<PAGE> 1
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, 1995.
/ / 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)
Delaware 36-6169781
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kemper Drive
Long Grove, Illinois 60049-0001
(Address of principal executive offices) (Zip Code)
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 April 30, 1995, 34,587,050 shares of Kemper Corporation Common Stock, $5
par value, were outstanding.
<PAGE> 2
KEMPER CORPORATION
FIRST-QUARTER 1995
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheet - March 31, 1995 and December 31, 1994. 3
Consolidated Statement of Operations -
Three months ended March 31, 1995 and 1994..................... 4
Consolidated Statement of Cash Flows -
Three months ended March 31, 1995 and 1994..................... 5
Notes to Consolidated Financial Statements........................ 6
Management's Discussion and Analysis -
Results of Operations.......................................... 10
Investments.................................................... 24
Liquidity and Capital Resources................................ 35
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................ 39
Signatures........................................................ 40
</TABLE>
- 2 -
<PAGE> 3
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1995, $5,453,206; 1994, $5,534,864) $ 5,309,357 $ 5,200,915
Equity securities, at market (cost 1995, $138,657; 1994, $40,669) 138,438 40,417
Short-term investments 286,106 349,651
Joint venture mortgage loans 647,894 616,192
Third-party mortgage loans 379,992 418,313
Other real estate-related investments 343,515 336,272
Other loans and investments 445,220 443,800
----------- -----------
Total investments 7,550,522 7,405,560
Cash 171,850 205,898
Other accounts and notes receivable 508,802 356,265
Reinsurance recoverable 711,255 741,867
Deferred insurance acquisition costs 707,102 696,804
Deferred investment product sales costs 159,704 166,397
Other assets 83,246 175,037
Net assets of discontinued operations 132,183 249,033
Assets of separate accounts 1,626,596 1,871,777
----------- -----------
Total assets $11,651,260 $11,868,638
=========== ===========
LIABILITIES
Life policy benefits $ 6,958,839 $ 7,129,293
Ceded life policy benefits 711,255 741,867
Other accounts payable and liabilities 488,660 424,388
Notes payable 54,173 54,173
Long-term debt 355,627 356,670
Convertible debentures of subsidiary 32,699 33,113
Liabilities of separate accounts 1,626,596 1,871,777
----------- -----------
Total liabilities 10,227,849 10,611,281
----------- -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock-no par value (outstanding 1995 and 1994, 6,681,165 shares) 360,363 360,363
Common stock-$5.00 par value (issued 1995, 66,334,045; 1994, 66,229,940 shares) 331,670 331,150
Additional paid-in capital 370,392 366,944
Unrealized loss on foreign currency translations (36,557) (35,888)
Unrealized loss on investments (124,876) (323,201)
Retained earnings 1,551,241 1,586,820
Treasury shares, at cost (1995, 31,812,441; 1994, 31,812,456 shares) (1,028,822) (1,028,831)
----------- -----------
Total stockholders' equity 1,423,411 1,257,357
----------- -----------
Total liabilities and stockholders' equity $11,651,260 $11,868,638
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE> 4
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------
1995 1994
-------- --------
<S> <C> <C>
Revenue
Asset management income $101,967 $118,998
Net investment income 131,629 109,173
Insurance premium income 38,331 36,901
Realized investment gain 43,433 29,396
Other income 24,638 26,700
-------- --------
Total revenue 339,998 321,168
-------- --------
Benefits and expenses
Asset management expenses 66,462 72,707
Amortized investment product sales costs 13,762 12,901
Insurance claim costs and policyholder benefits 122,352 119,449
Amortized policy acquisition costs 27,981 19,189
Interest expense 9,625 8,268
Other expenses 6,718 8,211
-------- --------
Total benefits and expenses 246,900 240,725
-------- --------
Earnings from continuing operations before income tax 93,098 80,443
-------- --------
Income tax (benefit)
Current 23,900 38,426
Deferred 23,704 (9,609)
-------- --------
Total income tax 47,604 28,817
-------- --------
Income from continuing operations 45,494 51,626
Income (loss) from discontinued operations, net of tax (3,215) 2,677
Gain (loss) on divestitures of discontinued operations, net of tax (64,034) 2,478
-------- --------
Net income (loss) $(21,755) $ 56,781
======== ========
Net income (loss) applicable to common stockholders $(27,651) $ 50,414
======== ========
Net income (loss) per share:
Primary
Income from continuing operations $ 1.14 $ 1.35
Income (loss) from discontinued operations (1.93) .15
-------- --------
Net income (loss) per share $ (.79) $ 1.50
======== ========
Fully diluted
Income from continuing operations $ 1.14 $ 1.24
Income (loss) from discontinued operations (1.93) .13
-------- --------
Net income (loss) per share $ (.79) $ 1.37
======== ========
Cash dividends declared and paid per common share $ .23 $ .23
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE> 5
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
-----------------------
1995 1994
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (21,753) $ 56,781
Reconcilement of net income (loss) to net cash provided:
Realized investment gain (43,433) (29,395)
Loss (gain) from sale of discontinued operations 67,250 (2,478)
Life policy benefits 71,839 92,031
Deferred federal income tax 21,848 72,185
Deferred insurance acquisition costs (1,587) (11,481)
Deferred investment product sales costs 6,693 850
Amortization on investments (3,986) 7,658
Other accounts and notes receivable (23,326) (33,989)
Other accounts payable and liabilities 125,887 (27,500)
Equity income from affiliates 2,941 15,127
Other (33,996) 3,119
--------- ----------
Net cash provided from operating activities 168,377 142,908
--------- ----------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 41,863 31,527
Fixed maturities sold prior to maturity 70,317 473,214
Equity securities 248 63,248
Mortgage loans, other loans and investments 77,231 208,316
Cost of investments purchased:
Fixed maturities (30,082) (998,298)
Equity securities (162) (379)
Mortgage loans, other loans and investments (72,793) (102,182)
Short-term investments, net 68,072 388,205
Unsettled investment transactions, net (29,038) (116,683)
Discontinued operations 2,750 (13,000)
Other 20,387 (32,131)
--------- ----------
Net cash provided by (used in) investing activities 148,793 (98,163)
--------- ----------
Cash flows from financing activities
Policyholder account balances:
Deposits 102,517 106,245
Withdrawals (344,810) (232,210)
Dividends paid to stockholders (13,826) (13,465)
Increase in notes payable, net - (1,043)
Other (95,099) 39,681
--------- ----------
Net cash used in financing activities (351,218) (100,792)
--------- ----------
Net decrease in cash (34,048) (56,047)
Cash, beginning of period 205,898 229,937
--------- ---------
Cash, end of period $ 171,850 $ 173,890
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE> 6
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 1994 Annual Report on Form
10-K. Certain reclassifications have been made in these financial
statements for 1994 to conform to the 1995 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 (loss) per share is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31
---------------------
(in thousands, except per share data) 1995 1994
------- -------
<S> <C> <C>
Net income (loss) reported $(21,755) $56,781
Add back:
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 5,896 5,882
-------- -------
Total $(27,651) $50,414
======== =======
Average common and equivalent shares outstanding 34,851 33,621
======== =======
Net income (loss) per share $ (.79) $ 1.50
======== =======
</TABLE>
The calculation of net income (loss) per share on a fully diluted basis is as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------
(in thousands, except per share data) 1995 1994
------- -------
<S> <C> <C>
Net income (loss) reported $(21,755) $56,781
Add back:
Interest and amortization expense on convertible
debentures, net of tax * 648
Deduct:
Employee interests in subsidiary, assuming full conversion * 1,133
Dividends on preferred stock 2,187 2,188
-------- -------
Total $(23,942) $54,109
======== =======
Average common and equivalent shares outstanding 40,398 39,584
======== =======
Net income (loss) per share $ ** $ 1.37
======== =======
</TABLE>
* The effect of employee interests in Kemper Financial Companies, Inc. is
anti-dilutive for the 1995 period; accordingly, net income is not adjusted.
** Net income per share on a fully diluted basis is anti-dilutive;
accordingly, net income per share is not adjusted.
- 6 -
<PAGE> 7
3. Certain accounts receivable are stated less an allowance for doubtful
accounts of $2.6 million at March 31, 1995.
4. The change in unrealized gains (losses), net of applicable tax, on fixed
maturities and equity securities not reflected in net income were $204.0
million and $(221.7) million for the three months ended March 31, 1995 and
1994, respectively.
5. At March 31, 1995, 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 66.3 million issued and 34.5 million outstanding. There were 31.8
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, 1995 and 1994. Interest payments totaled $11.5 million and
$11.4 million for the three months ended March 31, 1995 and 1994,
respectively.
7. Pursuant to SFAS 109 (Accounting for Income Taxes), deferred tax assets
are recognized 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 Company has established a valuation allowance to reduce the
deferred federal tax asset related to real estate and other investments
to the amount that, based upon available evidence, is, in management's
judgment, more likely that not to be realized. Any reversals of the
valuation allowance are contingent upon the recognition of future capital
gains in the Company's consolidated 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 1995, the
valuation allowance was decreased by $66.5 million. This decrease in the
valuation allowance solely relates to the decrease in the deferred federal
tax asset from unrealized losses on investments.
The tax effects of temporary differences that gave rise to significant
portions of the Company's net deferred federal tax liability from
continuing operations (included in "Other assets" in the consolidated
balance sheet) were as follows:
- 7 -
<PAGE> 8
<TABLE>
<CAPTION>
March 31 December 31
(in thousands) 1995 1994
--------- -----------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related $ 168,949 $ 167,456
Life policy reserves 126,083 128,339
Unrealized losses on investments 63,229 129,700
Tax capitalization of deferred acquisition costs 25,574 24,046
Other investment-related 23,615 24,074
Accrued employee benefits 12,550 13,409
Accrued expenses 9,899 11,874
Other 17,437 15,926
--------- ---------
Total deferred federal tax assets 447,336 514,824
Valuation allowance (114,908) (181,379)
--------- ---------
Total deferred federal tax assets after valuation
allowance 332,428 333,445
--------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 247,486 243,882
Deferred investment product sales costs 55,897 58,239
Depreciation and amortization 31,666 31,580
Other investment-related 29,102 6,454
Other 13,868 14,407
--------- ---------
Total deferred federal tax liabilities 378,019 354,562
--------- ---------
Net deferred federal tax liability $ (45,591) $ (21,117)
========= =========
</TABLE>
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. During the three months ended March 31, 1995, Kemper Financial Services,
Inc. sold its 50 percent interest in Investors Fiduciary Trust Company and
announced a definitive agreement to sell the business operations of its wholly
owned subsidiary, Supervised Service Company, Inc. See "RESULTS OF OPERATIONS
- - Asset Management" in this Form 10-Q.
9. On April 3, 1995, Kemper Corporation announced its plan to divest its
securities brokerage segment. As a result, these operations have been
classified as part of discontinued operations at and for the period ended March
31, 1995. The following table sets forth selected financial information
regarding the discontinued operations:
- 8 -
<PAGE> 9
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
(in millions)
Revenue $ 125.8 $ 151.4
======== ========
Income (loss), net of tax $ (3.2) $ 2.7
Loss on divestiture, net of tax (64.0) 2.5
-------- --------
Net income (loss) $ (67.2) $ 5.2
========= ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
Total assets $1,639.3 $1,641.8
Total liabilities 1,507.1 1,392.8
-------- --------
Net assets $ 132.2 $ 249.0
======== ========
</TABLE>
10. On April 10, 1995, the Kemper Corporation entered into an agreement in
principle to be acquired in a merger transaction. See "Management's Discussion
and Analysis" on the following page.
- 9 -
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
During 1994, Kemper Corporation ("Kemper") faced both an unsolicited suitor and
an unsuccessful merger agreement. The resulting distractions and uncertainties
negatively impacted certain of the operations of Kemper and its subsidiaries
(the "Company"). The Kemper board of directors has directed management to take
all appropriate actions to maximize value for stockholders, which process
continued through the first quarter of 1995.
On April 3, the Company approved a plan to divest its securities brokerage
segment. The plan has resulted in the segment being reclassified as a
component of discontinued operations.
On April 10, Kemper entered into an agreement in principle whereby Kemper would
be acquired by an investor group comprised of Zurich Insurance Company,
Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. in a
merger transaction valued at more than $2.0 billion. As of May 8, 1995, the
parties agreed to extend until May 15, 1995 the May 8, 1995 termination date
originally in the agreement in principle. Although there can be no assurance
that a definitive agreement will be reached as expected in May, the transaction
would be expected to close in the fourth quarter of 1995. Including the
estimated value to be received from the divestiture of the securities brokerage
segment, the total value to Kemper common stockholders from these transactions
should approximate $51.00 per share. Both the securities brokerage divestiture
plan and the agreement in principle were further described in a Form 8-K filed
April 12, 1995, which descriptions are incorporated herein by reference.
RESULTS OF OPERATIONS
The following table is a summary of the Company's results by category, for the
three months ended March 31, 1995 and 1994:
Summary of income (loss) by category
(in millions)
<TABLE>
<CAPTION>
1995 1994
---------------------------------- -----------------------------------
Net Net
realized Net realized Net
Operating investment income Operating investment income
earnings(1) results(2) (loss) earnings(1) results(2) (loss)
----------- --------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Asset management $13.6 $ 10.9 $ 24.5 $21.0 $ - $21.0
Life insurance 30.2 (.7) 29.5 28.8 10.2 39.0
Real estate (4.0) - (4.0) (11.1) 8.8 (2.3)
Other (7.3) 2.8 (4.5) (6.0) (.1) (6.1)
----- ------ ------ ------ ----- -----
Continuing operations 32.5 13.0 45.5 32.7 18.9 51.6
Discontinued operations (3.2) (64.0) (67.3) 2.7 2.5 5.2
----- ------ ------ ------ ----- -----
Total $29.3 $(51.0) $(21.8) $35.4 $21.4 $56.8
===== ====== ====== ====== ===== =====
</TABLE>
(1) Net income (loss) excluding realized investment results.
(2) See following table for realized investment results.
- 10 -
<PAGE> 11
Realized investment gain (loss)
(in millions)
<TABLE>
<CAPTION>
Three months ended March 31
----------------------------
1995 1994
----------- ---------
<S> <C> <C>
Fixed maturity write-downs $ - $ 0.2
Other gains and losses, net 43.4 29.6
------ -----
Realized investment gain from
continuing operations 43.4 29.4
Income tax expense 30.4 10.5
------ -----
Net realized investment gain
from continuing operations 13.0 18.9
Gain (loss) on divestiture of discontinued
operations, net of tax (64.0) 2.5
------ -----
Total $(51.0) $21.4
====== =====
</TABLE>
Continuing operations
Operating earnings for continuing operations were $32.5 million in the first
quarter of 1995, compared with $32.7 million in the same 1994 period.
Increased spreads on fixed rate annuities and effective expense control
generated an improvement in life insurance operating earnings, and the real
estate segment benefited from reduced joint venture operating losses primarily
as a result of sales, refinancings and restructurings. Asset management
earnings declined largely due to reduced management fees, distribution fees and
commission income.
Net income from continuing operations totaled $45.5 million in the first three
months of 1995, compared with $51.6 million in the first three months of 1994.
A net realized investment loss in the life insurance segment and no net
realized investment gains in the real estate segment were more than offset by
net realized investment gains in the asset management segment.
The other operations and corporate category consists of the holding company
income and expenses of both Kemper Corporation and Kemper Financial Companies,
Inc., a 97 percent-owned downstream holding company. This category reported a
net loss of $4.5 million for the first quarter of 1995, compared with a net
loss of $6.1 million for the same period in 1994.
Total operations
Including discontinued operations, the Company's net loss totaled $21.8 million
for the first quarter of 1995, compared with net income of $56.8 million for
the same period of 1994. Net loss per share for the first quarter of 1995 was
$.79 (primary and fully diluted), compared with net income of $1.50 per share
(primary) and $1.37 per share (fully diluted) in first-quarter 1994.
Discontinued operations include the Company's securities brokerage
subsidiaries, for which a plan for divestiture was announced in April 1995, and
the Company's former primary property-casualty insurance, reinsurance and risk
management subsidiaries, all of which were divested in 1993. In the first
quarter of 1995, the net loss from discontinued
- 11 -
<PAGE> 12
operations totaled $67.3 million, primarily due to a $66.0 million loss
relating to the announced divestiture. In the first quarter of 1994, the net
gain from discontinued operations totaled $5.2 million, reflecting $2.7 million
of securities brokerage operating earnings.
Net income (loss) per share in the following segment discussions is on a
primary basis.
- 12 -
<PAGE> 13
Asset management
The asset management segment principally consists of Kemper Financial Services,
Inc. ("KFS") and its subsidiaries, including Kemper Service Company ("KSvC")
and INVEST Financial Corporation ("INVEST").
<TABLE>
<CAPTION>
Selected financial highlights
(in millions, except per share data) Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
STATEMENT OF INCOME
Investment management fees $ 50.0 $ 57.2
Commission income 14.1 21.9
Distribution and redemption fees 14.9 19.0
Transfer agent revenue 18.7 18.2
Realized gain, non-operating 40.2 -
Investment and other income 5.4 4.0
------ ------
Total revenue 143.3 120.3
------ ------
Operating expenses 59.6 64.2
Commission expense 15.4 22.3
Deferral of mutual fund
commissions and sales expense (7.1) (12.1)
Amortization of deferred mutual
fund commissions and sales expense 13.8 12.9
------ ------
Total expenses 81.7 87.3
------ ------
Earnings before income tax 61.6 33.0
Income tax 37.1 12.0
------ ------
Net income $ 24.5 $ 21.0
====== ======
Realized investment gain, net of tax $ 10.9 $ -
====== ======
Operating earnings $ 13.6 $ 21.0
====== ======
Per share:
Operating earnings $ .39 $ .61
====== ======
Net income $ .70 $ .61
====== ======
</TABLE>
The asset management segment's net income for the first quarter of 1995
increased $3.5 million from the first quarter of 1994. This increase was
primarily due to a net realized investment gain of $11.6 million in the first
quarter of 1995 from the sale of Investors Fiduciary Trust Company ("IFTC").
On January 31, 1995, KFS sold its 50 percent interest in IFTC to State Street
Boston Corporation ("State Street") in exchange for 2,986,111 shares of State
Street stock with a market value of $98.2 million at the date of sale. IFTC
accounted for $0.6 million and $1.5 million of the segment's net income in the
first quarters of 1995 and 1994, respectively.
In March 1995, KSvC entered into a definitive agreement with DST Systems, Inc.
("DST") to sell the business operations of Supervised Service
- 13 -
<PAGE> 14
Company, Inc. ("SSC"), including certain internally-developed transfer agent
recordkeeping software. The Company also entered into a long-term remote
processing agreement with DST. In conjunction with the sale, KSvC took a
write-down on the carrying value of its data center equipment assets as the
area will be significantly downsized. The net impact of the sale to DST and
KSvC's write-down was immaterial to the segment's financial results. The
transaction closed in April 1995. SSC accounted for a net operating loss of
$0.1 million in the first quarter of 1995 and net loss of $0.7 million in the
first quarter of 1994.
The segment's net income was reduced by $0.7 million in the first quarter of
1995 by the credit enhancing arrangements the Company established in the period
and in the fourth quarter of 1994 pursuant to which the Company bears the risk
of loss associated with $198 million of Orange County, California notes held by
five non-government, taxable, money market mutual funds managed by KFS. Orange
County, which filed for bankruptcy protection in December 1994, has made the
monthly interest payments on the notes to date. The notes mature July 10,
1995, although Orange County has indicated it may seek an extension of the
maturity date. In March 1995, the five Kemper money market funds commenced
litigation against the underwriter of the notes seeking rescission of their
purchases and other relief.
The asset management segment's operating earnings of $13.6 million in the first
quarter of 1995 were improved over operating earnings of $12.0 million in the
fourth quarter of 1994 but were lower than the segment's operating earnings of
$21.0 million in the first quarter of 1994.
Reduced management fees, distribution and redemption fees, and commission
income were the primary reasons for the segment's $7.4 million decrease in
operating earnings. These revenue reductions of $19.1 million were partially
offset by $11.5 million of reduced operating and commission expenses.
The decrease of $7.2 million in investment management fees from the first
quarter of 1994 to the first quarter of 1995 was primarily due to a $5.6
billion reduction in mutual fund average assets under management. Bond funds
accounted for $4.5 billion of this decrease, while stock funds and money market
funds were responsible for decreases of $0.9 billion and $0.2 billion,
respectively.
Commission income was $14.1 million in the first quarter of 1995, compared with
$21.9 million for the same period last year, due to lower sales of most
products. At INVEST, the segment's principal producer of commission revenue,
commissions on the sale of mutual fund products declined $5.8 million in the
first three months of 1995 from the same period in 1994. Also adversely
affecting revenue were lower commissions on annuity products of $1.9 million in
the first quarter of 1995, compared with the first quarter of 1994, due to
decreased sales.
Distribution and redemption fee revenue decreased $4.1 million in the first
quarter of 1995 compared with the first quarter of 1994. Distribution fees,
based on assets managed in KFS' spread load mutual funds, were approximately
$3.5 million lower as spread load assets declined due to market depreciation,
redemptions of mutual fund shares and the conversion of spread load assets to
front-end load shares which
- 14 -
<PAGE> 15
are exempt from distribution fees. Receipt of contingent deferred sales
charges from redemption activity also declined as redemptions of spread load
assets were lower in the 1995 period.
Transfer agent revenue increased $0.5 million in the first quarter of 1995 from
the year-ago period primarily due to increased fees from SSC. KSvC accounted
for transfer agent revenue of $15.4 million and $16.6 million in the first
quarters of 1995 and 1994, respectively. SSC accounted for transfer agent
revenue of $3.3 million and $1.6 million in the first quarters of 1995 and
1994, respectively.
Investment and other income increased by $1.4 million from the first quarter of
1994, compared with the first quarter of 1995. This increase was primarily due
to additional interest and dividend income on investments of approximately $2.5
million, which was largely offset by reduced income from IFTC of $0.8 million
due to its previously mentioned sale in first-quarter 1995.
Operating expenses decreased by $4.6 million in the first quarter of 1995 from
the first quarter of 1994. Expense reductions of approximately $1.1 million
occurred in advertising, literature and sales promotion of mutual fund
products, and personnel expenses decreased approximately $3.5 million due to
staff reductions and reductions in production-related compensation due to lower
sales. In addition, remote processing fees were $1.5 million lower during the
1995 period due to the above-mentioned processing agreement with DST.
Professional services increased by approximately $1.3 million primarily due to
litigation-related expenses in the first quarter of 1995, and registration and
filing fees increased by approximately $0.6 million primarily due to the May
1994 implementation of a multiple class structure for most of the long-term
mutual funds managed by KFS.
Commission expense decreased to $15.4 million in the first three months of 1995
compared with $22.3 million in the first three months of 1994 due to lower
sales, with a related decrease in the deferral of such mutual fund commissions
and sales expense. Amortization of deferred mutual fund commission and sales
expense increased during the same period. The increase was due to increased
redemption activity and market value declines in 1994, and to a shortening of
the amortization period in 1995 for expenses related to sales of front-end load
mutual funds at net asset value.
<TABLE>
<CAPTION>
Assets under management
(in billions)
3/31/95 12/31/94 9/30/94 6/30/94 3/31/94
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mutual funds:
Bond $21.0 $20.6 $21.9 $22.9 $23.9
Stock 8.9 8.7 9.0 8.7 9.2
Money market 12.1 12.2 12.3 12.2 12.7
Investment advisory 4.5 5.0 5.6 4.8 4.9
Kemper Corporation
affiliates 9.1 9.3 9.6 9.6 9.7
The Kemper National
Insurance Companies 6.6 6.9 7.0 6.9 7.0
----- ----- ----- ----- -----
Total $62.2 $62.7 $65.4 $65.1 $67.4
===== ===== ===== ===== =====
</TABLE>
- 15 -
<PAGE> 16
Bond and stock mutual fund assets under management increased $0.6 billion from
December 31, 1994 primarily due to market value appreciation. Bond and stock
funds had asset appreciation of $1.7 billion in the first quarter of 1995,
compared with asset depreciation of approximately $1.1 billion in the first
quarter of 1994. Redemptions of stock and bond funds totaled $1.4 billion in
the first three months of 1995, while sales totaled $0.5 billion. Comparable
three-month 1994 redemptions and sales totals were $1.5 billion and $0.9
billion, respectively. Bond funds made up 64 percent of the redemption volume
in the first quarter of 1995, down from 75 percent in the same period last
year. Sales of stock mutual funds represented 44 percent of total stock and
bond fund sales in the first three months of 1995, up from 42 percent in the
first three months of 1994.
Money market fund assets under management were virtually flat in the first
quarter of 1995, as net redemptions offset increases from reinvested dividends.
The decline in investment advisory assets was primarily due to the loss of
clients in the first quarter of 1995 because of uncertainties with respect to
the Company's ownership, portfolio management turnover, performance and foreign
repatriation issues. Organizational stability is an important aspect affecting
the relationship with institutional clients and the retention of their assets.
The Kemper National Retirement Plan, representing approximately $0.3 billion in
assets under management, was transferred from Kemper Corporation affiliates to
the investment advisory area in the first quarter of 1995. Prior periods in
the table above have been restated. (See the table captioned "Other selected
balance sheet data" in the life insurance segment discussion below.)
The first-quarter 1995 declines in assets managed for the Kemper National
Insurance Companies and Kemper Corporation affiliates were primarily due to
decreases in real estate-related assets. These decreases do not affect the
asset management segment's revenue or net income (see "Real estate" below).
On May 2, 1995, KFS announced the signing of a definitive agreement to acquire
substantially all of the assets of Dreman Value Management, L.P. ("DVM"). The
planned acquisition would broaden KFS' retail and institutional product
offerings to include the value style of equity investing, to complement KFS'
current growth style. DVM currently has 37 employees, approximately $1.5
billion in institutional assets under management and $60.0 million in assets
managed for three value style equity mutual funds and one fixed income fund.
Consummation of the transaction is subject to, among other conditions,
regulatory approvals and approvals by the boards of directors and shareholders
of the mutual funds managed by DVM. The transaction is expected to close in
the third quarter of 1995.
- 16 -
<PAGE> 17
Life insurance
The life insurance segment consists of Federal Kemper Life Assurance Company,
Kemper Investors Life Insurance Company and their subsidiaries.
Selected financial highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
STATEMENT OF INCOME
Investment income $132.6 $122.0
Premium revenue 38.3 36.9
Other income 23.5 24.0
Realized investment gain (loss) (1.0) 15.6
------ ------
Total revenue 193.4 198.5
------ ------
Benefits to policyholders 122.3 119.5
Commissions, taxes, licenses and fees 16.9 17.0
Operating expenses 11.4 13.3
Deferral of policy acquisition costs (29.6) (30.7)
Amortization of deferred policy acquisition costs 28.0 19.2
------ ------
Total benefits and expenses 149.0 138.3
------ ------
Earnings before income tax 44.4 60.2
Income tax expense 14.9 21.2
------ ------
Net income $ 29.5 $ 39.0
====== ======
Realized investment gain (loss), net of tax $ (.7) $ 10.2
====== ======
Operating earnings $ 30.2 $ 28.8
====== ======
Per share:
Operating earnings $ .86 $ .85
====== ======
Net income $ .85 $ 1.15
====== ======
</TABLE>
The life insurance segment reported a decline in net income in the first
quarter of 1995, compared with the first quarter of 1994, primarily due to
realized investment losses in 1995, compared with realized investment gains in
1994. The segment's after-tax realized investment results included real
estate-related losses of $0.0 million and $9.9 million in the first quarters of
1995 and 1994, respectively, and other net realized investment losses,
primarily from the sale of fixed maturity investments, of $0.7 million in the
first quarter of 1995 and other net realized investment gains, primarily from
the sale of common stocks, of $20.1 million in the first quarter of 1994.
Operating earnings for the life insurance segment improved in the first quarter
of 1995, compared with the first quarter of 1994, primarily due to increased
spread income, lower operating expenses and higher premium revenue. These
improvements were partially offset by an increase in benefits paid to
policyholders and an increase in the amortization of deferred policy
acquisition costs.
- 17 -
<PAGE> 18
Continuing a strategy implemented during 1992, the life insurance segment
improved spread income by both increasing investment income and reducing
crediting rates on certain existing blocks of fixed annuity and
interest-sensitive life insurance products through most of 1994. Operating
earnings improved as crediting rates declined at a faster rate than the
segment's investment income. Beginning in late 1994, as a result of rising
interest rates and other competitive market factors, the life insurance segment
increased crediting rates on such products. Although the life insurance
segment continues to manage spread revenue, future increases in crediting rates
could adversely impact future operating earnings but could also help to improve
sales and the overall persistency of such products.
Investment income was positively impacted in the first quarter of 1995,
compared with the first quarter of 1994, from reductions in the level of
nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to the Company's real estate
subsidiaries. These sales totaled $5.0 million in the first quarter of 1995
and $80.8 million in the first quarter of 1994 and resulted in no realized gain
or loss to the life insurance segment. Investment income in 1995 also benefited
from rising investment yields on new money and from a repositioning of the
segment's fixed maturity investment portfolio in September 1994. The
repositioning of the segment's investment portfolio resulted in the sale of
$868.7 million of fixed maturity investments, which consisted of lower yielding
investment-grade corporate securities and collateralized mortgage obligations.
The $810.6 million of proceeds from the repositioning, together with $325.0
million of cash and short-term investments, was reinvested into higher yielding
U.S. government and agency guaranteed mortgage pass-through securities issued
by the Government National Mortgage Association and the Federal National
Mortgage Association. See "INVESTMENTS" below.
<TABLE>
<CAPTION>
Life insurance sales
(in millions) Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
Annuities:
General account $ 61.6 $ 77.2
Separate account 48.4 77.4
------ ------
Total annuities 110.0 154.6
Life insurance:
Term and other 38.1 36.5
Interest-sensitive 20.2 20.3
------ ------
Total life insurance 58.3 56.8
------ ------
Total sales $168.3 $211.4
====== ======
</TABLE>
Sales of term and other life insurance products include both renewal premiums
and new product sales. Despite a slight decline in the average premium per new
policy for term life products in 1995, premium revenue increased in the first
quarter of 1995, compared with the first quarter of 1994, due to an increase in
the number of new life policies sold and increasing renewal premiums. The
segment issued new life insurance
- 18 -
<PAGE> 19
business in the first quarter of 1995 of $3.3 billion in face amount, down from
$3.8 billion in first-quarter 1994 due in part to competitive conditions and
uncertainty concerning the Company's ownership. Total life insurance in force
grew to $98.6 billion at March 31, 1995, compared with $97.5 billion at
December 31, 1994 and $91.4 billion at December 31, 1993.
Sales of annuity products consist of deposits received. The decrease in
general account (fixed annuity) sales reflected the Company's continuing
strategy to direct its sales efforts toward separate account (variable annuity)
products, which increase administrative fees earned and pose minimal investment
risk for the Company as policyholders invest in one or more of several
underlying investment funds. Despite this strategy, separate account sales
declined in the first quarter of 1995, compared with the first quarter of 1994.
This decline was due to competitive conditions in certain distribution
channels, in part reflecting the life insurance subsidiaries' financial
strength and performance ratings and uncertainty concerning the Company's
ownership as well as the underlying investment fund performance.
Included in other income are administrative fees received from the segment's
separate account products of $5.1 million in the first quarter of 1995,
compared with $5.2 million in the first quarter of 1994. Other income also
included surrender charge revenue of $4.5 million in the first quarter of 1995,
compared with $3.8 million in the first quarter of 1994, as total general
account and separate account policyholder surrenders and withdrawals increased
to $424.2 million in the first quarter of 1995, compared with $246.7 million in
the first quarter of 1994. Policyholder withdrawals increased reflecting
rising interest rates which caused the segment's renewal crediting rates to be
lower than new money crediting rates and uncertainty concerning the Company's
ownership. The segment's crediting rate increases in late 1994 and in 1995
were designed to reduce the level of future withdrawals.
First-quarter 1995 benefits to policyholders included $27.5 million in death
benefits, compared with $19.6 million in the first quarter of 1994. While the
increase in death benefits is attributable in part to the overall growth in
insurance in force, the Company does not expect this level of death benefits to
continue in 1995.
The amortization of policy acquisition costs increased in the first quarter of
1995, compared with the first quarter of 1994, primarily as a result of an
increase in policyholder withdrawals and increasing renewal crediting rates.
Policyholder withdrawals and increasing renewal crediting rates adversely
impact the amortization of policy acquisition costs as both would be expected
to decrease the segment's projected future estimated gross profits.
Operating expenses decreased by $1.9 million, or 14.3 percent, in the first
quarter of 1995, compared with the first quarter of 1994, despite a 4.5 percent
increase in the number of term life insurance contracts sold, as a result of
expense control and the sale of one of the segment's wholly owned subsidiaries
in the fourth quarter of 1994.
Since year-end 1990, the Company has taken many steps to improve the earnings,
financial strength and competitive marketing position of its
- 19 -
<PAGE> 20
life insurance subsidiaries. These steps included adjustments in crediting
rates, reductions of operating expenses, reductions of below investment-grade
securities, a strategy not to embark on new real estate projects, additional
provisions for real estate-related losses, sales of $867.2 million of certain
real estate-related investments to the Company's real estate subsidiaries
through March 31, 1995, third-party sales and refinancings of certain mortgage
and other real estate loans, approximately $900 million in annuity reinsurance
transactions with an affiliated mutual life insurance company, a parental
guarantee of any indebtedness, and capital contributions of $275.8 million
through March 31, 1995. The statutory surplus ratio for the segment improved
to 11.0 percent at March 31, 1995 from 10.3 percent at December 31, 1994, 9.2
percent at December 31, 1993, 7.9 percent at December 31, 1992 and 1991, and
5.4 percent at year-end 1990.
The following tables reflect selected balance sheet data of the life insurance
segment:
<TABLE>
<CAPTION>
Invested assets and cash
(in millions)
March 31 December 31
1995 1994
---------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 239 3.3% $ 313 4.4%
Fixed maturities:
Investment-grade:
NAIC (1) Class 1 3,956 54.8 3,860 53.7
NAIC (1) Class 2 1,147 15.9 1,139 15.8
Performing below investment-grade (2) 201 2.8 196 2.7
Equity securities 24 .3 24 .3
Joint venture mortgage loans (3) 546 7.6 540 7.5
Third-party mortgage loans (3) 368 5.1 397 5.5
Other real estate-related investments (3) 314 4.3 297 4.1
Other 425 5.9 426 6.0
------ ----- ------ -----
Total (4) $7,220 100.0% $7,192 100.0%
====== ===== ====== =====
</TABLE>
(1) National Association of Insurance Commissioners ("NAIC")
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
(2) Excludes $57 million, or 0.8 percent, and $57 million, or 0.8 percent, at
March 31, 1995 and December 31, 1994, respectively, of bonds carried in
other real estate-related investments.
(3) See table captioned "Summary of gross and net real estate investments"
below.
(4) See "INVESTMENTS" below.
- 20 -
<PAGE> 21
Other selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
-------- -----------
<S> <C> <C>
Deferred insurance acquisition costs $ 707 $ 697
Assets of separate accounts(1) 1,627 1,871
Total assets 10,521 10,736
Life policy benefits, net of ceded reinsurance 6,959 7,129
Unrealized loss on investments (126) (322)
Stockholders' equity 961 738
</TABLE>
(1) The decrease in separate account assets reflects the transfer of certain
segregated assets and liabilities related to the pension plans of Lumbermens
Mutual Casualty Company and its affiliates (the "Kemper National Insurance
Companies"). The asset management segment had previously been receiving and
continues to receive administrative fees for managing such funds. The life
insurance segment, however, did not receive administrative fees for
managing such funds, therefore the transfer had no impact on the life
insurance segment's results.
- 21 -
<PAGE> 22
Real estate
This segment consists of the Company's real estate subsidiaries. These
subsidiaries include companies which act as general or limited partners in and
lenders to various joint ventures. Loans held by these subsidiaries are
subordinate to loans held by the Company's life insurance subsidiaries.
Selected financial highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
STATEMENT OF INCOME
Joint venture operating losses $(4.6) $(16.4)
Investment income and other 2.3 3.5
Realized investment gain - 13.7
----- ------
Total revenue (2.3) .8
----- ------
Operating expenses 3.4 3.4
Interest expense .4 .9
----- ------
Total expenses 3.8 4.3
----- ------
Loss before income tax benefit (6.1) (3.5)
Income tax benefit (2.1) (1.2)
----- ------
Net loss $ (4.0) $ (2.3)
====== ======
Realized investment gain,
net of tax $ - $ 8.8
====== ======
Operating loss $ (4.0) $(11.1)
====== ======
Per share:
Operating loss $ (.11) $ (.32)
====== ======
Net loss $ (.11) $ (.06)
====== ======
</TABLE>
The $11.8 million joint venture operating loss decline in the first quarter of
1995 from the level in the year ago period was primarily due to sales and
restructurings that were completed with respect to certain joint ventures,
reducing the level of operating losses the Company was required to record. In
the first quarter of 1994, such sales included real estate investment trust
("REIT") transactions, and such restructurings included a transaction in which
the interest payment terms of certain loans held by the Company, Fidelity Life
Association and the Kemper National Insurance Companies were amended, effective
January 1, 1994, to make interest payments contingent on cash being available.
This restructuring transaction reduced joint venture operating losses in 1994
by $9.2 million and was recorded in the second half of 1994.
In addition, joint venture operating losses declined in the first quarter
- 22 -
<PAGE> 23
of 1995 as a result of $5.7 million in adjustments to certain ventures' 1994
operating losses relating to interest on third-party debt previously expensed
in 1994 which was capitalized in the first quarter of 1995.
Investment and other income decreased $1.2 million in the first quarter of 1995
primarily due to a reduction in real estate management fee income as a result
of a lower level of real estate assets under management. This decrease was in
part due to the Kemper National Insurance Companies engaging a third-party real
estate asset manager effective January 1, 1995. In the first quarter of 1994,
this segment recorded $.4 million of real estate management fee revenue from
managing real estate assets of the Kemper National Insurance Companies.
In the first quarter of 1994, sales and other transfers to third parties of
certain equity investments in real estate, which had negative carrying values,
generated realized gains in excess of the real estate segment's additions to
reserves and write-downs. In the first quarter of 1995, the segment generated
realized gains at a level equal to additions to reserves and write-downs. See
"INVESTMENTS - Provisions for real estate-related losses" below.
The following table reflects selected balance sheet data of the real estate
segment:
<TABLE>
<CAPTION>
Selected balance sheet data
(in millions)
March 31 December 31
1995 1994
-------- -----------
<S> <C> <C>
Cash and short-term investments $ 13 $ 15
Joint venture mortgage loans (1) 111 84
Third-party mortgage loans (1) 12 21
Other real estate-related investments (1) 30 39
Other 5 5
---- ----
Total invested assets and cash (2) $171 $164
==== ====
Net deferred federal tax asset $ 85 $ 83
Total assets 385 387
Long-term debt 13 13
Stockholders' equity 325 330
</TABLE>
(1) See table captioned "Summary of gross and net real estate
investments" below.
(2) See "INVESTMENTS" below.
- 23 -
<PAGE> 24
INVESTMENTS
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>
<CAPTION>
Invested assets and cash
(in millions) March 31 December 31
1995 1994
------------- -------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 458 5.9% $ 555 7.3%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 3,957 51.2 3,861 50.7
NAIC(1) Class 2 1,147 14.9 1,139 15.0
Performing below investment-grade(2) 205 2.7 201 2.6
Equity securities 138 1.8 40 0.5
Joint venture mortgage loans(3) 648 8.4 616 8.1
Third-party mortgage loans(3) 380 4.9 418 5.5
Other real estate-related investments(3) 344 4.4 336 4.4
Other 445 5.8 445 5.9
------ ----- ------ -----
Total (4) $7,722 100.0% $7,611 100.0%
====== ===== ====== =====
</TABLE>
(1) National Association of Insurance Commissioners ("NAIC").
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
(2) Excludes $165 million, or 2.1 percent, and $168 million, or 2.2 percent,
at March 31, 1995 and December 31, 1994, respectively, of bonds carried in
other real estate-related investments.
(3) A joint venture mortgage loan is recharacterized in the current period as
a third-party mortgage loan where the Company has disposed of its related
equity interest in that venture.
(4) See table captioned "Summary of gross and net real estate investments"
below.
Fixed maturities
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, 1995 was
$143.8 million, or $4.17 per share, compared with unrealized depreciation of
$333.9 million, or $9.70 per share, at December 31, 1994. The Company has not
recorded a net deferred tax benefit for 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.
At March 31, 1995, investment-grade fixed maturities and cash and short-term
investments accounted for 72.0 percent of the Company's invested assets and
cash, compared with 73.0 percent at December 31, 1994. Approximately 73.1
percent of the Company's NAIC Class 1 bonds were rated AAA or equivalent at
March 31, 1995.
Approximately 52.5 percent of the Company's investment-grade fixed maturities
at March 31, 1995 were mortgage-backed securities. These
- 24 -
<PAGE> 25
investments consist primarily of marketable mortgage pass-through securities
issued by the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any 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, and the markets for these investments have been and are
expected to remain liquid.
Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the fact that the Company's
investments in mortgage-backed securities predominantly date since 1992, the
current interest rate environment is not expected to cause any material
extension of the average maturities of these investments. With the exception
of many of the life insurance segment's September 1994 purchases of such
investments, most of these investments were purchased by the Company at
discounts. Prepayment activity on such securities purchased at a discount is
not expected to result in any material losses to the Company because
prepayments would generally accelerate the reporting of the discounts as
investment income. Prepayment activity resulting from a decline in interest
rates on such securities purchased at a premium would accelerate the
amortization of premiums which would result in reductions of investment income
related to such securities. At March 31, 1995, the Company has unamortized
discounts and premiums of $42.1 million and $14.6 million, respectively,
related to mortgage-backed securities. Given the credit quality, liquidity and
anticipated payment characteristics of the Company's investments in
mortgage-backed securities, the Company believes that the associated risk can
be managed without material adverse consequences on its financial statements.
Below investment-grade securities holdings (NAIC classes 3 through 6)
(representing securities of 14 issuers at March 31, 1995) totaled less than
three percent of cash and invested assets at March 31, 1995 and December 31,
1994. 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 four 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.
Real estate-related investments
The $1.37 billion real estate portfolio held by the Company's continuing
operations constituted 17.7 percent of cash and invested assets at March 31,
1995, compared with $1.37 billion, or 18.0 percent, at December 31, 1994. 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 has taken
ownership positions in joint ventures with a small number of partners.
- 25 -
<PAGE> 26
Summary of gross and net real estate investments
(in millions)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------------------------- -----------------------------
Life Real Life Real
insurance estate insurance estate
Total segment segment Total segment segment
----- --------- --------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Investments before
reserves, write-downs,
foreign currency translation
adjustments and net joint
venture operating
losses:
Joint venture mortgage loans $ 673 $ 544 $ 129 $ 687 $ 542 $ 145
Third-party mortgage loans 430 407 23 461 440 21
Other real estate-related
investments 1,189 440 749 1,163 427 736
------ ------ ----- ------ ------ -----
Subtotal 2,292 1,391 901 2,311 1,409 902
Reserves (166) (48) (118) (183) (55) (128)
Write-downs (501) (104) (397) (504) (107) (397)
Foreign currency translation
adjustments (36) - (36) (36) - (36)
Cumulative net operating losses
of joint ventures owned (218) (21) (197) (218) (21) (197)
------ ------ ----- ------ ------ -----
Net real estate investments $1,371 $1,218 $ 153 $1,370 $1,226 $ 144
====== ====== ===== ====== ====== =====
</TABLE>
As reflected in the real estate portfolio table on the following page, the
Company has continued to fund both existing projects and legal commitments.
The future legal commitments were $478.3 million at March 31, 1995. This
amount represented a net decrease of $32.5 million since December 31, 1994,
largely due to fundings in first-quarter 1995. (The commitments also reflect
an asset guarantee of $53.0 million related to the 1993 sale of Kemper
Reinsurance Company.) As of March 31, 1995, the Company expects to fund
approximately $163.1 million of these legal commitments, along with providing
capital to existing projects. The disparity between total legal commitments
and the amount expected to be funded relates principally to standby financing
arrangements that provide credit enhancements to certain tax-exempt bonds,
which the Company does not presently expect to fund. The total legal
commitments, along with estimated working capital requirements, are considered
in the Company's evaluation of reserves and write-downs.
Generally, at the inception of a real estate loan, the Company anticipated that
it would roll over the loan and reset the interest rate at least one time in
the future, although the Company is not legally committed to do so. As a
result of the current weakness in the real estate markets and fairly
restrictive lending practices by other lenders in this environment, the Company
expects that all or most loans maturing in 1995 will be rolled over,
restructured or foreclosed.
Excluding the $84.1 million of real estate owned and the $75.1 million deficit
in the Company's net equity investments in joint ventures, the Company's real
estate loans (including real estate-related bonds) totaled $1,362.4 million at
March 31, 1995, after reserves and write-downs. Of this amount, $852.8 million
are on accrual status with a weighted average interest rate of approximately
7.8 percent. Of these accrual loans, 56.2 percent have terms requiring current
periodic payments of their full contractual interest, 30.3 percent require only
partial payments or payments to the extent of cash flow of the borrowers, and
13.5 percent
- 26 -
<PAGE> 27
defer all interest to maturity.
The deficit in equity investments in real estate, at March 31, 1995, consisted
of $119.2 million of loans to Spanish projects (described below), $63.8 million
of unsecured loans to joint ventures treated as equity investments, a $234.8
million deficit in the Company's other equity investments in joint ventures and
$23.3 million of reserves. The deficit includes the Company's share of
periodic operating results. 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 included $3.7 million of foreclosures, $75.6
million of deeds in lieu of foreclosure and $4.8 million of certain purchased
properties at March 31, 1995. Real estate owned was net of $133.3 million of
write-downs at March 31, 1995.
<TABLE>
<CAPTION>
Real estate portfolio
(in millions) Mortgage loans Other real estate-related investments
-------------- -----------------------------------------
Real
Joint Third Other estate Equity
venture party Bonds(2) loans(3) owned investments Total
-------- ------ --------- ------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $616.2 $418.3 $170.3 $176.2 $78.7 $(89.0) $1,370.7(1)
Additions (deductions):
Fundings 20.6 2.4 3.4 0.9 2.2 8.2 37.7
Interest added to principal 2.1 - - - - - 2.1
Sales/paydowns/distributions (33.6) (5.4) (2.4) (0.5) (2.7) (2.6) (47.2)
Maturities - - - (0.4) - - (0.4)
Rollovers at maturity:
Principal - - - 0.4 - - 0.4
Interest - - - - - - -
Operating loss - - - - - (5.0) (5.0)
Transfers to real estate owned (3.6) - - - 3.6 - -
Realized investment gain (loss) 37.4 (10.7) (4.0) (42.0) (0.6) 19.9 -
Net transfers 17.8 (27.9) - 10.1 - - -
Other transactions, net (9.0) 3.3 (0.1) 22.6 2.9 (6.6) 13.1
------ ------ ------ ------ ----- ------ --------
Balance at March 31, 1995 $647.9 $380.0 $167.2 $167.3 $84.1 $(75.1) $1,371.4(4)
====== ====== ====== ====== ===== ====== ========
</TABLE>
(1) Net of $686.6 million reserve and write-downs. Excludes $56.3 million of
real estate-related accrued interest.
(2) The Company's real estate-related bonds, all of which are presently rated
below investment-grade, are generally unsecured and were issued to the
Company by real estate finance or development companies generally to
provide financing for the Company's joint ventures for such purposes as
land acquisition, construction/development, refinancing debt, interest
and other operating expenses.
(3) The other real estate loans are notes receivable evidencing financing
primarily to joint ventures, for purposes similar to those funded by real
estate-related bonds.
(4) Net of $666.8 million reserve and write-downs. Excludes $58.6 million of
real estate-related accrued interest.
As reflected in the preceding table, cash received by the Company from
sales/paydowns/distributions during the quarter ended March 31, 1995 exceeded
the Company's cash fundings during the same period by $9.5 million.
Real estate concentrations
Real estate markets have been depressed in recent periods in areas where most
of the Company's real estate portfolio is located. Approximately one-half of
the Company's real estate holdings are in California and Illinois. California
real estate market conditions have continued to be worse than in many
- 27 -
<PAGE> 28
other areas of the country. Northern California and Illinois currently reflect
some stabilization and improvement.
At March 31, 1995, the Company's real estate portfolio also included $119.2
million of loans carried as equity investments in real estate (net of $184.7
million of cumulative write-downs, $36.5 million of foreign currency
translations and $32.8 million of cumulative operating losses) related to land
for office and retail development and residential projects located in
Barcelona, Spain. The Spanish projects accounted for $7.6 million of net
fundings, $3.1 million of foreign currency translation losses, and operating
income of $4.2 million during the first quarter of 1995 and represented
approximately 8.3 percent of the Company's real estate portfolio at March 31,
1995. These investments, which began in the late 1980s, accounted for $20.0
million of the March 31, 1995 off-balance-sheet legal commitments, of which the
Company expects to fund approximately $14.7 million.
Undeveloped land, including the Spanish projects, represented approximately
22.1 percent of the Company's real estate portfolio at March 31, 1995. To
maximize the value of certain land and other projects, additional development
is proceeding or is planned. Such development of existing projects may
continue to require substantial funding, either from the Company or third
parties. In the present real estate markets, third-party financing can require
credit enhancing arrangements (e.g., standby financing arrangements and loan
commitments) from the Company. The values of development projects are
dependent on a number of factors, including the Company's plans with respect
thereto, 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, 1995, the Company's loans to and investments in projects with the
Prime Group, Inc. or its affiliates, based in Chicago, represented
approximately $413.8 million, or 30.2 percent, of the Company's real estate
portfolio (including the previously mentioned Spanish projects, which are Prime
Group-related). This amount reflects $9.3 million in fundings during
first-quarter 1995. The Company also received cash from Prime Group-related
sales/paydowns/distributions totaling $1.5 million in the first quarter of
1995. Prime Group-related commitments accounted for $230.4 million of the
off-balance-sheet legal commitments at March 31, 1995, of which the Company
expects to fund $47.4 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 MLP projects.
During first-quarter 1995, the Company provided $22.2 million of fundings to
the MLP projects. The Company also received cash from MLP-related
sales/paydowns/distributions of $34.6 million in first-quarter 1995. At March
31, 1995, projects in the MLP accounted for $87.3 million of the Company's
off-balance-sheet legal
- 28 -
<PAGE> 29
commitments, of which the Company expects to fund $79.5 million. The Company's
equity interests in real estate that were affected by formation of the MLP are
held almost entirely in the Company's real estate segment. The Company records
50 percent of the operating results of the ventures held by the MLP. Of the
Company's real estate portfolio at March 31, 1995, approximately $437.5
million, or 31.9 percent, represented loans to and investments in MLP-owned
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
since 1993 had already been recording 50 percent of the operating results of
the related ventures, this transaction, which simplified the management of the
Company's portfolio, did not have any material adverse impact on the Company's
results of operations or financial condition.
Provisions for real estate-related losses
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 (both reserves and write-downs) on the basis of its valuations of the
related real estate, estimated in light of current economic conditions and
calculated in conformity with Statement of Financial Accounting Standards
("SFAS") 114 (Accounting by Creditors for Impairment of a Loan). 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 deficit in (i.e., the negative carrying value of) the Company's equity
investments in real estate is considered in the Company's periodic evaluations
of, and serves to reduce the level of, its provisions for real estate-related
losses. In 1994 and the first quarter of 1995, because certain negative
carrying values were eliminated due to the sales or transfers of the Company's
interests in the corresponding joint ventures, the Company generally added to
its provisions for real estate-related losses an amount equal to most of the
gains from such sales and transfers.
The Company decreased the net amount of its real estate reserves and
write-downs in the first quarter of 1995 and throughout 1994, primarily
reflecting sales and transfers to third parties. While the real estate
subsidiaries as equity owners recognized gains on sales and other transactions
during 1995 and 1994, additions to reserves and increases in write-downs have
affected both the life insurance segment (where most of the Company's loans are
held) and the real estate segment. The Company's
- 29 -
<PAGE> 30
real estate reserve was allocated as follows:
Real estate reserve
(in millions)
<TABLE>
<CAPTION>
Joint venture
and third-party 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 12/31/94 $25.1 $ 60.8 $29.8 $67.5 $54.9 $128.3
Change in reserve (2.4) (32.1) (4.5) 22.2 (6.9) (9.9)
----- ------ ----- ----- ----- ------
Balance at 3/31/95 $22.7 $ 28.7 $25.3 $89.7 $48.0 $118.4
===== ====== ===== ===== ===== ======
</TABLE>
In addition to the reserve, the Company's provision for real estate-related
losses (on assets held at the respective period end) included cumulative
write-downs (both by the Company and including the Company's share of
write-downs by joint ventures) totaling $500.4 million (life insurance segment,
$103.9 million; real estate segment, $396.5 million) at March 31, 1995, and
$503.4 million (life insurance segment, $106.7 million; real estate segment,
$396.7 million) at December 31, 1994. Reserves decreased in the first quarter
of 1995 primarily due to sales of real estate assets which carried reserves at
the time of sale.
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
fairly restrictive lending practices by banks and other lenders. Stagnant or
worsening economic conditions in the areas in which the Company has made loans,
or additional adverse information becoming known to the Company through its
regular reviews or otherwise, could result in higher levels of problem loans or
potential problem loans, reductions in the value of real estate collateral and
adjustments to the real estate reserve. The Company's net income and
stockholders' equity could be materially reduced in future periods if real
estate market conditions remain stagnant or worsen in areas where the Company's
portfolio is located.
Current conditions in the real estate markets have been adversely affecting the
financial resources of certain of the Company's joint venture partners. Every
partner, however, remains active in the control of its respective joint
ventures. In evaluating the partner's ability to meet its financial
commitments, the Company considers the amount of all applicable debt and the
value of all properties within that portion of the Company's portfolio
consisting of loans to and investments in joint ventures with such partner.
The following table is a summary of the Company's troubled real estate-related
investments:
- 30 -
<PAGE> 31
Troubled real estate-related investments
(before reserves and write-downs,
except for real estate owned)
(in millions)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
---------------------------- ---------------------------
Life Real Life Real
insurance estate insurance estate
segment segment Total segment segment Total
--------- ------- ----- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Potential problem loans (1) $ 77.0 $ 0.3 $ 77.3 $ 76.8 $ 0.1 $ 76.9
Nonaccrual loans (2) 344.3 358.0 702.3 380.9 352.2 733.1
Restructured loans (3)
(currently performing) 47.7 0.7 48.4 53.0 0.7 53.7
Real estate owned (4) 70.0 14.1 84.1 63.2 15.5 78.7
------ ------ ------ ------ ------ ------
Total (5)(6) $539.0 $373.1 $912.1 $573.9 $368.5 $942.4
====== ====== ====== ====== ====== ======
</TABLE>
(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.
(2) The Company does not accrue interest on real estate-related investments
when it judges that the likelihood of collection of interest is doubtful.
(3) 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).
(4) Real estate owned is carried at fair value and includes foreclosures,
deeds in lieu of foreclosure and certain purchased property. Cumulative
write-downs to fair value were $133.3 million and $132.6 million at March
31, 1995 and December 31, 1994, respectively.
(5) Total reserves and cumulative write-downs on properties owned at March 31,
1995 (excluding fair value adjustments to real estate owned) were 58.5
percent of total troubled real estate-related investments and 28.0 percent
of the Company's total real estate portfolio before reserves and
write-downs.
(6) Equity investments in real estate are not defined as part of, and
therefore are not taken into account in calculating, total troubled real
estate because the negative carrying value of equity investments would
reduce the total. The Company's equity investments also involve real
estate risks. See "Real estate concentrations" above.
Based on the level of troubled real estate-related investments the Company has
experienced, the Company anticipates additional foreclosures and deeds in lieu
of foreclosure in 1995 and beyond. Any consolidation accounting resulting from
foreclosures would add the related ventures' assets and senior third-party
liabilities to the Company's balance sheet and eliminate the Company's loans to
such ventures.
Due to the adverse real estate environment affecting the Company's portfolio in
recent years, the Company has continued to devote 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. The
Company continues to analyze various potential transactions designed to reduce
both its joint venture operating losses and the amount of its real
estate-related investments. Specific types of transactions under consideration
(and previously utilized) include loan sales, property sales, mortgage
refinancings and real estate investment trusts. However, there can be no
assurance that such efforts would result in continued improvements in the
performance of the Company's real estate portfolio.
- 31 -
<PAGE> 32
Net investment income
The following table shows each segment's contribution to the Company's net
investment income:
<TABLE>
<CAPTION>
Net investment income before taxes
(dollars in millions) Three months ended March 31
---------------------------
1995 1994
------ ------
<S> <C> <C>
Life insurance $132.6 $122.0
Real estate (3.5) (14.6)
Other and eliminations 2.5 1.8
------ ------
Consolidated $131.6 $109.2
====== ======
Investment yields:
Life insurance 7.36% 6.28%
====== ======
Consolidated 6.87% 5.36%
====== ======
</TABLE>
Included in pre-tax net investment income is the Company's share of the
operating losses from equity investments in real estate. The Company's share
of real estate operating losses (excluding write-downs) totaled $5.0 million
and $16.5 million for the quarters ended March 31, 1995 and 1994, respectively.
The pre-tax 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 total foregone investment income before tax was as follows:
<TABLE>
<CAPTION>
Foregone investment income
(dollars in millions)
Three months ended March 31
---------------------------
1995 1994
----- -----
<S> <C> <C>
Real estate-related investments:
Life insurance segment $7.6 $12.6
Real estate segment 2.3 0.6
---- -----
Total $9.9 $13.2
==== =====
Basis points:
Life insurance segment 42 62
==== ====
Consolidated 52 65
==== ====
</TABLE>
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
the level of nonaccrual real estate-related investments at March 31, 1995, the
Company estimates foregone investment income in 1995 will decrease slightly
compared with the 1994 level. Any nonperforming securities, and either
worsening or stagnant real estate conditions, would increase the expected
adverse effect on the Company's future investment income and realized
investment results.
- 32 -
<PAGE> 33
Future net investment income, results of operations and cash flow will reflect
the Company's current levels of investments in investment-grade securities,
real estate fundings treated as equity investments, nonaccrual real estate
loans and joint venture operating losses. The Company expects, however, that
any adverse effects should be offset to some extent by certain advantages that
it expects to realize over time from its other investment strategies, its 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 $13.0 million for first-quarter 1995, compared with $18.9
million for first-quarter 1994. Other realized losses of $0.7 million
(primarily from the sale of fixed maturities) and realized gains of $20.2
million (primarily from the sale of equities) in the first quarters of 1995 and
1994, respectively, were also taken in the life insurance segment. In the
first quarter of 1995, the asset management segment reported a realized
investment gain of $10.9 million primarily due to the sale of IFTC. (See
RESULTS OF OPERATIONS - Asset management" above.)
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.
A valuation allowance was established under SFAS 109 (and is evaluated as of
each reported period end) to reduce the deferred tax asset for investment
losses to the amount that, based upon available evidence, is in management's
judgment more likely than not to be realized.
Interest rates
Interest rate fluctuations affect the life insurance segment. In 1994, rapidly
rising short-term interest rates resulted in a much flatter yield curve as the
Federal Reserve Board raised rates five times during the year and once during
first-quarter 1995. Interest rates have subsequently declined through the
remainder of the first-quarter 1995.
- 33 -
<PAGE> 34
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 rising interest rate environment in 1994 contributed to an increase in net
investment income as well as to both realized and unrealized fixed maturity
investment losses in 1994. Also, lower renewal crediting rates on annuities
compared with higher new money crediting rates 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.
Approximately one-half of the Company's fixed annuity liabilities as of March
31, 1995, however, are no longer subject to significant surrender fees.
As interest rates rose during 1994 the life insurance subsidiaries' capital
resources were adversely impacted by unrealized loss positions from their fixed
maturity investments. As interest rates declined in the first quarter of 1995,
the life insurance subsidiaries' capital resources were positively impacted
from reductions in their unrealized loss positions on their fixed maturity
investments.
- 34 -
<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
Holding company
As a parent holding company, Kemper regularly reviews the strategic fit of all
its businesses and may consider the acquisition or disposition of its and its
subsidiaries' assets, and the Company may consider entering into joint venture,
reinsurance and other transactions. Since Kemper is a holding company, its
rights and the rights of its creditors to participate in the assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiaries' creditors, including customers of asset
management or securities brokerage subsidiaries, policyholders of insurance
company subsidiaries and lenders with respect to real estate subsidiaries
(except to the extent the Company itself may be a creditor with recognized or
secured claims against the subsidiary.)
Kemper receives from its subsidiaries interest on loans and dividends of cash
and property. Distributions to the parent are restricted. The parent also
receives from its subsidiaries payments for federal income tax. Additionally,
from time to time, Kemper borrows funds and issues securities for cash.
Kemper has used 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. At March 31, 1995, the parent had $54.7 million in cash and
short-term investments. Although not legally committed to do so, Kemper may use
portions of these funds for additional purchases of real estate-related
investments from its life insurance subsidiaries to maintain and/or improve
their regulatory capital positions and earnings capabilities. In first-quarter
1995, the Company purchased $5.0 million of certain real estate-related
investment from the life insurance subsidiaries. In 1994, the Company
purchased $222.8 million of certain real estate-related investments from the
life insurance subsidiaries and contributed $82.5 million to KILICO's capital,
which contribution was funded by dividends from FKLA. The Company's purchases
of such investments from its life insurance subsidiaries were consummated at
the carrying values of such investments at the dates of the purchases.
Consolidated
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, taxes and customers' account balances. 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 liquidity with respect to the
Company's continuing operations are asset management fees, 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.)
- 35 -
<PAGE> 36
In the life insurance segment, policyholder deposits decreased to $102.5
million during the first quarter of 1995 from $106.2 million for the first
quarter of 1994. Policyholder withdrawals increased to $344.8 million during
the first quarter of 1995 from $232.2 million for the first quarter of 1994,
primarily due to rising interest rates which caused the life insurance
segment's renewal crediting rates to be lower than new money crediting rates,
increased competition, and uncertainty regarding the Company's ownership. The
life insurance subsidiaries' late 1994 and early 1995 increases in crediting
rates were designed to produce new policyholder deposits and to reduce future
withdrawals.
The asset management segment sold its 50 percent interest in IFTC in January
1995 and the business operations of SSC in April 1995. (See "RESULTS OF
OPERATIONS - Asset management" above.)
The following table sets forth the consolidated short-term debt and
capitalization of the continuing operations of the Company at the dates
indicated:
<TABLE>
<CAPTION>
Capitalization
(in millions)
March 31 December 31
1995 1994
-------- -----------
<S> <C> <C>
Short-term debt $ 54.2 $ 54.2
-------- --------
Long-term debt:
6.875% Notes Due 2003 200.0 200.0
8.80% Notes Due 1998 110.8 110.8
Medium-term notes 35.5 35.5
Other long-term debt 9.3 10.4
Convertible debentures of subsidiary 32.7 33.1
-------- --------
Total long-term debt 388.3 389.8
-------- --------
Total short-term and long-term debt $ 442.5 $ 444.0
======== ========
Stockholders' equity:
Preferred stock $ 360.4 $ 360.4
Common stock 331.6 331.2
Additional paid-in capital 370.4 366.9
Unrealized loss on foreign currency transactions (36.6) (35.9)
Unrealized depreciation on investments (124.9) (323.2)
Retained earnings 1,551.2 1,586.8
Treasury shares, at cost (1,028.8) (1,028.8)
-------- --------
Total stockholders' equity 1,423.4 1,257.4
-------- --------
Total capitalization (excludes total short-term debt) $1,811.7 $1,647.2
======== ========
</TABLE>
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.
The parent company had $20.0 million due to banks at March 31, 1995 and
December 31, 1994. Also included in short-term debt at March 31, 1995 are $30.0
million of medium-term notes due in the fourth quarter of 1995. Kemper
Corporation renegotiated certain of its committed lines of credit with certain
banks effective October 27, 1994. The lines of credit total $317.5 million,
with $155.0 million expiring October 22, 1995 and $162.5 million expiring
November 1, 1996. These lines would not be available upon a change of control
of the Company. At March 31, 1995, $110 million of the aggregate amount of
these lines were reserved for the sole purpose
- 36 -
<PAGE> 37
of providing funding capability respecting real estate commitments which the
Company does not expect to ultimately require funding. Additionally, beginning
in the first quarter of 1995 and in conjunction with the issuance of letters of
credit totaling $205 million by a third-party bank syndicate to five money
market mutual funds managed by KFS to credit enhance the money funds'
investments in certain Orange County notes, a portion of the committed lines of
credit equal to the difference between $205 million and the aggregate cash and
marketable securities of the parent and its non-regulated subsidiaries will be
reserved for any future fundings under the Orange County letters of credit. As
of March 31, 1995, approximately $23 million of the committed lines were
reserved for this purpose. Interest rates on the Company's committed lines of
credit would generally approximate short-term bank corporate rates.
Long-term debt and insurance company ratings
All of the Company's long-term debt was issued prior to 1994. The majority of
the long-term debt was privately placed in 1993 at an initial interest rate of
6.875 percent. This rate increased to 7.375 percent from March 15, 1994 to
December 12, 1994, when the initial rate was reinstated upon the exchange of
such notes for publicly registered notes.
Ratings have become an increasingly important factor in establishing the
competitive position of life insurance companies. Rating organizations continue
to review the financial performance and condition of life insurers and their
investment portfolios, including those of the Company's life insurance
subsidiaries. Any reductions in the life insurance subsidiaries' claims-paying
ability or financial strength ratings could result in their products being less
attractive to consumers. Any reductions in Kemper Corporation's senior debt
ratings could adversely impact the Company's financial flexibility by limiting
the Company's access to capital or increasing its cost of borrowings.
Ratings reductions for Kemper Corporation or its subsidiaries and other
financial events can also trigger obligations to fund certain real-estate
related commitments to take out other lenders. In such events, those lenders
can be expected to renegotiate their loan terms, although they are not
contractually obligated to do so. Such circumstances could accelerate or
increase the Company's purchases of real estate-related assets from its
regulated life insurance subsidiaries to further support their respective
statutory capital positions.
A credit rating is not a recommendation to buy, sell or hold securities. Each
rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. On
April 11, 1995, following the announcement of an agreement in principle to sell
the Company, Standard & Poor's Corporation ("S&P") announced that it revised
its BBB senior debt and BB+ preferred stock ratings of the Company, which S&P
had placed under "CreditWatch with 'negative' implications" in 1994, to BB+ and
BB-, respectively, and placed these ratings on "CreditWatch with 'developing'
implications"; Moody's Investors Service announced that it changed the
direction of its review of its Baa2 senior debt and Baa3 preferred stock
ratings of the Company and Baa1 insurance financial strength ratings of the
Company's life insurance subsidiaries to under review "with direction
uncertain" from "for possible downgrade"; Duff & Phelps Credit Rating Co.
advised
- 37 -
<PAGE> 38
the Company that it did not revise its A- senior debt rating of the Company,
AA- claims paying ability rating of Federal Kemper Life Assurance Company and
A+ claims paying ability rating of Kemper Investors Life Insurance Company from
"Rating Watch - Uncertain"; and A. M. Best Company announced that its A-
ratings of the Company's life insurance subsidiaries remain "under review with
developing implications."
Convertible debentures of subsidiary
Convertible debentures of subsidiary represent employee interests in KFC.
Maturities and employee terminations during first-quarter 1995 accounted for
the $0.4 million reduction of convertible debentures from year-end 1994.
Approximately $7.5 million of debentures are scheduled to mature in 1995. The
outstanding debentures bear interest approximating the prime rate. All of the
outstanding debentures are subject to the Company's right to call. The Company
is considering calling all outstanding debentures for redemption by year-end
1995 or in early 1996.
Preferred stock
At March 31, 1995, the Company's outstanding preferred stock totaled $360.4
million. Dividends paid on the preferred stock during the first quarter of
1995 totaled $5.9 million.
Common stock
During first-quarter 1995, the Company received $0.3 million by issuing common
stock through employee stock option plans and issued $3.7 million of common
stock through the Kemper Corporation Dividend Reinvestment and Stock Purchase
Plan. During 1994 and first-quarter 1995, the quarterly dividend rate was $.23
per common share. The second-quarter 1995 dividend of $.23 per share was
declared on April 18, 1995 and is payable May 31, 1995.
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.
Stockholders' equity
Stockholders' equity totaled $1.42 billion at March 31, 1995, compared with
$1.26 billion at December 31, 1994. The first-quarter 1995 increase reflected a
$198.3 million reduction in the unrealized loss position of the Company's
investments, primarily fixed maturities of the life insurance segment, due to
declining interest rates. Stockholders' equity in 1995 also reflected the
Company's net loss of $21.8 million and the issuance of $4.0 million of common
stock during the first quarter.
Book value per common share increased to $30.79 at March 31, 1995, compared
with $26.06 at December 31, 1994. The increase in 1995 from the 1994 level
primarily reflected the reduction in the unrealized loss position of the
Company's investments of $5.74 per share.
- 38 -
<PAGE> 39
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number
27 Financial data schedule is filed herewith.
99.1 Agreement in principle dated April 10, 1995 among Kemper
Corporation, Zurich Insurance Company, Insurance Partners,
L.P. and Insurance Partners Offshore (Bermuda), L.P. is
incorporated herein by reference to exhibit 10.1 to Kemper
Corporation's Form 8-K filed April 12, 1995.
99.2 Agreement dated May 8, 1995 extending termination date of
agreement in principle is filed herewith.
(b) Reports on Form 8-K.
During the three months ended March 31, 1995, the Company filed one
current report on Form 8-K. Filed on February 6, 1995 and dated December 23,
1994, this Form 8-K reported, under Item 5 thereof, the sale of the Company's
50 percent interest in Investors Fiduciary Trust Company; revisions to the
Orange County credit enhancements; and the results of the voting at the 1994
annual meeting of stockholders.
In the second quarter of 1995 through the date of the filing of this Form
10-Q, the Company filed one current report on Form 8-K. Filed on April 12,
1995 and dated April 3, 1995, this Form 8-K reported, under Item 5 thereof, the
Company's announcement of its plan to divest its securities brokerage
operations and an agreement in principle pursuant to which Kemper Corporation
would be acquired in a merger transaction, as well as certain changes in the
Company's credit ratings.
- 39 -
<PAGE> 40
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, 1995
/s/J. H. FITZPATRICK
--------------------
J. H. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Date: May 12, 1995
/s/J. R. SITAR
--------------------
J. R. Sitar
Senior Vice President and
Chief Accounting Officer
- 40 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 5,309,357
<DEBT-CARRYING-VALUE> 5,309,357
<DEBT-MARKET-VALUE> 5,309,357
<EQUITIES> 138,438
<MORTGAGE> 1,027,886
<REAL-ESTATE> 343,515
<TOTAL-INVEST> 7,550,522
<CASH> 171,850
<RECOVER-REINSURE> 711,255
<DEFERRED-ACQUISITION> 707,102
<TOTAL-ASSETS> 11,651,260
<POLICY-LOSSES> 7,670,094
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 409,800
<COMMON> 331,670
0
360,363
<OTHER-SE> 731,378
<TOTAL-LIABILITY-AND-EQUITY> 11,651,260
30,331
<INVESTMENT-INCOME> 131,629
<INVESTMENT-GAINS> 43,433
<OTHER-INCOME> 24,638
<BENEFITS> 122,352
<UNDERWRITING-AMORTIZATION> 27,981
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 93,908
<INCOME-TAX> 47,604
<INCOME-CONTINUING> 45,494
<DISCONTINUED> (67,249)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,755)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.79)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
Exhibit 99.2
ZURICH INSURANCE COMPANY
INSURANCE PARTNERS, L.P.
INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.
One Chase Manhattan Plaza
New York, New York 10005
May 8, 1995
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
Attention: David B. Mathis
Chairman of the Board and
Chief Executive Officer
Ladies and Gentlemen:
Reference is made to the letter agreement, dated April 10, 1995 (the
"Letter Agreement"), among Kemper Corporation, Zurich Insurance Company,
Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P.
Pursuant to paragraph 7(c) of the Letter Agreement, the undersigned
hereby agree that (i) the Letter Agreement shall not terminate at the close of
business on May 8, 1995 and (ii) the Letter Agreement shall instead terminate
at the close of business on May 15, 1995, or such later date as the parties
hereto may agree.
Very truly yours,
ZURICH INSURANCE COMPANY
By:____________________________
Name:
Title:
By:_____________________________
Name:
Title:
