTIZATION> 8,890
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 20,420
<INCOME-TAX> 6,149
<INCOME-CONTINUING> 14,271
<DISCONTINUED> 3,250
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,521
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
