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 March 31, 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 May 1, 1994, 33,286,487 shares of Kemper Corporation Common Stock,
$5 par value, were outstanding.
Sequentially numbered page 1 of 40 pages (including exhibits)
Exhibit Index on page 36
KEMPER CORPORATION
FIRST-QUARTER 1994
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheet -
March 31, 1994 and December 31, 1993.......................... 3
Consolidated Statement of Operations -
Three months ended March 31, 1994 and 1993.................... 4
Consolidated Statement of Cash Flows -
Three months ended March 31, 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)........................... 22
Liquidity and Capital Resources............................... 33
PART II. OTHER INFORMATION
ITEM 5. Other Information...................................... 36
ITEM 6. Exhibits and Reports on Form 8-K....................... 36
Signatures....................................................... 37
Exhibit 10....................................................... 38
</TABLE>
- 2 -
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
<TABLE>
March 31 December 31
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1994, $5,637,930; 1993, $5,147,592) $ 5,564,316 $ 5,333,175
Equity securities, at market (cost 1994, $29,784; 1993, $53,366) 36,504 98,968
Short-term investments 328,113 713,401
Joint venture mortgage loans 961,069 1,053,403
Third-party mortgage loans 125,613 153,880
Other real estate-related investments 309,956 272,188
Other loans and investments 443,014 446,717
----------- -----------
Total investments 7,768,585 8,071,732
Cash (restricted 1994, $6,661; 1993, $470) 199,242 253,105
Securities purchased under resale agreements 481,032 204,467
Securities held by brokerage firm subsidiaries, at market 273,806 285,695
Accounts receivable from brokerage firms and customers 732,523 776,971
Other accounts and notes receivable 748,079 617,458
Reinsurance recoverable 816,551 835,975
Deferred insurance acquisition costs 634,073 622,592
Deferred investment product sales costs 186,081 186,931
Other assets 286,855 299,543
Assets of separate accounts 1,890,518 1,883,656
----------- -----------
Total assets $14,017,345 $14,038,125
=========== ===========
LIABILITIES
Life policy benefits $ 8,163,404 $ 8,216,762
Securities sold under repurchase agreements 446,984 181,879
Securities sold, not yet purchased, at market 82,611 77,023
Accounts payable to brokerage firms and customers 294,508 354,998
Other accounts payable and liabilities 853,926 915,954
Notes payable 392,226 349,237
Long-term debt 392,820 393,978
Convertible debentures of subsidiary 44,200 45,651
Liabilities of separate accounts 1,890,518 1,883,656
----------- -----------
Total liabilities 12,561,197 12,419,138
----------- -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock-no par value (outstanding 1994 and 1993, 6,690,637 shares) 360,600 360,600
Common stock-$5.00 par value (issued 1994, 64,882,440; 1993, 64,620,863 shares) 324,412 323,104
Additional paid-in capital 321,338 313,531
Unrealized loss on foreign currency translations (50,474) (56,878)
Unrealized gain (loss) on investments (66,673) 155,004
Retained earnings 1,592,896 1,549,580
Treasury shares, at cost (1994, 31,717,409; 1993, 31,717,505 shares) (1,025,951) (1,025,954)
----------- -----------
Total stockholders' equity 1,456,148 1,618,987
----------- -----------
Total liabilities and stockholders' equity $14,017,345 $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>
Three Months Ended
March 31
--------------------
1994 1993
-------- --------
<S> <C> <C>
Revenue
Asset management income $119,497 $121,342
Net investment income 109,173 106,760
Insurance premium income 36,901 33,918
Securities brokerage income 142,867 167,646
Realized investment gain (loss) 29,396 (34,247)
Other income 26,700 23,737
-------- --------
Total 464,534 419,156
-------- --------
Benefits and expenses
Asset management expenses 66,383 72,446
Amortized investment product sales costs 12,901 11,279
Insurance claim costs and policyholder benefits 119,449 131,540
Amortized policy acquisition costs 19,189 15,040
Securities brokerage expenses 135,849 151,227
Interest expense 18,456 18,509
Other expenses 8,211 17,012
-------- --------
Total 380,438 417,053
-------- --------
Earnings from continuing operations before income tax 84,096 2,103
-------- --------
Income tax (benefit)
Current 33,511 14,483
Deferred (3,718) (7,415)
-------- --------
Total income tax 29,793 7,068
-------- --------
Income (loss) from continuing operations 54,303 (4,965)
Income from discontinued operations, net of tax - 14,633
Gain on sales of discontinued operations, net of tax 2,478 -
-------- --------
Income before cumulative effect of a change in
accounting principle 56,781 9,668
Cumulative effect of a change in accounting principle, net of tax - 2,545
-------- --------
Net income $ 56,781 $ 12,213
======== ========
Net income applicable to common stockholders $ 50,414 $ 12,213
======== ========
Net income per share:
Primary
Income (loss) from continuing operations $ 1.43 $ (0.14)
Income from discontinued operations .07 .30
-------- --------
Income before cumulative effect of a change in
accounting principle 1.50 .16
Cumulative effect of a change in accounting principle, net of tax - .05
-------- --------
Net income per share $ 1.50 $ .21
======== ========
Fully diluted
Income (loss) from continuing operations $ 1.31 $ (0.14)
Income from discontinued operations .06 .30
-------- --------
Income before cumulative effect of a change in
accounting principle 1.37 .16
Cumulative effect of a change in accounting principle, net of tax - .05
-------- ------
Net income per share $ 1.37 $ .21
======== ========
Cash dividends declared and paid per common share $ .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>
Three Months Ended
March 31
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 56,781 $ 12,213
Reconcilement of net income to net cash provided:
Realized investment (gain) loss (29,395) 34,247
Gains from sales of discontinued operations (2,478) -
Life policy benefits 92,031 106,923
Accounts payable to brokerage firms and customers (60,490) (276,229)
Deferred federal income tax 78,197 (39,893)
Brokerage firm portfolios 6,017 (64,042)
Accounts receivable from brokerage firms and customers 44,448 207,361
Deferred insurance acquisition costs (11,481) (9,174)
Deferred investment product sales costs 850 (8,886)
Amortization on investments 7,658 523
Other accounts and notes receivable (25,901) 28,129
Other accounts payable and liabilities (76,404) 28,953
Equity income from affiliates 15,127 19,829
Other 1,488 (5,574)
------- -------
Net cash provided from operating activities 96,448 34,380
------- -------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 31,527 4,698
Fixed maturities sold prior to maturity 473,214 793,226
Equity securities 63,248 8,955
Mortgage loans, other loans and investments 208,316 135,228
Cost of investments purchased:
Fixed maturities (998,298) (556,542)
Equity securities (379) (2,785)
Mortgage loans, other loans and investments (102,182) (195,009)
Short-term investments, net 388,205 (345,691)
Net receivable for securities transactions (116,683) 34,450
Other (36,161) (4,730)
------- --------
Net cash used in investing activities (89,193) (128,200)
------- --------
Cash flows from financing activities
Policyholder account balances:
Deposits 106,245 114,993
Withdrawals (232,210) (172,150)
Issuance of long-term debt - 1,250
Reduction of long-term debt (115) (440)
Treasury shares acquired - (653)
Dividends paid to stockholders (13,465) (13,486)
Increase in notes payable, net 41,946 59,848
Other 36,481 70,583
-------- --------
Net cash provided from (used in) financing activities (61,118) 59,945
-------- --------
Net decrease in cash (53,863) (33,875)
Cash, beginning of period 253,105 246,040
-------- --------
Cash, end of period $199,242 $212,165
======== ========
<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>
Three Months Ended
March 31
---------------------
(in thousands, except per share data) 1994 1993
------- -------
<S> <C> <C>
Net income reported $56,781 $12,213
Add back:
Dividends on redeemable securities of subsidiary - *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax 648 *
Deduct:
Employee interests in subsidiary, assuming full conversion 1,133 *
Dividends on preferred stock 5,882 2,187
------- -------
Total $50,414 $10,026
======= =======
Average common and equivalent shares outstanding 33,621 49,404
======= =======
Net income per share $ 1.50 $ .21
======= =======
</TABLE>
The calculation of net income per share on a fully diluted basis is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
(in thousands, except per share data) 1994 1993
------- -------
<S> <C> <C>
Net income reported $56,781 $12,213
Add back:
Dividends on redeemable securities of subsidiary - *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax 648 *
Deduct:
Employee interests in subsidiary, assuming full conversion 1,133 *
Dividends on preferred stock 2,188 2,187
------- -------
Total $54,109 $10,026
======= =======
Average common and equivalent shares outstanding 39,584 49,404
======= =======
Net income per share $ 1.37 $ .21
======= =======
<F1>
* The effect of employee interests in Kemper Financial Companies, Inc. is anti-dilutive for the 1993
period; accordingly, net income is not adjusted.
</TABLE>
- 6 -
3. Certain accounts receivable are stated less an allowance for doubtful
accounts of $19.9 million at March 31, 1994.
4. The change in unrealized gains (losses), net of applicable tax, on
fixed maturities and equity securities not reflected in net income
were $(221.7) million and $109.7 million for the three months ended
March 31, 1994 and 1993, respectively.
5. At March 31, 1994, there were 20 million authorized shares of
preferred stock with 24.0 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 64.9 million issued and 33.2
million outstanding. There were 31.7 million treasury shares.
6. Kemper Corporation defines cash as cash, money market accounts and
certain short-term investments with original maturities of three
months or less. There were no federal income taxes paid during the
three months ended March 31, 1994 and 1993. Interest payments totaled
$19.7 million and $16.6 million for the three months ended March 31,
1994 and 1993, respectively.
7. 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
three months of 1994, the valuation allowance was increased by $23.5
- 7 -
million. This increase in the valuation allowance solely relates to
the increase in the net deferred federal tax asset from unrealized
losses on investments.
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>
March 31 December 31
(in thousands) 1994 1993
--------- -----------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related $284,176 $ 268,699
Life policy reserves 134,690 134,274
Accrued expenses 42,729 50,359
Accrued employee benefits 26,486 26,663
Unrealized losses on investments 23,515 -
Other investment-related 22,621 22,071
Tax capitalization of deferred acquisition costs 20,025 18,100
Other 18,085 17,436
-------- ---------
Total deferred federal tax assets 572,327 537,602
Valuation allowance (75,018) (51,503)
-------- ---------
Total deferred federal tax assets after valuation
allowance 497,309 486,099
-------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 221,926 217,907
Unrealized gains on investments - 81,065
Deferred investment product sales costs 65,128 65,426
Depreciation and amortization 33,918 33,754
Partnerships 8,755 4,606
Other investment-related 7,364 4,673
Other 17,770 18,112
-------- ---------
Total deferred federal tax liabilities 354,861 425,543
-------- ---------
Net deferred federal tax asset $142,448 $ 60,556
======== =========
</TABLE>
The $81.9 million change in the net deferred federal tax asset for the
first quarter of 1994 is primarily attributable to an $81.1 million
increase in the net deferred federal tax asset relating to the change
in unrealized gains on investments. The valuation allowance of $75.0
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.
8. 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" and the current estimated market value of such
securities was below cost, no adjustment to the Company's financial
statements was required.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Total operations
Kemper Corporation and its subsidiaries (the "Company") reported net
income (including discontinued operations) of $56.8 million for the first
quarter of 1994, compared with $12.2 million for the same period of 1993.
The improvement in first-quarter 1994 is primarily due to realized
investment gains of $21.4 million, compared with realized investment
losses of $20.8 million in first-quarter 1993. Net income per share for
the first quarter of 1994 was $1.50 primary ($1.37 fully diluted),
compared with net income of $.21 per share (both primary and fully
diluted) in first-quarter 1993. Discontinued operations reported net
income of $2.5 million in the first quarter of 1994, compared with $29.1
million in the first quarter of 1993.
Operating earnings for continuing operations improved to $35.4 million in
the first quarter of 1994, compared with $22.3 million (before the SFAS
109 charge) in the same 1993 period. This improvement was primarily from
life insurance results and reduced joint venture operating losses in the
real estate companies. Reduced expenses were seen at the holding company
level while asset management results remained flat despite a drop in
assets under management for the quarter.
<TABLE>
Summary of Income (Loss) by Category
(in millions)
<CAPTION>
Three Months Ended March 31
-------------------------------------------------------------------------
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 $21.0 $ - $21.0 $ 20.2 $ .9 $ - $21.1
Life insurance 28.8 10.2 39.0 15.2 2.7 (15.6) 2.3
Securities brokerage 2.7 - 2.7 6.9 (5.5) - 1.4
Real estate (11.1) 8.8 (2.3) (13.5) (5.7) (11.7) (30.9)
Other operations and
corporate (6.0) (.1) (6.1) (6.5) (4.3) - (10.8)
----- ----- ----- ------ ----- ------- -----
Continuing operations 35.4 18.9 54.3 22.3 (11.9) (27.3) (16.9)
Discontinued operations - 2.5 2.5 8.2 14.4 6.5 29.1
----- ----- ----- ------ ----- ------- -----
Total $35.4 $21.4 $56.8 $ 30.5 $ 2.5 $ (20.8) $12.2
===== ===== ===== ====== ===== ======= =====
<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>
- 9 -
<TABLE>
Realized Investment Gain (Loss)
(in thousands)
<CAPTION>
Three Months Ended March 31
----------------------------
1994 1993
----------- ---------
<S> <C> <C>
Real estate-related losses:
Increase in reserve $ (21,971) $ (24,146)
Write-downs of real estate-related investments (14,408) (630)
Realized gains on sales or other transfers 36,379 -
--------- ---------
Total real estate-related losses 0 (24,776)
Fixed maturity write-downs (202) (14,230)
Other gains and losses, net 29,598 4,760
--------- ---------
Realized investment gain (loss) from
continuing operations 29,396 (34,246)
Income tax expense (benefit) 10,443 (6,978)
--------- ---------
Net gain (loss) from continuing operations 18,953 (27,268)
Realized investment gain from discontinued
operations, net of tax - 6,433
Gain on sale of discontinued operations, net of tax 2,478 -
--------- ---------
Total $ 21,431 $ (20,835)
========= =========
</TABLE>
Revenue from continuing operations totaled $464.5 million for
first-quarter 1994, compared with $419.2 million for the same 1993
period. The increase is due primarily to realized investment gains of
$29.4 million in first-quarter 1994, compared with realized investment
losses of $34.2 million in first-quarter 1993. Revenue from the
securities brokerage segment decreased $24.7 million to $142.9 million in
first-quarter 1994 (see "Securities brokerage" below). All other
categories of revenue reflected slight variances which in the aggregate
totaled a net increase of $6.4 million.
Book value per share at March 31, 1994 was $33.03, compared with $38.34
at year-end 1993, as unrealized depreciation on investments of $221.7
million, or $6.68 per share, in the first quarter of 1994 more than
offset improvements in net income per share.
Recent Development
- - ------------------
In March 1994, General Electric Capital Corporation ("GECC") announced an
unsolicited proposal to acquire the outstanding common stock of Kemper
Corporation. (See Part II, Item 5 below in this Form 10-Q.) The Company
believes that GECC's announcement, and the related uncertainties
respecting control of the Company, may be adversely affecting the levels
of sales of certain of the Company's products and services since the
beginning of the second quarter of 1994.
Net income (loss) per share in the following segment discussions is on a
primary basis.
- 10 -
Asset management
The asset management segment principally consists of Kemper Financial
Services, Inc. ("KFS") and its subsidiaries, including Kemper Asset
Management Company, Kemper Service Company ("KSvC") and INVEST Financial
Corporation ("INVEST").
<TABLE>
Selected Financial Highlights
(in millions, except per share data)
<CAPTION>
Three Months Ended March 31
---------------------------
1994 1993
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS
Investment management fees $ 57.4 $ 58.8
Commission income 21.9 26.6
Distribution and redemption fees 19.0 19.0
Transfer agent revenue 18.2 16.6
Investment and other income 6.0 8.2
------ ------
Total revenue 122.5 129.2
------ ------
Operating expenses 66.4 75.2
Commission expense 22.3 31.3
Deferral of mutual fund commissions
and sales expense (12.1) (20.2)
Amortization of deferred mutual fund
commissions and sales expense 12.9 11.3
------ ------
Total expenses 89.5 97.6
------ ------
Earnings before income tax and
change in accounting principle 33.0 31.6
Income tax expense 12.0 11.4
------ ------
Net income before change
in accounting principle 21.0 20.2
Cumulative effect of
change in accounting principle - .9
------ ------
Net income $ 21.0 $ 21.1
====== ======
Net income per share $ .61 $ .43
====== ======
</TABLE>
The asset management segment's net income for the first quarter of 1994
remained flat compared with the first quarter of 1993. Reduced management
fees, commission income, investment and other income and higher
amortization of commissions and sales expense were offset by higher
transfer agent revenue and reduced operating expenses.
Total investment management fees in the first quarter of 1994 decreased to
$57.4 million from $58.8 million in the first quarter of 1993. Investment
management fees on Kemper mutual funds increased approximately $2.2 million
in the first quarter of 1994, compared with the same period of 1993, as
average assets of KFS' stock mutual funds and tax-exempt mutual funds were
higher in the first quarter of 1994, compared with the same period last
year. This increase was offset by a decline in investment management fees
of approximately $1.5 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, revenue from real estate management fees are reported in
the real estate segment; these revenues totalled $2.0 million in
first-quarter 1994.
Commission income decreased $4.7 million in the first quarter of 1994,
compared with the first quarter of 1993, due to lower sales.
- 11 -
Transfer agent revenue increased $1.6 million in the first quarter of 1994,
compared with the first quarter of 1993, primarily due to increased
shareholder transaction volumes on Kemper mutual funds.
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 quarter of 1994 decreased approximately $1.8 million
from the first quarter of 1993. The decrease was partially offset by a
reduction in related operating expenses.
Operating expenses decreased $8.8 million in the first quarter of 1994,
compared with the first quarter of 1993. Operating expenses declined due
to the above-mentioned KSvC service reductions and the transfer of real
estate operations to the real estate segment. Expense reductions of
approximately (i) $2.7 million were realized with the closing of Selected's
operations, (ii) $2.4 million occurred in advertising, literature and sales
promotion, and (iii) $1.9 million were made in personnel primarily due to
the reduction of production-related compensation as a result of lower stock
and bond mutual fund sales. Expense reductions of $1.6 million were also
realized in data processing and facilities.
Commission expenses were $22.3 million in the first quarter of 1994,
compared with $31.3 million in the first quarter of 1993, due to lower
sales in 1994. The reduced commission expense was the primary cause of the
$8.1 million decrease in the deferral of mutual fund commissions and sales
expenses. Amortization of deferred mutual fund commissions and sales
expense increased $1.6 million primarily due to increased redemption
activity of KFS' 12b-1 spread load mutual fund product.
<TABLE>
Assets Under Management (in billions)
<CAPTION>
3/31/94 12/31/93 9/30/93 6/30/93 3/31/93
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mutual funds:
Bond $23.9 $25.7 $25.7 $25.9 $25.2
Stock 9.2 9.4 9.4 8.7 8.9
Money market 12.7 12.3 14.3 14.2 15.1
Investment advisory 4.6 4.7 4.6 4.3 4.5
Kemper Corporation subsidiaries 10.0 9.8 9.9 10.5 10.4
Kemper National Insurance
Companies and other 7.0 7.4 7.4 7.1 7.2
----- ----- ----- ----- -----
Total $67.4 $69.3 $71.3 $70.7 $71.3
===== ===== ===== ===== =====
</TABLE>
Bond and stock mutual fund assets under management decreased $2.0 billion
from December 31, 1993 primarily due to net redemptions and market
depreciation. Redemptions of stock and bond funds totalled $1.5 billion in
the first quarter of 1994, compared with $869 million for the same period
last year. Bond funds made up 75 percent of the redemption volume in 1994,
largely caused by sharply rising interest rates. Stock and bond funds had
asset depreciation of approximately $1.1 billion in the first quarter of
1994 primarily caused by the market correction experienced in the first
quarter. Sales of stock and bond mutual funds in the first quarter of 1994
were $898 million, compared with $1.4 billion in the first quarter of 1993.
Due to the relative decline in sales of bond funds, sales of stock mutual
- 12 -
funds increased to 42 percent of total stock and bond fund sales compared
with 36 percent for the same period last year.
Money market fund assets under management increased $0.4 billion from
December 31, 1993 as shareholders moved their money into short-term
investments seeking safety of principal with the increase in interest rates
and the decline in the markets.
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 competi-
tion issues, such as brand name marketing emphasizing long-term investment
performance, distribution through diversified channels, cost control and
improved service through internalization of its shareholder accounting
system (scheduled for completion in late 1994) and expansion of
international investment capabilities. In March 1994, KFS hired a Director
of International Equities to further strengthen and enhance its
international abilities to take advantage of the investment opportunities
overseas. The Company is continuing to expand its product line to satisfy
the needs of its customers.
In late May 1994, KFS is planning to establish for many of its funds,
subject to approval by the shareholders of such funds, a multiple class
structure to provide fund shareholders with the choice of either (i) the
traditional front-end load option, or (ii) a spread load (contingent
deferred sales charge) option charging annual 12b-1 distribution fees
(certain of KFS' funds already provide 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 would offer a
broad product line with 21 stock and bond funds, each in these three
configurations, in place of 33 stock and bond funds currently offered. In
addition, KFS would offer for qualifying investors (mainly institutions
making large investments) a no-load and no distribution fee option. The
Company believes this multiclass structure would, 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.
- 13 -
Life insurance
The life insurance segment consists of Federal Kemper Life Assurance
Company and Kemper Investors Life Insurance Company.
<TABLE>
Selected Financial Highlights
(in millions, except per share data)
<CAPTION>
Three Months Ended March 31
---------------------------
1994 1993
------ ------
<S> <C> <C>
STATEMENT OF INCOME
Investment income $ 122.0 $ 124.9
Premium revenue 36.9 33.9
Other income 24.0 19.0
Realized investment gain (loss) 15.6 (16.6)
------- -------
Total revenue 198.5 161.2
------- -------
Benefits to policyholders 119.5 131.5
Commissions, taxes, licenses and fees 17.0 18.4
Operating expenses 13.3 13.3
Deferral of policy acquisition costs (30.7) (24.2)
Amortization of deferred policy
acquisition costs 19.2 15.1
------- -------
Total benefits and expenses 138.3 154.1
------- -------
Earnings before income tax and
change in accounting principle 60.2 7.1
Income tax expense 21.2 7.5
------- -------
Net income (loss) before change
in accounting principle 39.0 (.4)
Cumulative effect of change
in accounting principle - 2.7
------- -------
Net income $ 39.0 $ 2.3
======= =======
Realized investment gain (loss),
net of tax $ 10.2 $ (15.6)
======= =======
Operating earnings $ 28.8 $ 17.9
======= =======
Per share:
Operating earnings $ .85 $ .36
======= =======
Net income $ 1.15 $ .05
======= =======
</TABLE>
The life insurance segment reported improved net income in the first
quarter of 1994, compared with the first quarter of 1993. The
improvement in 1994 was primarily the result of realized investment
gains, increases in spread income, favorable mortality results and an
increase in premium revenue.
The segment's after-tax realized investment results included real
estate-related losses of $9.9 million and $6.2 million in the first
quarters of 1994 and 1993, respectively, and after-tax write-downs and
restructurings of certain below investment-grade securities totaling $0.1
million and $14.2 million in the first quarters of 1994 and 1993,
respectively. These losses were offset by other realized investment
gains of $20.2 million and $4.8 million during the first quarters of 1994
and 1993, respectively, primarily from the sale of common stocks in 1994
and fixed maturities in 1993. (See INVESTMENTS below.)
- 14 -
Operating earnings for the life insurance segment improved in the first
quarter of 1994, compared with the first quarter of 1993, primarily due
to increased spread income as crediting rates declined at a faster rate
than the slight decline in investment income. Continuing a strategy
implemented during 1992, the life insurance segment continued to reduce
crediting rates on certain of its 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 negatively impacted in the first quarters of 1994 and 1993 by
a continuing shift to higher-quality, lower-yielding investments and
foregone income on nonperforming investments. Mitigating these factors
somewhat were the benefits from capital contributions of $70.0 million in
1993 as well as sales of certain real estate-related assets to the
Company's real estate subsidiaries totaling $80.8 million in
first-quarter 1994 and $447.1 million in 1993, respectively, and rising
investment yields on new money during the first quarter of 1994.
<TABLE>
Life insurance sales
(in millions)
<CAPTION>
Three Months Ended March 31
---------------------------
1994 1993
------- -------
<S> <C> <C>
Annuities:
General account $ 77.2 $ 100.6
Separate account 77.4 66.4
------- -------
Total annuities 154.6 167.0
------- -------
Life insurance:
Term and other 36.5 20.0
Interest-sensitive 20.3 41.7
------- -------
Total life insurance 56.8 61.7
------- -------
Total sales $ 211.4 $ 228.7
======= =======
</TABLE>
Sales of term and other life products include both renewal premiums and
new product sales. Despite declining sales of new term life products,
premium revenue increased during the first quarter of 1994, compared with
the first quarter of 1993, due to increasing renewal premiums on term
life products. The segment issued new life insurance business in the
first quarter of 1994 of $3.8 billion in face amount, down from $4.5
billion in first-quarter 1993, due in part to competitive conditions.
Total life insurance in force grew to $92.5 billion at March 31, 1994,
compared with $91.3 billion at December 31, 1993. The decrease in
general account annuity sales and interest-sensitive life insurance sales
reflects the Company's continuing strategy to direct its sales efforts
toward separate account products, which pose minimal investment risk for
the Company and increase administrative fees earned. Reflecting this
strategy, the separate account sales for the first quarter of 1994
increased by approximately 16.6 percent compared with the same period in
1993.
To address its competition, the Company has adopted certain business
strategies. These include additional reductions of real estate-related
assets; continued focus on existing and new term and variable annuity
products; distribution through diversified channels, with new 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
- 15 -
through the use of technology.
Included in other income were administrative fees received from the
segment's separate account (variable annuity) products of $5.2 million in
the first quarter of 1994, compared with $4.0 million in the first
quarter of 1993. Administrative fee revenue increased in the first
quarter of 1994 due to increases in separate account assets. Other
income also included surrender charge revenue of $3.8 million in the
first quarter of 1994, compared with $3.2 million in the first quarter 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 quarter of
1994, compared with the first quarter of 1993, reflecting lower annuity
and life insurance sales. The higher level of deferral of policy
acquisition costs reflected an increased level of imputed interest
capitalized on deferred insurance acquisition costs due to improvements
in projected future revenue streams. The amortization of policy
acquisition costs increased during the first quarter of 1994, compared
with the first quarter of 1993, primarily as the result of the level of
nonperforming real estate-related assets and improvements in net income
during the first quarter of 1994, compared with the first quarter of
1993. The current level of nonperforming real estate-related assets has
reduced the present value of future estimated gross profits, thereby
accelerating the amortization of policy acquisition costs.
Operating expenses in the first quarter of 1994 were flat, compared with
first-quarter 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 losses; sales of $720.2 million of certain real
estate-related investments to the Company's real estate subsidiaries;
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. The statutory
surplus ratio for the segment improved to 9.4 percent at March 31, 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.
- 16 -
The following tables reflect selected balance sheet data of the life
insurance segment:
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
March 31 December 31
1994 1993
----------- -----------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 185 2.4% $ 571 7.2%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 3,790 50.0 3,548 44.6
NAIC(1) Class 2 1,563 20.6 1,557 19.5
Below investment-grade:(2)
Performing 206 2.7 222 2.8
Equity securities 36 .5 98 1.2
Joint venture mortgage loans(3) 876 11.6 993 12.5
Third-party mortgage loans(3) 126 1.7 145 1.8
Other real estate-related investments(3) 380 5.0 405 5.1
Other 421 5.5 424 5.3
------ ----- ------ -----
Total(4) $7,583 100.0% $7,963 100.0%
====== ===== ====== =====
<F1>
(1) National Association of Insurance Commissioners (NAIC).
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F2>
(2) Excludes $101 million, or 1.3%, and $143 million, or 1.8%, at March 31, 1994 and December 31, 1993,
respectively, of bonds carried in other real estate-related investments.
<F3>
(3) See table captioned "Summary of gross and net real estate investments at page 26 below.
<F4>
(4) See INVESTMENTS below.
</TABLE>
<TABLE>
Other selected balance sheet data
(in millions)
<CAPTION>
March 31 December 31
1994 1993
----------- -----------
<S> <C> <C>
Deferred insurance acquisition costs $ 634 $ 623
Assets of separate accounts 1,891 1,883
Total assets 11,271 11,577
Life policy benefits(1) 7,347 7,381
Stockholder's equity 952 1,136
<F1>
(1) Net of ceded reinsurance.
</TABLE>
- 17 -
Securities brokerage
The securities brokerage segment primarily consists of Kemper Securities,
Inc. ("KSI").
<TABLE>
Selected Financial Highlights
(in millions, except per share data)
<CAPTION>
Three Months Ended March 31
----------------------------
1994 1993
------- ------
<S> <C> <C>
STATEMENT OF INCOME
Commissions $111.4 $123.5
Interest and dividend income 17.1 18.6
Securities gains, net 1.4 13.6
Investment banking fees 6.9 4.5
Other income 14.6 16.1
------ ------
Total revenue 151.4 176.3
------ ------
Production-related compensation 61.7 69.7
Other operating expenses 75.9 84.4
Interest expense 10.1 11.9
------ ------
Total expenses 147.7 166.0
------ ------
Earnings before income tax and change in
accounting principle 3.7 10.3
Income tax expense 1.0 3.4
------ ------
Net income before change in accounting principle 2.7 6.9
Cumulative effect of change in accounting principle - (5.5)
------ ------
Net income $ 2.7 $ 1.4
====== ======
Net income per share $ .08 $ .03
====== ======
</TABLE>
The securities brokerage segment had net income of $2.7 million, or $.08
per share, for the first quarter of 1994, compared with net income of
$1.4 million, or $.03 per share, for the same period in 1993.
Revenue for the segment was $151.4 million, a decrease of $24.9 million
from the first quarter of 1993, indicative of the generally weaker credit
and equity markets in 1994 and reflecting reduced investment consultant
(registered representative) head count. Commission revenues decreased
$12.2 million, primarily in fixed-income products, to $111.4 million for
the quarter. While producer head count declined by approximately 13
percent when comparing first-quarter 1994 with first-quarter 1993
primarily due to the mid-1993 rumors that KSI was for sale, commission
per investment consultant improved by approximately 5 percent.
To further 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.
These include, in addition to KSI's ongoing retail focus, more
coordination of the Company's distribution functions at both INVEST and
KSI and plans to increase the number of investment consultants,
particularly those focused on sales of packaged products.
The decline in securities gains revenue of $12.2 million in the first
quarter of 1994, compared with first-quarter 1993, reflected the
volatility in the credit markets during the current period as concerns
over interest-rate tightening caused significant market declines. In
contrast, the first quarter of 1993 saw strong credit markets, in
particular in the tax-exempt UIT arena, which allowed the segment to post
- 18 -
gains of $13.6 million during the first quarter of 1993.
Investment banking fees increased from 1993 levels by $2.4 million to
$6.9 million, reflecting management's refocus on corporate finance
activities which culminated in senior manager roles in two equity initial
public offerings in the first quarter of 1994. Other income decreased in
the first-quarter 1994 by $1.5 million as first-quarter 1993 income
included revenue from the disposition of certain investments.
A decrease in securities interest and dividend income of $1.5 million was
offset by a decrease in interest expense of $1.8 million. These
reductions are attributable primarily to the disposition of
mortgage-backed securities and related bonds. The decrease was partially
offset by the increased costs of financing securities held and
receivables from other broker-dealers and customers.
Total expenses decreased $18.3 million, from $166.0 million in
first-quarter 1993, to $147.7 million in first-quarter 1994, largely as a
result of continued focus on cost containment.
Production-related compensation decreased $8.0 million due to lower
commission expense to investment consultants and reduced production-based
bonus accruals. Other operating expenses decreased $8.5 million as the
benefits of cost containment programs have begun to take effect.
Specifically, when comparing the first quarters of 1994 and 1993,
non-production compensation, electronic communication, data processing
and general administrative expenses have all declined. In addition,
other expenses also decreased, in part due to lower litigation-related
expenses. As announced earlier in 1994, this segment settled certain
significant litigation matters within established reserves.
- 19 -
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. These subsidiaries have recourse
obligations in favor of, and hold loans subordinate to, loans by the
Company's life insurance subsidiaries.
<TABLE>
Selected Financial Highlights
(in millions, except per share data)
<CAPTION>
Three Months Ended March 31
---------------------------
1994 1993
------- -------
<S> <C> <C>
STATEMENT OF INCOME
Joint venture operating losses $ (16.4) $ (20.2)
Investment income and other 3.5 6.4
Realized investment gain (loss) 13.7 (17.6)
------- -------
Total revenue .8 (31.4)
------- -------
Operating expenses 3.4 5.4
Interest expense .9 .2
------- -------
Total expenses 4.3 5.6
------- -------
Loss before income tax and change
in accounting principle (3.5) (37.0)
Income tax benefit (1.2) (11.8)
------- -------
Net loss before change in
accounting principle (2.3) (25.2)
Cumulative effect of change in
accounting principle - (5.7)
------- -------
Net loss $ (2.3) $ (30.9)
======= =======
Realized investment gain (loss),
net of tax expense (benefit) $ 8.8 $ (11.7)
======= =======
Operating loss $ (11.1) $ (19.2)
======= =======
Per share:
Operating loss $ (.32) $ (.39)
======= =======
Net loss $ (.06) $ (.63)
======= =======
</TABLE>
The joint venture operating loss decline in the first quarter of 1994 was
primarily due to sales and restructurings completed with certain joint
ventures which reduced the level of losses the Company was required to
record. 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 based on the amount of
nonaccrual loans on these same ventures.
Effective January 1, 1994, real estate management fee income and expenses
are recorded in the real estate segment, whereas previously they were
included in the asset management segment. The net impact of this
reclassification is immaterial to the Company. In addition, investment and
other income decreased by $2.9 million in the first quarter of 1994, with a
similar decrease in operating expenses, because Kemper Real Estate
Management Company became 50-percent owned and unconsolidated in March
1993.
- 20 -
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 additions to reserves and write-downs in the first
quarter of 1994.
The following table reflects selected balance sheet data of the real
estate segment. See INVESTMENTS below.
<TABLE>
Selected balance sheet data
(in millions)
<CAPTION>
March 31 December 31
1994 1993
-------- -----------
<S> <C> <C>
Cash and short-term investments $ 21 $ 13
Joint venture mortgage loans(1) 85 60
Third-party mortgage loans(1) - 9
Other real estate-related investments(1) (70) (135)
Other 3 4
---- ----
Total invested assets and cash $ 39 $(49)
==== ====
Net deferred federal tax asset $170 $168
Total assets 280 187
Long-term debt 13 13
Stockholder's equity 248 163
<F1>
(1) See table captioned "Summary of gross and net real estate investments" at page 26 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 $6.1 million for
the first quarter of 1994, compared with a net loss of $10.8 million for
the same period in 1993. Results for 1993 include a charge of $4.3
million for the adoption of SFAS 109, which changed the method of
accounting for deferred income taxes. 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.
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 $14.6 million from these operations in
the first quarter of 1993. In first-quarter 1994, the Company recorded
an additional gain on the sales of discontinued operations of $2.5
million as certain contingent liabilities were settled. At March 31,
1994, $44.1 million in reserves remain for other contingent liabilities
related to such dispositions.
- 21 -
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.
<TABLE>
Invested assets and cash
(in millions)
<CAPTION>
March 31 December 31
1994 1993
------------- -------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 527 6.6% $ 967 11.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 3,791 47.6 3,548 42.6
NAIC(1) Class 2 1,563 19.6 1,558 18.7
Below investment-grade:(2)
Performing 211 2.6 227 2.7
Equity securities 36 .5 99 1.2
Joint venture mortgage loans(3) 961 12.1 1,053 12.6
Third-party mortgage loans(3) 126 1.6 154 1.8
Other real estate-related investments(3) 310 3.9 272 3.3
Other 443 5.5 447 5.5
------ ----- ------ -----
Total $7,968 100.0% $8,325 100.0%
====== ===== ====== =====
<F1>
(1) National Association of Insurance Commissioners (NAIC).
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F2>
(2) Excludes $187 million, or 2.3%, and $171 million, or 2.0%, at March 31, 1994 and December 31, 1993,
respectively, of bonds carried in other real estate-related investments.
<F3>
(3) See table capitoned "Summary of gross and net real estate investments" at page 26 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 March 31, 1994 was $73.6 million, or $2.22 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 March 31, 1994, investment-grade fixed maturities and cash and
short-term investments accounted for 73.8 percent of the Company's
invested assets and cash, compared with 72.9 percent at
December 31, 1993. Approximately 65 percent of the Company's NAIC Class
1 bonds were rated AAA or equivalent at March 31, 1994.
Approximately one-third of the Company's investment-grade fixed
maturities at March 31, 1994, were mortgage-backed securities. These
investments consist primarily of marketable mortgage pass-through
- 22 -
securities issued by the Government National Mortgage Association (GNMA),
the Federal National Mortgage Association (FNMA) or the Federal Home Loan
Mortgage Corporation (FHLMC) 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 1992 and 1993, the current rise in interest rates is not expected to
cause any material extension of the average maturities of these
investments. Inasmuch as most of these investments were purchased by the
Company at discounts, any prepayment activity is not expected to result
in any material losses to the Company because any prepayment would
generally accelerate the reporting of the discounts as investment income.
Given the credit quality, liquidity and anticipated payment
characteristics of the Company's investments in mortgage-backed
securities, 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:
<TABLE>
Net investment income before taxes
(in millions)
<CAPTION>
Three Months Ended March 31
---------------------------
1994 1993
------ ------
<S> <C> <C>
Life insurance $122.0 $124.9
Real estate (14.6) (18.4)
Other and eliminations 1.8 .3
------ ------
Total $109.2 $106.8
====== ======
Investment yields:
Life insurance 6.28% 6.58%
------ ------
Total 5.36% 5.59%
------ ------
</TABLE>
Included in pretax 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 $16.5 million and $23.3 million for the
quarters ended March 31, 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 pretax yields on its average invested assets are net of
foregone investment income equal to 67 and 76 basis points for the first
quarter of 1994 and 1993, respectively. The Company's total foregone
investment income before tax on both nonperforming fixed maturity
investments and nonaccrual real estate-related investments was $13.2
- 23 -
million and $14.1 million at March 31, 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 these
loans excluded from the Company's share of joint venture operating
results. Based on total nonperforming securities and real estate-related
investments on nonaccrual status at March 31, 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 gains of $18.9 million for first-quarter 1994,
compared with realized investment losses of $27.3 million for
first-quarter 1993. Fixed maturity write-downs decreased due to the
increased quality of the Company's fixed maturity portfolio. Other
realized gains of $20.2 million (primarily from the sale of equities) and
$4.8 million (primarily from the sale of fixed maturities) in the first
quarters of 1994 and 1993, respectively, were also taken in the life
insurance segment.
Unrealized gains and losses on fixed maturity investments are not
reflected in the Company's results of operations. These changes in
unrealized value are included as a separate component of stockholders'
equity, net of any applicable income tax expense. 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 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
- 24 -
of loss. The additions to the provision for real estate-related losses
include increases to reserves on loans, write-downs to fair value of
certain real estate-related assets and the Company's share of write-downs
by joint ventures.
A valuation allowance was established upon adoption of SFAS 109 to reduce
the deferred tax asset for real estate-related 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 March 31, 1994, below investment-grade securities holdings (NAIC
classes 3 through 6) decreased to 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.
The Company's below investment-grade holdings decreased through sales,
maturities, restructurings, market value adjustments and write-downs.
At March 31, 1994, below investment-grade securities of approximately 12
issuers were held by the Company. Write-downs and restructurings on
below investment-grade securities for first-quarter 1994 totaled $.2
million pretax, compared with $14.2 million for first-quarter 1993.
Real estate-related investments
The $1.4 billion real estate portfolio held by the Company's continuing
operations constituted 17.6 percent of cash and invested assets at
March 31, 1994, down from 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.
- 25 -
<TABLE>
Summary of gross and net real estate investments
(in millions)
<CAPTION>
March 31, 1994 December 31, 1993
-------------------------------- --------------------------------
Life Real estate Life Real estate
Total segment segment Total segment segment
------ -------- ----------- ----- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investments before
reserves, write-downs,
net joint venture operating
losses:
Joint venture mortgages $1,173 $ 982 $ 191 $1,306 $1,121 $ 185
Third-party mortgages 126 126 - 154 145 9
Other real estate
investments 1,177 492 685 1,092 484 608
------ ------ ------ ------ ------ -----
Subtotal 2,476 1,600 876 2,552 1,750 802
Reserves (468) (98) (370) (446) (89) (357)
Write-downs (361) (99) (262) (355) (96) (259)
Cumulative net operating losses
of joint ventures owned (250) (21) (229) (272) (22) (250)
------ ------ ------ ------ ------ -----
Net real estate investments $1,397 $1,382 $ 15 $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 $622.0 million at March 31, 1994. This
amount represented a net decrease of $14.8 million since December 31,
1993, largely due to fundings in first-quarter 1994. As of March 31,
1994, the Company expects to fund approximately $268.6 million of these
legal commitments, along with providing capital to existing projects.
The commitments, along with estimated costs to complete, 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 $95.5 million of real estate owned and a $71.3 million
deficit in the Company's net equity investments in joint ventures, the
Company's real estate loans (including real estate-related bonds) totaled
$1,372.4 million at March 31, 1994, after reserves and write-downs. Of
this amount, $819.3 million are on accrual status. Of these accrual
loans, 57.4 percent have terms requiring current periodic payments of
their full contractual interest, 28.1 percent require only partial
payments or payments to the extent of cash flow of the borrowers, and
14.5 percent defer all interest to maturity.
- 26 -
<TABLE>
Real estate portfolio
(in millions)
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 20.5 1.5 30.3 3.6 5.4 17.8 79.1
Interest added to principal .2 - - - - - .2
Sales/Paydowns/Distributions (7.4) (1.2) (8.3) (5.3) (5.2) ( .6) (28.0)
REIT(2) (93.4) - (15.9) (11.7) - (2.4) (123.4)
Maturities - - - (6.2) - - (6.2)
Rollovers at maturity:
Principal - - - 6.2 - - 6.2
Joint venture operating loss - - - - - (16.5) (16.5)
Transfers to real estate owned - (19.1) - (10.7) 29.8 - -
Realized investment gain (loss) 35.6 ( .7) 10.6 (51.1) (13.3) 18.9 -
Other transactions (47.9) (8.8) ( .6) 56.2 .6 6.2 5.7
------ ------ ------ ----- ----- ------ --------
Balance at March 31, 1994 $961.0 $125.6 $190.3 $95.5 $95.5 $(71.3) $1,396.6(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 $779.3 million reserve and write-downs. Excludes $73.3 million of real estate-related accrued
interest.
</TABLE>
Other real estate-related investments
The Company's real estate-related bonds, all of which are presently rated
below investment-grade, 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.
Like the bonds, the other real estate loans are notes receivable that
generally are unsecured. These loans have provided financing to joint
ventures for purposes similar to those funded by real estate-related
bonds.
The deficit in equity investments in real estate at March 31, 1994,
consists of $163.4 million of loans to Spanish projects (described
below), $60.7 million of unsecured loans to joint ventures treated as
equity investments, a $215.2 million deficit in the Company's net equity
investments in joint ventures and reserves of $80.2 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 March 31, 1994, includes $87.9 million
of deeds in lieu of foreclosure and $7.6 million of certain purchased
properties. Real estate owned at March 31, 1994, is net of $47.4 million
of write-downs.
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.
- 27 -
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 March 31, 1994, also included
$163.4 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. The Spanish projects accounted for $12.4
million of fundings during the first quarter of 1994 and represented
approximately 11.7 percent of the Company's real estate portfolio at
March 31, 1994. These investments, which began in the late 1980s,
accounted for $41.9 million of the March 31, 1994, off-balance-sheet
legal commitments, which the Company expects to fully fund.
Undeveloped land, including the Spanish projects, represented
approximately 22.2 percent of the Company's real estate portfolio at
March 31, 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 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 March 31, 1994, the Company's loans to and investments in projects
with the Prime Group, Inc. or its affiliates, based in Chicago,
represented approximately $494.4 million, or 35.4 percent, of the
Company's real estate portfolio (including the previously mentioned
Spanish projects, which are Prime Group-related). This amount reflects
the first-quarter formation of a REIT (see preceding table) and includes
$44.1 million in fundings during first-quarter 1994. Prime Group-related
commitments accounted for $432.9 million of the off-balance-sheet legal
commitments at March 31, 1994, of which the Company expects to fund
$125.7 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 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 Bedford-related projects. During first-quarter 1994,
the Company provided $17.7 million of fundings to projects in the MLP.
At March 31, 1994, these projects accounted for $131.0 million of the
Company's off-balance-sheet legal commitments, of which the Company
expects to fund $108.3 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 MLP has reduced the
Company's share of the operating losses from Bedford-related ventures
that the Company would otherwise have recorded. The Company records 50
percent of the operating results of the ventures held by the new
- 28 -
partnership. Of the Company's real estate portfolio at March 31, 1994,
approximately $508.0 million, or 36.4 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 been recording
50 percent of the operating results of the related ventures, this
transaction, which simplifies 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 added $22.0 million to its real estate reserves in the first
quarter 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
the first quarter. 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 reserves and
write-downs. While the real estate subsidiaries as equity owners
recognized gains on the first-quarter 1994 transactions, the additions to
the reserves 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:
- 29 -
<TABLE>
Real estate reserve
(in millions)
<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
Asset transfer - - (2.5) 2.5 (2.5) 2.5
Change in reserve (17.9) (17.6) 28.9 28.6 11.0 11.0
----- ------ ----- ------ ---- ------
Balance at 3/31/94 $36.0 $111.0 $62.2 $258.4 $98.2 $369.4
===== ====== ===== ====== ===== ======
</TABLE>
In addition to the reserve, the Company's provision for real
estate-related losses included cumulative write-downs totaling $311.7
million (life insurance segment, $99.2 million; real estate segment,
$212.5 million) at March 31, 1994, and $298.5 million (life insurance
segment, $96.0 million; real estate segment, $202.5 million) at
December 31, 1993.
The Company's real estate reserve and write-downs increased in 1993
primarily due to declining valuations in the Company's real estate
portfolio. The declining valuations in 1993 reflected the Company's
view, based on economic data then available, that there will be slower
than previously anticipated economic growth in the future and therefore
slower absorption of real estate, particularly undeveloped land. Due to
the Company's assessment for slower economic growth, in the regions where
its principal holdings of real estate are concentrated, the Company's
plans with respect to certain projects were changed to reflect deferrals
of their commencement or completion.
- 30 -
The following table is a summary of the Company's troubled real
estate-related investments:
<TABLE>
Troubled real estate-related investments
(before reserves and write-downs)
(in millions)
March 31 December 31
1994 1993
-------- --------
<S> <C> <C>
Potential problem loans (1) $ 32.9 $ 20.2
Past due loans (2) .2 6.1
Nonaccrual loans (3)
Life insurance segment 639.1 755.8
Real estate segment 410.0 372.0
Restructured loans (4)
(currently performing) 59.3 59.5
Real estate owned (5) 142.9 107.5
-------- --------
Total $1,284.4(6) $1,321.1
======== ========
<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 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 includes deeds in lieu of foreclosure and certain purchased property.
<F6>
(6) Total reserves and cumulative write-downs are 60.7 percent of total troubled real estate-related
investments and 35.8 percent of the Company's total real estate portfolio before reserves and
write-downs at March 31, 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. Potential accounting impacts from the Company's real estate
portfolio could be material to the invested asset portfolio and future
results of operations.
Current conditions in the real estate markets are adversely affecting the
financial resources of certain of the Company's joint venture partners.
Each 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. Any consolidation
accounting resulting from foreclosures would add the related ventures'
- 31 -
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.
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 quarter
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 to a reduction in net
investment income of the life insurance segment over the last few years.
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 have begun to rise during 1994, the life insurance
subsidiaries' capital resources can be 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' liabilities and
that 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
money market product sales to increase and sales of stock funds to slow.
- 32 -
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.
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 first-quarter 1994, the
Company purchased $80.8 million of certain real estate-related
investments from the life insurance subsidiaries. In 1993, the Company
provided $517.1 million in cash to the life insurance subsidiaries by
purchasing from them $447.1 million of certain real estate-related
investments and contributing $70.0 million to capital. Through 1996, the
Company expects to continue to make substantial purchases of real
estate-related investments from its life insurance subsidiaries.
At March 31, 1994, Kemper Corporation had $99.3 million in cash and
short-term investments. The Company expects to use most of these funds
for the purchases of real estate-related investments from the life
insurance subsidiaries to maintain and improve their regulatory capital
positions.
Policyholder deposits decreased to $106.2 million for the first quarter
of 1994 from $115.0 million for the first quarter of 1993, and
policyholder withdrawals increased to $232.2 million for the first
quarter of 1994 from $172.2 million for the first quarter of 1993,
primarily due to planned reductions in crediting rates on fixed-rate
annuities as well as increased competition.
<TABLE>
Debt
(in millions)
<CAPTION>
March 31 December 31
1994 1993
-------- -----------
<S> <C> <C>
Short-term debt $392.2 $349.2
Long-term debt 392.8 394.0
Convertible debentures
of subsidiary 44.2 45.7
</TABLE>
- 33 -
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 $368.1
million at March 31, 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 March 31, 1994 and
December 31, 1993. The Company renegotiated its committed lines of
credit with certain banks effective November 1, 1993. The lines of
credit total $325.0 million, with $162.5 million expiring November 1,
1994, and $162.5 million expiring November 1, 1996. These lines are
unused and fully available. Interest rates would generally approximate
short-term bank corporate rates.
The Company previously had an $80 million line of credit from Lumbermens,
which at December 31, 1993, was unused. On January 12, 1994, the Company
and Lumbermens mutually agreed to cancel this line of credit.
Long-term debt
Included in long-term debt at March 31, 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 expects to occur in the second
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 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. Any reductions in the life insurance
subsidiaries' claims-paying ability or financial strength ratings could
result in their products being less attractive to consumers.
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.
- 34 -
In connection with GECC's announcement of its unsolicited proposal to
acquire the Company (see Part II, Item 5 below in this Form 10-Q), on
March 15, 1994, Moody's Investors Service placed "under review with
direction uncertain" 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 'developing' implications" its
BBB senior debt rating and BB+ preferred stock rating of Kemper
Corporation; and Duff & Phelps Credit Rating Co. placed "on Rating Watch
- - -- Uncertain" 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.
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. Employee terminations during
first-quarter 1994 accounted for the $1.5 million reduction of
convertible debentures. The outstanding debentures bear interest
approximating the prime rate.
Common stock
During first-quarter 1994, the Company received $9.1 million by issuing
common stock through the Kemper Corporation Dividend Reinvestment and
Stock Purchase Plan and employee stock option plans. During 1993 and
first-quarter 1994, the quarterly dividend rate was $.23 per common
share. The second-quarter 1994 dividend of $.23 per share was declared
in April 1994 and is payable May 31, 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
March 31, 1993, the Company's outstanding preferred stock totaled $360.6
million. Dividends paid on the preferred stock during the first quarter
of 1994 totaled $5.9 million.
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.
- 35 -
PART II. OTHER INFORMATION
ITEM 5. Other Information
On March 14, 1994, General Electric Capital Corporation ("GECC")
announced an unsolicited proposal to acquire the outstanding common stock
of Kemper Corporation ("Kemper") for $55 per share. On March 17, 1994,
the board of directors of Kemper rejected the proposal. On March 20,
1994, GECC requested a list of Kemper's stockholders. On March 24, 1994,
GECC filed a preliminary proxy statement with the Securities and Exchange
Commission in connection with GECC's solicitation of proxies to elect
four of its nominees to the board of directors of Kemper. On March 28,
1994, Kemper filed its preliminary proxy statement, including therein
Kemper's nominees for reelection to the board of directors, and mailed it
to stockholders. On or about April 4, 1994, GECC began distributing its
definitive proxy statement. On April 9, 1994, Kemper commenced mailing
its definitive proxy statement.
On May 8, 1994, GECC and Kemper entered into a letter agreement pursuant
to which (i) GECC increased its offer to $60 per share, subject to
certain conditions, and (ii) GECC and Kemper agreed to vote their proxies
at Kemper's May 11, 1994 Annual Meeting to adjourn such meeting, prior to
the taking of any vote on the election of directors, until August 22,
1994. Also, the Kemper Board of Directors authorized its management and
advisors to take all appropriate actions to maximize value for Kemper
stockholders. A copy of the GECC/Kemper letter agreement is attached at
Exhibit 10 to this Form 10-Q, and the preceding summary of this letter
agreement is subject to, and qualified in its entirety by reference to,
such agreement.
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS.
--------
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------------
<C> <S> <C>
10 Letter agreement dated May 8, 1994 between General
Electric Capital Corporation and Kemper
Corporation........................................... 38
</TABLE>
(b) REPORTS ON FORM 8-K.
The Company filed one current report on Form 8-K during the three months
ended March 31, 1994. On January 18, 1994, Kemper Corporation filed a
Form 8-K which reported, under item 5 thereof, (A) a December 22, 1993
refinancing of $275.3 million of mortgage and other real estate-related
loans and related accrued interest; (B) a January 1994 transaction with a
former joint venture real estate partner; (C) the December 31, 1993 sale
of Federal Kemper Insurance Company; (E) the settlement of certain
litigation matters during December 1993 and January 1994; (F) the
termination on January 12, 1994 of a line of credit; and (G) a
reorganization of management structure.
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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: May 12, 1994
/s/J. H. FITZPATRICK
--------------------
J. H. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Date: May 12, 1994
/s/J. R. SITAR
--------------------
J. R. Sitar
Senior Vice President and
Chief Accounting Officer
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Exhibit 10
- - --------------------------------------------------------------
General Electric Capital Corporation
May 8, 1994
Kemper Corporation
One Kemper Drive
Building 3 - 3rd Floor
Long Grove, Illinois 60049
Gentlemen:
General Electric Capital Corporation ("GE Capital") is hereby
offering to acquire Kemper Corporation ("Kemper") for $60 in cash per
share of common stock in a merger transaction; subject to the
satisfactory completion of due diligence by GE Capital and the
satisfaction of the other conditions more fully described below.
GE Capital's $60 per share cash offer (the "Offer") is subject to
the following conditions:
1. GE Capital will be permitted to conduct, as soon as
practicable following the execution of this letter, a full due diligence
review of all material aspects of the businesses and operations of Kemper
through the examination of all material files and records and interviews
with Kemper employees at all management levels, including, without
limitation, the right to conduct a full review of Kemper's entire real
estate portfolio and the files with respect to all of Kemper's past,
present and potential litigation, contingent liabilities (including
environmental liabilities) and regulatory examinations and
investigations.
2. The execution and delivery of a mutually satisfactory merger
agreement containing customary terms and conditions for transactions of
this nature, including the satisfaction of all regulatory requirements
and obtaining all regulatory approvals and the requisite approvals of the
Boards of Kemper funds.
Kemper has advised GE Capital that, in light of the Offer, the
Kemper Board of Directors has authorized its management and advisors to
take all appropriate actions to maximize value for Kemper stockholders.
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Kemper Corporation
May 8, 1994
Page Two
Kemper and GE Capital hereby agree that each will vote its proxies
at the Kemper Annual Meeting of Stockholders to be held on May 11, 1994
to adjourn such meeting prior to the taking of any vote on the election
of directors. The meeting will be adjourned until 10:00 a.m. on
August 22, 1994.
GE Capital and Kemper each hereby also agrees to issue the joint
press release attached hereto as Appendix I and that each will consult
with the other before issuing any additional press releases or
announcements with respect to the terms of this letter agreement.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return the enclosed copy of this letter where
indicated below.
Very truly yours,
GENERAL ELECTRIC CAPITAL CORPORATION
By:/s/PAUL A. STREET
---------------------------------
Paul A. Street
Senior Vice President
Accepted and Agreed:
KEMPER CORPORATION
By:/s/JOHN H. FITZPATRICK
----------------------
John H. Fitzpatrick
Executive Vice President
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