<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 June 30, 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)
<TABLE>
<S> <C>
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)
</TABLE>
708-320-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 27, 1995, 34,743,157 shares of Kemper Corporation Common Stock, $5
par value, were outstanding.
<PAGE> 2
KEMPER CORPORATION
SECOND-QUARTER 1995
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheet - June 30, 1995 and December 31, 1994... 3
Consolidated Statement of Operations -
Three months and six months ended June 30, 1995 and 1994........ 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1995 and 1994......................... 5
Notes to Consolidated Financial Statements......................... 6
Management's Discussion and Analysis -
Results of Operations........................................... 10
Investments..................................................... 25
Liquidity and Capital Resources................................. 36
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................... 40
ITEM 2. Changes in Securities................................... 40
ITEM 4. Submission of Matters to a Vote of Security Holders..... 40
ITEM 5. Other Information....................................... 40
ITEM 6. Exhibits and Reports on Form 8-K........................ 42
Signatures......................................................... 44
</TABLE>
-2-
<PAGE> 3
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1995, $5,346,389; 1994, $5,534,864) $ 5,425,143 $ 5,200,915
Equity securities, at market (cost 1995, $28,151; 1994, $40,669) 29,890 40,417
Short-term investments 431,261 349,651
Joint venture mortgage loans 615,034 616,192
Third-party mortgage loans 379,935 418,313
Other real estate-related investments 318,384 336,272
Other loans and investments 438,149 443,800
----------- -----------
Total investments 7,637,796 7,405,560
Cash 299,125 205,898
Other accounts and notes receivable 402,677 356,265
Reinsurance recoverable 657,685 741,867
Deferred insurance policy acquisition costs 666,186 696,804
Deferred investment product sales costs 154,466 166,397
Other assets 77,137 175,037
Net assets of discontinued operations 132,686 249,033
Assets of separate accounts 1,691,119 1,871,777
----------- -----------
Total assets $11,718,877 $11,868,638
=========== ===========
LIABILITIES
Life policy benefits $ 6,869,230 $ 7,129,293
Ceded life policy benefits 657,685 741,867
Other accounts payable and liabilities 502,692 424,388
Notes payable 50,000 54,173
Long-term debt 346,250 356,670
Convertible debentures of subsidiary 26,676 33,113
Liabilities of separate accounts 1,691,119 1,871,777
----------- -----------
Total liabilities 10,143,652 10,611,281
----------- -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock-no par value (outstanding 1995, 6,680,839; 1994, 6,681,157 shares) 360,355 360,363
Common stock-$5.00 par value (issued 1995, 66,535,507; 1994, 66,229,940 shares) 332,678 331,150
Additional paid-in capital 376,907 366,944
Unrealized loss on foreign currency translations (34,900) (35,888)
Unrealized gain (loss) on investments 38,260 (323,201)
Retained earnings 1,530,646 1,586,820
Treasury shares, at cost (1995, 31,809,486; 1994, 31,812,456 shares) (1,028,721) (1,028,831)
----------- -----------
Total stockholders' equity 1,575,225 1,257,357
----------- -----------
Total liabilities and stockholders' equity $11,718,877 $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>
Six months ended Three months ended
June 30 June 30
-------------------- ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue
Asset management income $200,883 $230,058 $ 98,916 $111,060
Net investment income 268,118 226,077 136,489 115,322
Insurance premium income 77,910 75,170 39,579 38,268
Realized investment gain (loss) (27,808) 24,752 (71,241) (4,643)
Other income 50,716 49,531 26,078 22,831
-------- -------- -------- --------
Total revenue 569,819 605,588 229,821 282,838
-------- -------- -------- --------
Benefits and expenses
Asset management expenses 124,604 140,716 58,141 68,008
Amortized investment product sales costs 26,559 27,494 12,797 14,593
Insurance claim costs and policyholder benefits 244,566 236,284 122,213 116,835
Amortized policy acquisition costs 52,309 40,717 24,328 21,528
Interest expense 19,482 20,115 9,857 10,265
Other expenses 15,627 20,903 8,910 12,693
-------- -------- -------- --------
Total benefits and expenses 483,147 486,229 236,246 243,922
-------- -------- -------- --------
Earnings (loss) from continuing operations
before income tax 86,672 119,359 (6,425) 38,916
-------- -------- -------- --------
Income tax (benefit)
Current 28,901 44,821 5,003 6,395
Deferred 17,336 (435) (6,369) 9,174
-------- -------- -------- --------
Total income tax 46,237 44,386 (1,366) 15,569
-------- -------- -------- --------
Income (loss) from continuing operations 40,435 74,973 (5,059) 23,347
Income (loss) from discontinued operations, net of tax (2,712) 113 502 (2,563)
Gain (loss) on divestitures of discontinued operations,
net of tax (66,099) 2,478 (2,065) --
-------- -------- -------- --------
Net income (loss) $(28,376) $ 77,564 $ (6,622) $ 20,784
======== ======== ======== ========
Net income (loss) applicable to common stockholders $(40,270) $ 65,775 $(12,619) $ 14,877
======== ======== ======== ========
Net income (loss) per share:
Primary
Income (loss) from continuing operations $ .82 $ 1.86 $ (.32) $ .50
Income (loss) from discontinued operations (1.97) .07 (.04) (.07)
-------- -------- -------- --------
Net income (loss) per share $ (1.15) $ 1.93 $ (.36) $ .43
======== ======== ======== ========
Fully diluted
Income (loss) from continuing operations $ .82 $ 1.78 $ (.32) $ .50
Income (loss) from discontinued operations (1.97) .06 (.04) (.07)
-------- -------- -------- --------
Net income (loss) per share $ (1.15) $ 1.84 $ (.36) $ .43
======== ======== ======== ========
Cash dividends declared and paid per common share $ .46 $ .46 $ .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>
Six months ended
June 30
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (28,378) $ 77,448
Reconcilement of net income (loss) to net cash provided:
Realized investment gain 27,808 (24,752)
Loss (gain) from sale of discontinued operations 67,250 (2,478)
Life policy benefits 137,860 183,662
Deferred federal income tax 19,860 78,242
Deferred insurance acquisition costs (9,089) (21,179)
Deferred investment product sales costs 11,932 5,125
Amortization on investments 3,002 30,359
Other accounts and notes receivable (45,291) (34,021)
Other accounts payable and liabilities 74,312 (112,854)
Equity income from affiliates (610) 26,775
Other (9,695) 4,388
--------- ---------
Net cash provided from operating activities 248,961 210,715
--------- ---------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 122,760 59,248
Fixed maturities sold prior to maturity 210,451 681,718
Equity securities 104,962 63,042
Mortgage loans, other loans and investments 110,998 346,139
Cost of investments purchased:
Fixed maturities (134,306) (1,104,975)
Equity securities ( - ) (384)
Mortgage loans, other loans and investments (87,282) (204,566)
Short-term investments, net (81,610) 287,384
Unsettled investment transactions, net (298) (32,782)
Discontinued operations 2,750 (13,000)
Other 54,790 (23,541)
--------- ---------
Net cash provided from investing activities 303,215 58,283
--------- ---------
Cash flows from financing activities
Policyholder account balances:
Deposits 204,887 202,767
Withdrawals (607,569) (472,876)
Dividends paid to stockholders (33,305) (27,088)
Reductions of long-term debt (10,420) (905)
Decrease in notes payable, net (4,173) (1,183)
Other (8,368) (15,706)
--------- ---------
Net cash used in financing activities (458,948) (314,991)
--------- ---------
Net increase (decrease) in cash 93,228 (45,993)
Cash, beginning of period 205,898 229,937
--------- ---------
Cash, end of period $ 299,126 $ 183,944
========= =========
</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>
Six months ended Three months ended
June 30 June 30
------------------ ------------------------
(in thousands, except per share data) 1995 1994 1995 1994
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss) reported $(28,376) $77,564 $ (6,622) $20,784
Add back:
Dividends on redeemable securities of subsidiary * * * *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax * * * *
Deduct:
Employee interests in subsidiary, assuming full conversion * * * *
Dividends on preferred stock 11,894 11,789 5,997 5,907
-------- ------- -------- -------
Total $(40,270) $65,775 $(12,619) $14,877
======== ======= ======== =======
Average common and equivalent shares outstanding 34,925 34,068 34,998 34,510
======== ======= ======== =======
Net income (loss) per share $ (1.15) $ 1.93 $ (0.36) $ 0.43
======== ======= ======== =======
</TABLE>
The calculation of net income (loss) per share on a fully diluted
basis is as follows:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
------------------ ------------------
(in thousands, except per share data) 1995 1994 1995 1994
------ ------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss) reported $(28,376) $77,564 $(6,622) $20,784
Add back:
Dividends on redeemable securities of subsidiary * * * *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax * * * *
Deduct:
Employee interests in subsidiary, assuming full conversion * * * *
Dividends on preferred stock 4,375 4,375 2,187 2,187
-------- ------- ------- -------
Total $(32,751) $73,189 $(8,809) $18,597
======== ======= ======== =======
Average common and equivalent shares outstanding 40,248 39,776 40,544 39,918
======== ======= ======== =======
Net income per share $ ** $ 1.84 $ ** $ **
======== ======= ======== =======
</TABLE>
* The effect of employee interests in Kemper Financial Companies, Inc. is
anti-dilutive for the 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 $1.7 million at June 30, 1995.
4. The change in unrealized gains (losses), net of applicable tax, on
fixed maturities and equity securities not reflected in net income was
$361.5 million and $(386.0) million for the six months ended June 30,
1995 and 1994, respectively.
5. At June 30, 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 Cumulative Convertible
Preferred Stock issued and outstanding. Of the 200 million shares of
authorized common stock, there were 66.5 million issued and 34.7
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. Federal income taxes paid during the six months ended
June 30, 1995 amounted to a refund of $3.5 million, compared with a
tax payment of $28.1 million in the same period of 1994. Interest
payments totaled $17.0 million and $34.6 million for the six months
ended June 30, 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 than 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 six months of 1995, the valuation
allowance was decreased by $117.4 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 liabilities" in the
consolidated balance sheet) were as follows:
- 7 -
<PAGE> 8
<TABLE>
<CAPTION>
June 30 December 31
(in thousands) 1995 1994
--------- -----------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related $ 136,440 $ 167,456
Life policy reserves 124,588 128,339
Other investment-related 38,698 24,074
Tax capitalization of deferred acquisition costs 27,513 24,046
Accrued employee benefits 12,071 13,409
Unrealized losses on investments 12,317 129,700
Accrued expenses 9,727 11,874
Other 17,624 15,926
--------- ---------
Total deferred federal tax assets 378,978 514,824
Valuation allowance (63,996) (181,379)
--------- ---------
Total deferred federal tax assets after valuation
allowance 314,982 333,445
--------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 233,165 243,882
Deferred investment product sales costs 54,063 58,239
Depreciation and amortization 32,367 31,580
Unrealized gains on investments 27,832 -
Other investment-related 2,948 6,454
Other 14,347 14,407
--------- ---------
Total deferred federal tax liabilities 364,722 354,562
--------- ---------
Net deferred federal tax liability $ (49,740) $ (21,117)
========= =========
</TABLE>
The tax returns through the year 1986 have been examined by the
Internal Revenue Service ("IRS"). The tax returns for the years 1987
through 1990 are currently under examination by the IRS. Changes
proposed are not material to the Company's financial position.
8. During the six months ended June 30, 1995, Kemper Financial Services,
Inc. sold its 50 percent interest in Investors Fiduciary Trust Company
and the business operations of a wholly owned subsidiary, Supervised
Service Company, Inc., and entered into a definitive agreement to
acquire the assets of Dreman Value Management, L.P. 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 periods
ended June 30, 1995 and 1994. The results of discontinued operations
also reflect adjustments to estimated liabilities with respect to the
property-casualty, reinsurance and risk management operations that
were divested in 1993. The following table sets forth selected
financial information regarding the discontinued operations:
- 8 -
<PAGE> 9
<TABLE>
<CAPTION>
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
1995 1994 1995 1994
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Revenue $260.6 $283.1 $134.8 $131.8
====== ====== ====== ======
Income (loss), net of tax $ (2.7) $ 0.1 $ 0.5 $ (2.6)
Income (loss) on divestiture,
net of tax (66.1) 2.5 (2.1) -
------ ------ ------ ------
Net income (loss) $(68.8) $ 2.6 $ (1.6) $ (2.6)
====== ====== ====== ======
June 30, 1995 December 31, 1994
-------------- -----------------
Total assets $1,792.4 $1,641.8
Total liabilities 1,659.7 1,392.8
-------- --------
Net assets $ 132.7 $ 249.0
======== ========
</TABLE>
10. On May 15, 1995, Kemper Corporation entered into a definitive
agreement 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
On April 3, 1995, Kemper Corporation ("Kemper") approved a plan to divest its
securities brokerage segment. The plan has resulted in the segment being
reclassified as a component of discontinued operations. The planned
divestiture of the securities brokerage operations, through a sale to an
employee stock ownership plan and a distribution in the form of a property
dividend to Kemper common stockholders, is proceeding. Completion of the
transaction is subject to certain conditions including the Securities and
Exchange Commission declaring effective a related registration statement. July
27, 1995 was established as the record date for the planned property dividend.
Prior to closing, a payable date would be established.
On May 15, 1995, Kemper signed a definitive merger agreement with Zurich
Insurance Company, Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P., and ZIP Acquisition Corp. (the "Merger Agreement"). In the
merger, Kemper stockholders are to receive $49.50 per share in cash. The
transaction is subject to certain conditions, including divestiture of the
securities brokerage operations and certain approvals by state insurance
regulators, mutual fund shareholders and the common stockholders of Kemper.
The transaction is expected to close in the fourth quarter of 1995 or, at the
option of the investor group, in January 1996. (See Part II, ITEM 5 of this
Form 10-Q.)
- 10 -
<PAGE> 11
RESULTS OF OPERATIONS
The following table is a summary of the results of Kemper and its subsidiaries
(the "Company"), by category, for the periods ended June 30, 1995 and 1994:
Summary of income (loss) by category
(in millions)
<TABLE>
<CAPTION>
Six months ended June 30, 1995 Six months ended June 30, 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 $31.1 $ (.1) $31.0 $39.5 $ - $39.5
Life insurance 62.0 (39.9) 22.1 58.4 1.4 59.8
Real estate (4.7) - (4.7) (20.4) 13.6 (6.8)
Other (14.5) 6.5 (8.0) (18.4) .9 (17.5)
----- ------ ------ ----- ----- -----
Continuing operations 73.9 (33.5) 40.4 59.1 15.9 75.0
Discontinued operations (2.7) (66.1) (68.8) .1 2.5 2.6
----- ------ ------ ----- ----- -----
Total $71.2 $(99.6) $(28.4) $59.2 $18.4 $77.6
===== ====== ====== ===== ===== =====
</TABLE>
(1) Net income (loss) excluding realized investment results.
(2) See following table for realized investment results.
Realized investment gain (loss)
(in millions)
<TABLE>
<CAPTION>
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Real estate-related losses $(73.6) $ - $(73.6) $ -
Gains on sales of IFTC, SSC & State Street 48.2 - 6.0 -
Orange County-related charge (24.8) - (22.8) -
Other gains and losses, net 22.3 24.7 19.1 (4.6)
------ ----- ------ -----
Realized investment gain (loss)
from continuing operations (27.9) 24.7 (71.3) (4.6)
Income tax expense (benefit) 5.6 8.8 (24.8) (1.6)
------ ----- ------ -----
Net realized investment gain (loss)
from continuing operations (33.5) 15.9 (46.5) (3.0)
Gain (loss) on divestiture of discontinued
operations, net of tax (66.1) 2.5 (2.0) -
------ ----- ------ -----
Total $(99.6) $18.4 $(48.5) $(3.0)
====== ===== ====== =====
</TABLE>
Continuing operations
Operating earnings for continuing operations were $73.9 million for the first
six months of 1995, compared with $59.1 million in the same 1994 period.
Operating earnings for the second quarter of 1995 totaled $41.4 million,
compared with $26.4 million for the same period of 1994. These improvements in
both six-month and second-quarter results reflect increased spreads on fixed
rate annuities and effective expense control in the life insurance segment
and reduced joint venture operating losses in the real estate segment. Asset
management earnings declined in both the six-month and second-quarter periods
largely due to reduced management fees, distribution fees and commission income.
Net income from continuing operations totaled $40.4 million in the first six
months of 1995, compared with $75.0 million in the first
- 11 -
<PAGE> 12
six months of 1994. The Company reported a second-quarter 1995 net loss of
$5.1 million, compared with net income of $23.3 million in the second quarter
of 1994. Decreased net income for the six month and second-quarter periods in
1995 resulted from $47.9 million of after-tax real estate-related realized
investment losses in the life insurance 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 $8.0 million for the first six months of 1995, compared with a net
loss of $17.5 million for the same period in 1994. The 1995 results reflect
realized investment gains of $6.5 million (after-tax) primarily from the sale
of equities, compared with $0.9 million (after-tax) for the same period of
1994. The 1994 results included additional operating expenses of $6.2 million
(after-tax) relating to a proxy contest and a failed merger. Expenses for the
six months ended June 30, 1995 included $0.3 million (after-tax) relating to
the planned merger.
Total operations
Including discontinued operations, the Company's net loss totaled $28.4 million
for the first six months of 1995, compared with net income of $77.6 million for
the same period of 1994. Net loss per share for the first six months of 1995
was $1.15 (primary and fully diluted), compared with net income of $1.93 per
share (primary) and $1.84 per share (fully diluted) in the first six months of
1994. The Company recorded a net loss of $6.6 million, or $.36 per share
(primary and fully diluted), in the second quarter of 1995, compared with net
income of $20.8 million, or $.43 per share (primary and fully diluted), in the
same period of 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 six
months of 1995, the net loss from discontinued operations totaled $68.8
million, primarily due to a $66.1 million loss relating to the divestiture of
the securities brokerage operations. In the first six months of 1994, the net
gain from discontinued operations totaled $2.6 million.
Net income (loss) per share in the following segment discussions is on a
primary basis.
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<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").
Selected financial highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Investment management fees $100.8 $112.1 $ 50.8 $ 54.9
Commission income 29.4 40.9 15.2 19.0
Distribution and redemption fees 29.4 36.3 14.5 17.2
Transfer agent revenue 33.9 38.3 15.2 20.1
Investment and other income 10.5 8.6 5.2 4.6
Realized investment gain (loss) 23.5 - (16.8) -
------ ------ ------ ------
Total revenue 227.5 236.2 84.1 115.8
------ ------ ------ ------
Operating expenses 111.6 127.2 51.9 63.0
Commission expense 31.4 42.2 16.0 19.9
Deferral of mutual fund commissions
and sales expense (14.6) (22.4) (7.6) (10.3)
Amortization of deferred mutual fund
commissions and sales expense 26.5 27.5 12.8 14.6
------ ------ ------ ------
Total expenses 154.9 174.5 73.1 87.2
------ ------ ------ ------
Earnings before income tax 72.6 61.7 11.0 28.6
Income tax expense 41.6 22.2 4.5 10.1
------ ------ ------ ------
Net income $ 31.0 $ 39.5 $ 6.5 $ 18.5
====== ====== ====== ======
Realized investment loss, net of tax $ (0.1) $ - $(11.0) $ -
====== ====== ====== ======
Operating earnings $ 31.1 $ 39.5 $ 17.5 $ 18.5
====== ====== ====== ======
Per share:
Operating earnings $ .89 $ 1.16 $ .50 $ .53
====== ====== ====== ======
Net income $ .89 $ 1.16 $ .19 $ .53
====== ====== ====== ======
</TABLE>
The asset management segment's net income for the first six months of
1995 decreased $8.5 million when compared with the first six months of 1994.
This decrease was primarily due to lower operating earnings, which were $31.1
million in the first half of 1995, compared with $39.5 million in the first
half of 1994. Reduced management fees, distribution and redemption fees,
transfer agent fees and commission income all contributed to the decline in
operating earnings. These revenue reductions were partially offset by reduced
operating and commission expenses (see discussion below).
Also reducing the segment's net income was an after-tax Orange County-related
charge totaling $16.1 million in the first six months of 1995. This charge
primarily reflected the difference between the December 31, 1994 estimated
value of $198.0 million face amount of Orange County, California notes
and their June 30, 1995 estimated value. The Company renewed credit-enhancing
arrangements in the period that were established in the fourth quarter of 1994
pursuant to which the Company bears the risk of loss associated with the Orange
County notes held by five non-government taxable money market mutual funds
managed by KFS.
- 13 -
<PAGE> 14
Orange County, which filed for bankruptcy protection in December 1994,
has made the monthly interest payments on the notes to date. The five affected
Kemper money market funds have consented to extend the maturity date of the
notes to June 30, 1996. The original maturity date was July 10, 1995. The
Company's bank letter of credit arrangements with respect to the Orange County
notes were also extended to the new maturity date.
The segment's net income in 1995 benefited from a net realized investment gain
of $11.6 million in the first quarter from the sale of KFS' 50 percent interest
in Investors Fiduciary Trust Company ("IFTC") and by a net realized investment
gain of $4.4 million in the second quarter from the sale of shares of State
Street Boston Corporation ("State Street") common stock. On January 31, 1995,
KFS sold its 50 percent interest in IFTC to State Street in exchange for
2,986,111 shares of State Street common stock with a market value of $98.2
million at that date. On June 21, 1995, KFS sold all of its shares of State
Street stock and received approximately $105.0 million. IFTC contributed
$0.6 million and $2.8 million of the segment's operating earnings recorded
in the first half of 1995 and 1994, respectively.
In April 1995, KSvC sold to DST Systems, Inc. ("DST") the business operations
of Supervised Service 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 is being downsized. The net impact of the sale to
DST and KSvC's write-down was immaterial to the segment's financial results.
Also, in April 1995, KFS sold 5,034 shares of its 12,500 shares of Dimensional
Fund Advisors, Inc. ("DFA") to DFA for approximately $2.2 million. In July, KFS
entered into an agreement to sell its remaining 7,466 shares of DFA for
approximately $3.2 million. A realized investment gain of approximately
$280,000 was attributable to the April sale and an additional gain of
approximately $415,000 is expected to be realized in the second half of 1995.
On May 2, 1995, KFS announced the signing of a definitive agreement to acquire
substantially all 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 and complement KFS'
current growth style. DVM currently has 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, certain third-party
approvals. The transaction is expected to close later in the third quarter of
1995.
The decrease of $11.3 million in investment management fees in the first half
of 1995 when compared with the first half of 1994 was primarily due to a $4.0
billion reduction in mutual fund average assets under management. Bond funds
accounted for $3.4 billion of this decrease, while stock funds and money market
funds represented declines of $0.4 billion and $0.2 billion, respectively.
- 14 -
<PAGE> 15
Commission income was $29.4 million in the first six months of 1995,
compared with $40.9 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 $7.0 million
in the first six months of 1995 when compared with the same period in 1994.
Also adversely affecting INVEST's revenue were decreased sales of annuity
products, where commissions declined $4.5 million in the first half of 1995
compared with the first half of 1994. INVEST's 1995 sales were down in large
part because of favorable interest rates available from competing products in
the bank distribution system.
Distribution and redemption fee revenue decreased $6.9 million in the
first six months of 1995 compared with the first six months of 1994.
Distribution fees, based on assets managed in KFS' spread load mutual funds,
were approximately $5.5 million lower as spread load assets declined due to
market depreciation, redemptions of fund shares and routine conversions of
spread load assets to front-end load shares which are exempt from distribution
fees. Receipt of contingent deferred sales charges from redemption activity
also declined as redemptions from spread load funds were lower during the 1995
period.
Transfer agent revenue decreased to $33.9 million in the first six months of
1995 from $38.3 million in the same period last year. This $4.4 million
decrease was primarily due to reductions in the number of transactions and new
account activity, fee caps on spread load and level load assets, and cessation
of unit investment trust processing in 1995. In addition, SSC's transfer agent
fees decreased approximately $0.5 million during the 1995 period due to the
above-described sale of its business operations. KSvC accounted for transfer
agent revenue of $30.7 million and $34.6 million in the first six months of
1995 and 1994, respectively. SSC accounted for transfer agent revenue of $3.2
million and $3.7 million in the first six months of 1995 and 1994,
respectively.
Investment and other income increased by $1.9 million in the first half of
1995 compared with the first half of 1994. This increase was primarily due to
additional interest and dividend income of approximately $2.8 million in 1995,
and the above-described sale of KFS' DFA shares.
Operating expenses declined by $15.6 million in the first six months of
1995 when compared with the first six months of 1994. Expense reductions in
advertising, literature and sales promotion of mutual fund products
approximated $1.2 million. Personnel expenses decreased approximately $10.6
million due to staff reductions and reductions in production-related
compensation due to lower sales. Transfer agent remote processing fees and
software application depreciation costs were $3.5 million lower during the
period based on the above-mentioned agreement with DST. Professional services
increased by approximately $1.2 million primarily due to litigation-related
expenses.
- 15 -
<PAGE> 16
Commission expense decreased to $31.4 million in the first half of 1995,
compared with $42.2 million in the first half of 1994, due to lower sales.
With the reduction of sales, there was a related decrease in the deferral of
mutual fund commissions and sales expense. Amortization of deferred
mutual fund commission and sales expense also decreased during 1995. The
decrease was due to greater than planned investment performance in the spread
load funds in 1995 and was partially offset by a shortening of the
amortization period in 1995 for expenses related to sales of front-end load
mutual funds at net asset value.
Assets under management
(in billions)
<TABLE>
<CAPTION>
6/30/95 3/31/95 12/31/94 9/30/94 6/30/94
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Mutual funds:
Bond $21.1 $21.0 $20.6 $21.9 $22.9
Stock 9.4 8.9 8.7 9.0 8.7
Money market 12.6 12.1 12.2 12.3 12.2
Investment advisory 4.6 4.5 5.0 5.6 4.8
Kemper Corporation
affiliates 9.0 9.1 9.3 9.6 9.6
The Kemper National
Insurance Companies 6.6 6.6 6.9 7.0 6.9
----- ----- ----- ----- -----
Total $63.3 $62.2 $62.7 $65.4 $65.1
----- ----- ----- ----- -----
</TABLE>
Bond and stock mutual fund assets under management increased $1.2 billion from
December 31, 1994 primarily due to market value appreciation. Bond and stock
funds had asset appreciation of $3.4 billion in the first six months of 1995,
compared with asset depreciation of approximately $1.7 billion in the first
half of 1994. Redemptions of stock and bond funds totaled $2.8 billion in the
first half of 1995, while sales totaled $1.0 billion. Comparable six-month
1994 redemptions and sales totals were $3.1 billion and $1.6 billion,
respectively. Bond funds made up 63 percent of the redemption volume in the
first half of 1995, down from 78 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 six months of 1995, up from 42 percent in the first half of 1994.
Money market fund assets under management increased $0.4 billion in the first
half of 1995, as net sales in wholesale-distributed money funds were positive
for the period.
The decline in investment advisory assets in the first half of 1995 was
primarily due to the loss of clients because of uncertainties with respect to
the Company's ownership, portfolio management turnover and performance.
Organizational stability affects the relationships 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 half 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.)
- 16 -
<PAGE> 17
The first-half 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.)
- 17 -
<PAGE> 18
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>
Six months ended Three months ended
June 30 June 30
------------------ -------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Investment income $ 263.8 $ 245.7 $ 131.2 $ 123.7
Premium revenue 77.9 75.2 39.6 38.3
Other income 48.1 47.0 24.6 23.0
Realized investment gain (loss) (61.4) 2.2 (60.4) (13.4)
------- ------- ------- -------
Total revenue 328.4 370.1 135.0 171.6
------- ------- ------- -------
Benefits to policyholders 244.6 236.3 122.3 116.8
Commissions, taxes, licenses and fees 35.6 32.6 18.7 15.6
Operating expenses 24.0 27.5 12.6 14.2
Deferral of policy acquisition costs (61.4) (61.9) (31.8) (31.2)
Amortization of deferred policy
acquisition costs 52.3 40.7 24.3 21.5
------- ------- ------- -------
Total benefits and expenses 295.1 275.2 146.1 136.9
------- ------- ------- -------
Earnings (loss) before income tax 33.3 94.9 (11.1) 34.7
Income tax expense (benefit) 11.2 35.1 (3.7) 13.9
------- ------- ------ -------
Net income (loss) $ 22.1 $ 59.8 $ (7.4) $ 20.8
======= ======= ======= =======
Realized investment gain (loss),
net of tax $ (39.9) $ 1.4 $ (39.2) $ (8.8)
======= ======= ======= =======
Operating earnings $ 62.0 $ 58.4 $ 31.8 $ 29.6
======= ======= ======= =======
Per share:
Operating earnings $ 1.77 $ 1.71 $ .91 $ .86
======= ======= ======= =======
Net income (loss) $ .63 $ 1.76 $ (.22) $ .60
======= ======= ======= =======
</TABLE>
The life insurance segment reported a decline in net income in the first half
of 1995, compared with the first half 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 $47.9 million (see the discussion captioned "Real
Estate Asset Sales" in ITEM 5 of this Form 10-Q below) and $14.5 million for
the six months ended June 30, 1995 and 1994, respectively, offset by other net
realized investment gains of $8.0 million and $15.9 million for the six months
ended June 30, 1995 and 1994, respectively, primarily from the sales of fixed
maturity investments in 1995 and common stocks in 1994.
Operating earnings for the life insurance segment improved in the first half of
1995, compared with the first half 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.
- 18 -
<PAGE> 19
The life insurance segment improved spread income by increasing investment
income and by also reducing crediting rates on certain existing blocks of fixed
annuity and interest-sensitive life insurance products through most of 1994.
Such reductions in crediting rates occurred as overall interest rates also
declined. Operating earnings then began to improve as crediting rates
declined at a faster rate than the segment's investment income. Beginning in
late 1994, however, as a result of rising interest rates and other competitive
market factors, the life insurance segment began to increase crediting rates on
such interest-sensitive products, which adversely impacts spread income. The
recent decline in interest rates during the second quarter of 1995, however,
has created an interest rate environment mitigating at present competitive
pressures to increase renewal crediting rates further.
Investment income was positively impacted in the first half of 1995, compared
with the first half of 1994, from reductions in the level of non-performing
real estate-related investments, primarily from sales of certain real
estate-related investments to the Company's real estate subsidiaries in recent
periods. These sales totaled $5.0 million in the first half of 1995 and
$164.7 million in the first half of 1994 and resulted in no realized gain or
loss to the life insurance segment. Investment income in 1995 also benefited
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.
Life insurance sales
(in millions)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
----------------- ------------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Annuities:
General account $ 156.0 $ 146.3 $ 94.4 $ 69.1
Separate account 86.7 146.7 38.3 69.3
------- ------- ------- -------
Total annuities 242.7 293.0 132.7 138.4
Life insurance:
Term and other 77.7 77.3 39.6 40.8
Interest-sensitive 40.2 38.9 20.0 18.6
------- ------- ------- -------
Total life insurance 117.9 116.2 59.6 59.4
------- ------- ------- -------
Total sales $ 360.6 $ 409.2 $ 192.3 $ 197.8
======= ======= ======= =======
</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
half of 1995, compared with the first half of 1994, primarily due to increasing
renewal premiums. The segment issued new life insurance business in the first
half of 1995 of $6.5 billion in face amount, down from $8.0 billion in
first-half 1994, due in part to competitive conditions and uncertainty
concerning the Company's ownership. Total life insurance in force grew to
$98.1 billion at June
- 19 -
<PAGE> 20
30, 1995, compared with $97.5 billion at December 31, 1994 and $91.4 billion at
December 31, 1993.
Sales of annuity products consist of total deposits received. The increase in
general account (fixed annuity) sales reflected the Company's current strategy
to increase sales of fixed annuities as a result of the current interest rate
environment. The Company's longer term strategy is 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 half of
1995, compared with the first half 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.
Included in other income are administrative fees received from the segment's
separate account products of $10.5 million in the first half of 1995, compared
with $10.3 million in the first half of 1994. Other income also included
surrender charge revenue of $8.4 million in the first half of 1995, compared
with $7.8 million in the first half of 1994, as total general account and
separate account policyholder surrenders and withdrawals increased to $800.3
million in the first half of 1995, compared with $513.3 million in the first
half of 1994. Policyholder withdrawals increased during the first half of 1995
reflecting uncertainty regarding the Company's ownership and rising interest
rates late in 1994 and early in 1995. The segment's crediting rate increases
in late 1994 and in early 1995 are designed to reduce the level of future
withdrawals. As a result of increases in renewal crediting rates and
declining interest rates in the second quarter of 1995, together with
the benefits of the segment's planned association with the Zurich Insurance
Company, the Company expects that the level of surrender and withdrawal
activity experienced by the life insurance segment in the first half of 1995
should decrease for the remainder of 1995.
First-half 1995 benefits to policyholders included $53.7 million in death
benefits, compared with $39.3 million in the first half of 1994. The
increase in death benefits can be attributed in part to the overall growth in
insurance in force.
The amortization of insurance policy acquisition costs increased in the first
six months of 1995, compared with the first six months 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 insurance policy acquisition costs
as both would be expected to decrease the segment's projected future estimated
gross profits.
- 20 -
<PAGE> 21
Operating expenses decreased by $3.5 million, or 12.7 percent, in the first
half of 1995, compared with the first half of 1994, primarily as a result of
expense control efforts.
Since year-end 1990, the Company has taken many steps to improve the earnings,
financial strength and competitive marketing position of its 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
June 30, 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 June 30, 1995. The statutory surplus ratio for the segment improved to
11.8 percent at June 30, 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:
Invested assets and cash
(in millions)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
---------------- ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 305 4.1% $ 313 4.4%
Fixed maturities:
Investment-grade:
NAIC (1) Class 1 4,125 56.2 3,860 53.7
NAIC (1) Class 2 1,088 14.8 1,139 15.8
Performing below investment-grade (2) 207 2.8 196 2.7
Equity securities 14 .2 24 .3
Joint venture mortgage loans (3) 520 7.1 540 7.5
Third-party mortgage loans (3) 373 5.1 397 5.5
Other real estate-related investments (3) 284 3.9 297 4.1
Other 429 5.8 426 6.0
------ ----- ------ -----
Total (4) $7,345 100.0% $7,192 100.0%
====== ===== ====== =====
</TABLE>
(1) National Association of Insurance Commissioners ("NAIC")
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
(2) Excludes $33 million, or 0.5 percent, and $57 million, or 0.8 percent, at
June 30, 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.
- 21 -
<PAGE> 22
Other selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
-------- -----------
<S> <C> <C>
Deferred insurance acquisition costs $ 666 $ 697
Assets of separate accounts(1) 1,691 1,871
Total assets 10,616 10,736
Life policy benefits, net of ceded reinsurance 6,869 7,129
Unrealized gain (loss) on investments 51 (322)
Stockholders' equity 1,113 738
</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, and therefore the transfer had no impact on the life insurance
segment's results.
- 22 -
<PAGE> 23
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>
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Joint venture operating losses $ (3.5) $ (29.4) $ 1.1 $ (13.0)
Investment income and other 5.0 7.1 2.7 3.6
Realized investment gain - 21.0 - 7.3
------- ------- ------- -------
Total revenue 1.5 (1.3) 3.8 (2.1)
------- ------- ------- -------
Operating expenses 8.1 7.2 4.7 3.8
Interest expense .6 1.9 .2 1.0
------- ------- ------- -------
Total expenses 8.7 9.1 4.9 4.8
------- ------- ------- -------
Loss before income tax (7.2) (10.4) (1.1) (6.9)
Income tax benefit (2.5) (3.6) (.4) (2.4)
------- ------- ------- -------
Net loss $ (4.7) $ (6.8) $ (.7) $ (4.5)
======= ======= ======= =======
Realized investment gain,
net of tax $ - $ 13.6 $ - $ 4.8
======= ======= ======= =======
Operating loss $ (4.7) $ (20.4) $ (.7) $ (9.3)
======= ======= ======= =======
Per share:
Operating loss $ (.13) $ (.60) $ (.02) $ (.27)
======= ======= ======= =======
Net loss $ (.13) $ (.20) $ (.02) $ (.13)
======= ======= ======= =======
</TABLE>
The $25.9 million joint venture operating loss decline in the first six months
of 1995 from the level in the year ago period was primarily due to certain
joint venture audit adjustments and also reflected sales and restructurings
that were completed with respect to certain joint ventures, reducing the level
of operating losses the Company was required to record. Audit adjustments to
certain ventures' 1994 operating losses reported to the Company in 1995
included $8.5 million relating to recognizing gains in certain
property sales which previously were deferred and $5.7 million relating to
interest on third-party debt previously expensed in 1994 which was capitalized
in the first six months of 1995.
In the first half 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.
Investment and other income decreased $2.1 million in the first half 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. While mostly
attributable to a decline in real estate assets managed, this decrease was also
in part due to the Kemper National Insurance Companies
- 23 -
<PAGE> 24
engaging a third-party real estate asset manager effective January 1, 1995. In
the first half of 1994, this segment recorded $.5 million of real estate
management fee revenue from managing real estate assets of the Kemper National
Insurance Companies.
In the first half of 1995, the segment generated realized gains at a
level equal to additions to reserves and write-downs. In the first six months
of 1994, sales and other transfers to third parties of certain equity
investments in real estate, which had negative carrying values, generated
realized gains in excess of the segment's additions to reserves and
write-downs. See "INVESTMENTS - Provisions for real estate-related losses"
below.
The following table reflects selected balance sheet data of the real estate
segment:
Selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
------- -----------
<S> <C> <C>
Cash and short-term investments $ 25 $ 15
Joint venture mortgage loans (1) 103 84
Third-party mortgage loans (1) 6 21
Other real estate-related investments (1) 34 39
Other 5 5
---- ----
Total invested assets and cash (2) $173 $164
==== ====
Net deferred federal tax asset $ 54 $ 83
Total assets 378 387
Long-term debt 13 13
Stockholders' equity 326 330
</TABLE>
(1) See table captioned "Summary of gross and net real estate
investments" below.
(2) See "INVESTMENTS" below.
- 24 -
<PAGE> 25
INVESTMENTS
The Company's invested assets predominantly reflect investments of its life
insurance and real estate subsidiaries. The Company's principal investment
strategy is to maintain a balanced, well-diversified portfolio supporting
insurance contracts written by its life insurance subsidiaries. The Company's
subsidiaries make shifts in their investment portfolios depending on, among
other factors, the interest rate environment, liability durations and changes
in market and business conditions.
Invested assets and cash
<TABLE>
<CAPTION>
(in millions) June 30 December 31
1995 1994
------------- -------------
<S> <C> <C>
Cash and short-term investments $ 730 9.2% $ 555 7.3%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 4,126 52.0 3,861 50.7
NAIC(1) Class 2 1,088 13.7 1,139 15.0
Performing below investment-grade(2) 211 2.7 201 2.6
Equity securities 30 0.4 40 0.5
Joint venture mortgage loans(3) 615 7.7 616 8.1
Third-party mortgage loans(3) 380 4.8 418 5.5
Other real estate-related investments(3) 319 4.0 336 4.4
Other 438 5.5 445 5.9
------ ----- ------ -----
Total (4) $7,937 100.0% $7,611 100.0%
====== ===== ====== =====
</TABLE>
(1) National Association of Insurance Commissioners ("NAIC").
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
(2) Excludes $138 million, or 1.7 percent, and $168 million, or 2.2 percent,
at June 30, 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 when 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 appreciation, net of tax, on fixed maturities at June 30,
1995 was $51.2 million, or $1.47 per share, compared with unrealized
depreciation of $333.9 million, or $9.70 per share, at December 31, 1994. The
Company does not record a net deferred tax benefit for 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 June 30, 1995, investment-grade fixed maturities and cash and short-term
investments accounted for 74.9 percent of the Company's invested assets and
cash, compared with 73.0 percent at December 31, 1994. Approximately 72.4
percent of the Company's NAIC Class 1 bonds were rated AAA or equivalent at
June 30, 1995.
- 25 -
<PAGE> 26
Approximately 52.7 percent of the Company's investment-grade fixed maturities
at June 30, 1995 were mortgage-backed securities. These investments consist
primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any 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 were predominantly made
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 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 the
premiums which would result in reductions of investment income related to such
securities. At June 30, 1995, the Company has unamortized discounts and
premiums of $40.9 million and $13.7 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 June 30, 1995) totaled less than
three percent of cash and invested assets at June 30, 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 $1.31 billion real estate portfolio held by the Company's continuing
operations constituted 16.5 percent of cash and invested assets at June 30,
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
- 26 -
<PAGE> 27
projects where the Company has taken ownership positions in joint ventures with
a small number of partners.
Summary of gross and net real estate investments
(in millions)
<TABLE>
<CAPTION>
June 30, 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 $ 627 $ 519 $ 108 $ 687 $ 542 $ 145
Third-party mortgage loans 403 396 7 461 440 21
Other real estate-related
investments 1,100 397 703 1,163 427 736
------ ------ ----- ------ ------ -----
Subtotal 2,130 1,312 818 2,311 1,409 902
Reserves (94) (50) (44) (183) (55) (128)
Write-downs (478) (71) (407) (504) (107) (397)
Foreign currency translation
adjustments (35) - (35) (36) - (36)
Cumulative net operating losses
of joint ventures owned (210) (22) (188) (218) (21) (197)
------ ------ ----- ------ ------ -----
Net real estate investments $1,313 $1,169 $ 144 $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 $441.0 million at June 30, 1995. This amount
represented a net decrease of $69.8 million since December 31, 1994, largely
due to fundings in the first six months of 1995. (The commitments also reflect
an asset guarantee of $38.6 million related to the 1993 sale of Kemper
Reinsurance Company.) As of June 30, 1995, the Company expects to fund
approximately $135.9 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 $68.8 million of real estate owned and a $60.1 million deficit
in the Company's net equity investments in joint ventures, the Company's real
estate loans (including real estate-related bonds) totaled $1,304.6 million at
June 30, 1995, after reserves and write-downs. Of this amount, $756.0 million
are on accrual status with a weighted average interest rate of approximately
7.8 percent. Of these accrual loans, 60.5 percent have terms requiring current
periodic payments of their full
- 27 -
<PAGE> 28
contractual interest, 24.6 percent require only partial payments or payments to
the extent of cash flow of the borrowers, and 14.9 percent defer all interest
to maturity.
The deficit in equity investments in real estate, at June 30, 1995, consisted
of $138.1 million of loans to Spanish projects (described below), $64.5 million
of unsecured loans to joint ventures treated as equity investments, a $238.9
million deficit in the Company's other equity investments in joint ventures and
$23.8 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 $3.8 million of foreclosures, $61.2
million of deeds in lieu of foreclosure and $3.8 million of certain purchased
properties at June 30, 1995. Real estate owned was net of $103.4 million of
write-downs at June 30, 1995.
Real estate portfolio
<TABLE>
<CAPTION>
(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 27.2 3.4 3.9 1.0 3.0 27.7 66.2
Interest added to principal 13.2 8.4 0.1 2.5 - - 24.2
Sales/paydowns/distributions (44.7) (18.3) (4.4) (5.7) (12.3) (3.1) (88.5)
Maturities - - - (0.4) - - (0.4)
Rollovers at maturity:
Principal - - - 0.4 - - 0.4
Interest - - - - - - -
Operating loss - - - - - (4.5) (4.5)
Transfers to real estate owned (3.6) - - - 3.6 - -
Realized investment gain (loss) 4.0 (24.2) (7.2) (65.9) 2.8 16.9 (73.6)
Net transfers 17.8 (27.9) (22.2) 40.4 - (8.1) -
Other transactions, net (15.1) 20.2 ( 0.1) 20.8 (7.0) - 18.8
------ ------ ------ ------ ----- ------ --------
Balance at June 30, 1995 $615.0 $379.9 $140.4 $169.3 $68.8 $(60.1) $1,313.3(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 $572.5 million reserve and write-downs. Excludes $39.0 million of
real estate-related accrued interest.
As reflected in the preceding table, cash received by the Company from
sales/paydowns/distributions during the first six months of 1995 exceeded the
Company's cash fundings during the same period by $22.3 million.
Real estate concentrations
Real estate markets have been depressed in recent years 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
- 28 -
<PAGE> 29
worse than in many other areas of the country. Real estate markets in
northern California and Illinois show some stabilization and improvement.
At June 30, 1995, the Company's real estate portfolio also included $138.1
million of loans carried as equity investments in real estate (net of $184.7
million of cumulative write-downs, $34.8 million of foreign currency
translations and $34.3 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 $26.4 million of net
fundings, $1.5 million of foreign currency translation losses, and operating
income of $2.7 million during the first six months of 1995 and represented
approximately 10.3 percent of the Company's real estate portfolio at June 30,
1995. These investments, which began in the late 1980s, accounted for $13.3
million of the June 30, 1995 off-balance-sheet legal commitments, of which the
Company expects to fund approximately $7.7 million.
Undeveloped land, including the Spanish projects, represented approximately
24.8 percent of the Company's real estate portfolio at June 30, 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 June 30, 1995, the Company's loans to and investments in projects with the
Prime Group, Inc. or its affiliates, based in Chicago, represented
approximately $401.1 million, or 30.5 percent, of the Company's real estate
portfolio (including the previously mentioned Spanish projects, which are Prime
Group-related). This amount reflects $33.2 million in fundings during
first-half 1995. The Company also received cash from Prime Group-related
sales/paydowns/distributions totaling $22.7 million in the first six months of
1995. Prime Group-related commitments accounted for $220.3 million of the
off-balance-sheet legal commitments at June 30, 1995, of which the Company
expects to fund $40.0 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. 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. As MLP partners, the Company and Lumbermens have participated in
funding certain cash needs of the MLP projects. During the first six months of
1995, the Company provided $26.3 million of fundings to the MLP projects. The
Company also
- 29 -
<PAGE> 30
received cash from MLP-related sales/paydowns/distributions of $48.5 million in
the first half of 1995. At June 30, 1995, projects in the MLP accounted for
$85.9 million of the Company's off-balance-sheet legal commitments, of which
the Company expects to fund $75.0 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 June 30, 1995, approximately $410.6 million, or 31.3 percent,
represented loans to and investments in MLP-owned ventures. (See ITEM 5 below.)
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 half 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 six months 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 real estate reserve was
allocated as follows:
- 30 -
<PAGE> 31
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 (16.0) (55.9) 11.5 (28.6) (4.5) (84.5)
------ ------ ----- ------ ----- ------
Balance at 6/30/95 $ 9.1 $ 4.9 $41.3 $ 38.9 $50.4 $ 43.8
====== ====== ===== ====== ===== =====
</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 $478.3 million (life insurance segment,
$71.4 million; real estate segment, $406.8 million) at June 30, 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 six
months of 1995 primarily due to sales of real estate assets which carried
reserves at the time of sale, as well as write-offs of fully reserved loans.
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:
- 31 -
<PAGE> 32
Troubled real estate-related investments
(before reserves and write-downs,
except for real estate owned)
(in millions)
<TABLE>
<CAPTION>
June 30, 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) $ 59.4 $ 0.4 $ 59.8 $ 76.8 $ 0.1 $ 76.9
Past due loans (2) - 4.7 4.7 - - -
Nonaccrual loans (3) 361.2 291.6 652.8 380.9 352.2 733.1
Restructured loans (4)
(currently performing) 47.8 0.7 48.5 53.0 0.7 53.7
Real estate owned (5) 55.7 13.1 68.8 63.2 15.5 78.7
------ ------ ------ ------ ------ ------
Total (6)(7) $524.1 $310.5 $834.6 $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) Interest more than 90 days past due but not on nonaccrual status.
(3) The Company does not accrue interest on real estate-related investments
when it judges that the likelihood of collection of interest is doubtful.
(4) The Company defines a "restructuring" of debt as an event whereby the
Company, for economic or legal reasons related to the debtor's financial
difficulties, grants a concession to the debtor it would not otherwise
consider. Such concessions either stem from an agreement between the
Company and debtor or are imposed by law or a court. By this definition,
restructured loans do not include any loan that, upon the expiration of
its term, both repays its principal and pays interest then due from the
proceeds of a new loan that the Company, at its option, may extend (roll
over).
(5) 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 $103.4 million and $132.6 million at June
30, 1995 and December 31, 1994, respectively, on real estate owned at
those dates.
(6) Total reserves and cumulative write-downs on properties owned at June 30,
1995 (excluding fair value adjustments to real estate owned) were 56.2
percent of total troubled real estate-related investments and 26.3 percent
of the Company's total real estate portfolio before reserves and
write-downs.
(7) 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
- 32 -
<PAGE> 33
assurance that such efforts would result in continued improvements in the
performance of the Company's real estate portfolio.
Net investment income
The following table (respecting the Company's entire investment portfolio)
shows each segment's contribution to the Company's net investment income:
Net investment income before taxes
(dollars in millions)
<TABLE>
<CAPTION>
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Life insurance $263.8 $245.7 $131.2 $123.7
Real estate (1.1) (25.6) 2.4 (11.0)
Other and eliminations 5.4 2.5 2.9 .7
------ ------ ------ ------
Consolidated $268.1 $222.6 $136.5 $113.4
====== ====== ====== ======
Investment yields:
Life insurance 7.26% 6.40% 7.20% 6.61%
====== ====== ====== ======
Consolidated 6.90% 5.64% 6.97% 5.89%
====== ====== ====== ======
</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 $4.5 million
and $30.3 million for the six months ended June 30, 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:
Foregone investment income
(dollars in millions)
<TABLE>
<CAPTION>
Six months ended June 30 Three months ended June 30
------------------------ ---------------------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Real estate-related investments:
Life insurance segment $13.8 $24.8 $6.2 $12.2
Real estate segment 5.4 3.4 3.1 2.8
----- ----- ---- -----
Total $19.2 $28.2 $9.3 $15.0
===== ===== ==== =====
Basis points:
Life insurance segment 38 65 34 65
===== ===== ==== =====
Consolidated 51 72 49 78
===== ===== ==== =====
</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 June 30, 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.
- 33 -
<PAGE> 34
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 losses of $33.5 million for the first six months of 1995, compared
with $15.9 million of gains for the first six months of 1994. The life
insurance segment reported real estate-related losses of $47.9 million (see the
discussion captioned "Real Estate Asset Sales" in ITEM 5 of this Form 10-Q
below) and $14.5 million for the first six months ended June 30, 1995 and 1994,
respectively, offset by other realized investment gains of $8.0 million and
$15.9 million for the six months ended June 30, 1995 and 1994, respectively,
primarily from the sales of fixed maturity investments in 1995 and common
stocks in 1994. In the first six months of 1995, the asset management segment
reported net realized investment gains of $0.1 million.
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.
- 34 -
<PAGE> 35
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 six months of 1995.
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 June
30, 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 six months of
1995, the life insurance subsidiaries' capital resources were positively
impacted by the eliminations of these unrealized loss positions on their fixed
maturity investments.
- 35 -
<PAGE> 36
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, subject in any event to the terms of the
Merger Agreement. 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 by various regulatory
limitations. 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 June 30, 1995, the parent had $103.1 million in cash and
short-term investments. Although not legally committed to do so, Kemper has
used its cash resources in earlier periods to purchase real estate-related
investments from its life insurance subsidiaries to maintain and/or improve
their regulatory capital positions and earnings capabilities. In the first six
months of 1995, the Company purchased $5.0 million of certain real
estate-related investments from the life insurance subsidiaries. In 1994, the
Company purchased $222.8 million of such 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 liquidity with respect to the
Company's continuing operations are asset management fees, collections of life
insurance premium revenue, deposits for fixed annuities and interest-sensitive
life contracts, investment income, other operating revenue and cash provided
from maturing or sold investments. (See "INVESTMENTS" above.)
- 36 -
<PAGE> 37
In the life insurance segment, policyholder deposits increased to $204.9
million during the first six months of 1995 from $202.8 million for the first
six months of 1994. Policyholder withdrawals increased to $607.6 million
during the first six months of 1995 from $472.9 million for the first six
months of 1994, primarily due to rising interest rates which caused the life
insurance segment's renewal crediting rates to be lower than competitors' 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 following table sets forth the consolidated short-term debt and
capitalization of the continuing operations of the Company at the dates
indicated:
Capitalization
(in millions)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
-------- -----------
<S> <C> <C>
Short-term debt $ 50.0 $ 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 - 10.4
Convertible debentures of subsidiary 26.6 33.1
-------- --------
Total long-term debt 372.9 389.8
-------- --------
Total short-term and long-term debt $ 422.9 $ 444.0
======== ========
Stockholders' equity:
Preferred stock $ 360.3 $ 360.4
Common stock 332.7 331.2
Additional paid-in capital 376.9 366.9
Unrealized loss on foreign currency transactions (34.9) (35.9)
Unrealized appreciation (depreciation) on investments 38.3 (323.2)
Retained earnings 1,530.6 1,586.8
Treasury shares, at cost (1,028.7) (1,028.8)
-------- --------
Total stockholders' equity 1,575.2 1,257.4
-------- --------
Total capitalization (excludes total short-term debt) $1,948.1 $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 June 30, 1995 and December
31, 1994. Also included in short-term debt at June 30, 1995 were $30.0 million
of medium-term notes due in the fourth quarter of 1995. Kemper 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
- 37 -
<PAGE> 38
upon a change of control of the Company. At June 30, 1995, $120 million of the
aggregate amount of these lines were reserved for the sole purpose of providing
funding capability respecting certain tax exempt bond-related real estate
commitments which the Company does not expect to ultimately require funding.
Additionally, in conjunction with the issuance of letters of credit totaling
$212 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 $212 million and the aggregate cash and marketable
securities of the parent and its non-regulated subsidiaries will be reserved to
secure any future fundings under the Orange County letters of credit. As of
June 30, 1995, none 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'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 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. Subject to certain limitations under the Merger Agreement, 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 "Credit Watch with 'negative' implications" in 1994, to BB+
and BB-, respectively, and placed these ratings on "Credit Watch 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
- 38 -
<PAGE> 39
life insurance subsidiaries to under review "with direction uncertain" from
"for possible downgrade"; Duff & Phelps Credit Rating Co. advised 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."
On July 26, 1995, the Company's life insurance subsidiaries were notified by
S&P that they have been assigned a claims paying ability rating of Aq "Good."
Convertible debentures of subsidiary
Convertible debentures of subsidiary represent employee interests in
KFC. Maturities and employee terminations during the first six months of 1995
accounted for the $6.4 million reduction of convertible debentures from
year-end 1994. Approximately $3.6 million of additional debentures are
scheduled to mature later 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. All of the outstanding debentures will become
subject to mandatory redemption as a result of closing the planned divestiture
of the Company's securities brokerage operations and the planned sale of KFS
and its subsidiaries to the Zurich Insurance Company incident to the merger of
the Company.
Preferred stock
At June 30, 1995, the Company's outstanding preferred stock totaled $360.4
million. Dividends paid on the preferred stock during the first six months of
1995 totaled $11.8 million.
Common stock
During the first six months of 1995, the Company received $9.3 million by
issuing common stock through employee stock option plans and issued $2.2
million of common stock through the Kemper Corporation Dividend Reinvestment
and Stock Purchase Plan (the "DRP"). Pursuant to the Merger Agreement, stock
issuances under the DRP have been limited to certain employee accounts. During
1994 and the first six months of 1995, the quarterly dividend rate was $.23 per
common share. The third-quarter 1995 dividend of $.23 per share was declared
on July 18, 1995 and is payable August 31, 1995.
While the board of directors (subject to the provisions of the Merger
Agreement) intends to continue quarterly cash dividends of $.23 per share,
future declarations 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 $1.58 billion at June 30, 1995, compared with
$1.26 billion at December 31, 1994. The first-half 1995 increase reflected a
$361.4 million benefit in the unrealized 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 $28.4 million and the issuance of $11.5 million of common stock during
the first six months of 1995.
Book value per common share increased to $34.98 at June 30, 1995, compared with
$26.06 at December 31, 1994. The increase in 1995 from the 1994 level primarily
reflected the benefit in the unrealized position of the Company's investments
of $10.41 per share.
- 39 -
<PAGE> 40
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
During the second quarter of 1995, the previously reported investigation by
the Securities and Exchange Commission into the Company's real estate-related
accounting practices and related disclosures was resolved with an
administrative proceeding in which the Company consented to the issuance of an
order. See the section captioned "Legal Proceedings" in the Company's current
report on Form 8-K dated May 17, 1995, filed July 14, 1995 (the "May 17
Form 8-K") which is incorporated herein by reference.
ITEM 2. Changes in Securities
In connection with the Merger Agreement, on May 15, 1995, the Company executed
the Second Amendment (the "Rights Amendment") to the Rights Agreement, dated as
of July 18, 1990, as previously amended June 16, 1994 (the "Rights Agreement"),
to provide that the approval, execution or delivery of the Merger
Agreement and related transactions would not result in the occurrence of any
"Distribution Date", "Triggering Event" or "Stock Acquisition Date" respecting
the Company's "Preferred Stock Purchase Rights" (each as defined in the Rights
Agreement). ITEM 1 of the Company's Form 8-A/A filed June 2, 1995,
incorporated herein by reference, further describes the Company's Preferred
Stock Purchase Rights and the Rights Amendment.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 17, 1995, the Company held its 1995 annual meeting of stockholders at
which the stockholders re-elected management's four nominees to the board of
directors and ratified the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for 1995. See the section captioned "Annual
Meeting of Stockholders" in the May 17 Form 8-K which is incorporated herein
by reference.
ITEM 5. Other Information
On May 15, 1995, the Company, Zurich Insurance Company ("Zurich"), Insurance
Partners, L.P., Insurance Partners Offshore (Bermuda), L.P. (collectively,
"Insurance Partners," and together with Zurich, the "Investor Group") and ZIP
Acquisition Corp. entered into the Merger Agreement. A copy of the Merger
Agreement and copies of two related agreements were filed as exhibits nos. 2.1,
2.2 and 2.3, respectively, to the Company's Current Report on Form 8-K dated
May 15, 1995, filed May 22, 1995 (the "May 15 Form 8-K"), and are incorporated
herein by reference.
Real Estate Asset Sales
In compliance with the Merger Agreement, the Company has been using diligent
efforts to enter into agreements to sell, and to cause its subsidiaries to
enter into agreements to sell, various real estate assets, including certain
mortgage and other loans, real estate owned and equity interests in real
estate. Pursuant to Section 4.6(a) of the Merger Agreement, the Company has
the right to require that any binding sale
- 40 -
<PAGE> 41
agreement with a third party include a condition that the Company shall not be
obligated to consummate such real estate asset sale unless either the Merger
(as defined in the Merger Agreement) is consummated or the Preliminary Closing
Conditions (as defined in the Merger Agreement) are satisfied or waived.
Since May 15, 1995, however, with respect to certain selected real
estate-related assets, the Company has entered into sale agreements without
requiring the above-described condition, or the Company has otherwise
determined that it is willing to enter into such sales contracts. A major
consequence of the Company's unconditional intent to sell such assets under
current real estate market conditions is the Company's recording of additions
to its provisions for real estate-related losses (reserves and write-downs) to
mark the subject assets down to the estimated or actual sales contract prices
(less estimated sales expenses). Such prices in several instances differed
significantly from the Company's carrying values as determined pursuant to
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan." Primarily due to these differences, the Company's
additions to reserves and write-downs in the second quarter of 1995 resulted in
after-tax, real estate-related, realized investment losses of approximately
$47.9 million, all recorded in the life insurance segment.
Although the Company would not have intended to sell all of such real estate
assets at such prices in the absence of the Merger Agreement, the Company
determined that it would proceed with the sales with respect to selected assets
without the above-described condition in order to facilitate their sales and
the Merger. If the Company determines to enter into other real estate sales
contracts without including therein the above-described condition, then further
additions to the Company's provisions for real estate-related losses may be
necessary.
The Company has entered into certain real estate sales and other contracts that
include the above-described condition. These contracts include a Purchase and
Sale Agreement dated July 28, 1995, pursuant to which real estate assets would
be sold at a price substantially less than their June 30, 1995 carrying value
of approximately $504.2 million, and a letter agreement with Lumbermens dated
May 15, 1995 (the "Lumbermens Agreement"), pursuant to which, among other
things, the MLP would be substantially restructured. The Lumbermens Agreement
was filed as exhibit no. 2.3 to the May 15 Form 8-K and is incorporated herein
by reference.
Also in the Merger Agreement the Company agreed to various covenants relating
to conduct of business prior to the Merger. Such covenants include real
estate-related restrictions with respect to operating, funding or entering into
contracts with respect to real estate projects, including in particular the
Company's Spanish developments. See "Management's Discussion and Analysis -
INVESTMENTS - Real estate concentrations" above. Because the values of
development projects depend in part on the Company's plans with respect
thereto, and because the Investors Group's consent is necessary at the present
time for implementing such plans, there can be no assurance that the Company's
plans, and therefore estimated values, may not change substantially
- 41 -
<PAGE> 42
before either the Merger or the satisfaction or waiver of the Preliminary
Closing Conditions. In such event, the Company would record further additions
to its provisions for real estate-related losses.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number
2.1 Agreement and Plan of Merger dated May 15, 1995 between Zurich
Insurance Company, Insurance Partners, L.P., Insurance Partners
Offshore (Bermuda), L.P., ZIP Acquisition Corp. and Kemper
Corporation. Incorporated herein by reference to the identically
numbered exhibit to the May 15 Form 8-K.
2.2 Agreement and Plan of Merger dated May 15, 1995 between Zurich
Insurance Company, KFS Acquisition Corp., Kemper Financial
Services, Inc., Kemper Financial Companies, Inc. and Kemper
Corporation. Incorporated herein by reference to the identically
numbered exhibit to the May 15 Form 8-K.
2.3 Letter Agreement dated May 15, 1995 between Zurich Insurance
Company, Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P., Lumbermens Mutual Casualty Company, Kemper
Corporation and Kemper Financial Services, Inc. Incorporated
herein by reference to the identically numbered exhibit to the
May 15 Form 8-K.
4 Second Amendment to Rights Agreement dated as of May 15, 1995
between Kemper Corporation and Harris Trust and Savings Bank.
Incorporated herein by reference to the identically numbered
exhibit to the May 15 Form 8-K.
10.1 Amendment No. 2, dated as of July 7, 1995, to the Letter of Credit
Agreement, dated as of January 26, 1995, among Kemper Asset
Holdings, Inc., the banks party thereto and The Bank of New York as
administrative agent and issuing bank. Incorporated herein by
reference to the identically numbered exhibit to the May 17
Form 8-K.
10.2 Amended Restated Note Proceeds Transfer Agreement dated as of
July 7, 1995 among Kemper Asset Holdings, Inc., certain
Massachusetts business trusts and Kemper Corporation as guarantor.
Incorporated herein by reference to the identically numbered exhibit
to the May 17 Form 8-K.
22 Published report regarding matters submitted to a vote of security
holders. The section captioned "Annual Meeting of Stockholders" is
incorporated herein by reference to the May 17 Form 8-K.
27 Financial data schedule is filed electronically herewith.
- 42 -
<PAGE> 43
(b) Reports on Form 8-K.
During the three months ended June 30, 1995, the Company filed two
current reports on Form 8-K. Filed on April 12, 1995 and dated
April 3, 1995, one 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. During the
second quarter of 1995, the Company also filed the May 15 Form 8-K which
reported, under ITEM 5 thereof, the execution of the Merger
Agreement.
In the third quarter of 1995 through the date of the filing of this
Form 10-Q, the Company filed one current report on Form 8-K. The May 17
Form 8-K reported, under Item 5 thereof,(A) the results of the voting at
the Company's May 17, 1995 Annual Meeting of Stockholders, (B) certain
legal proceedings, (c) the Company's sale of 2,986,111 shares of common
stock of State Street Boston Corporation, (D) an update on the Company's
Orange County-related letter of credit arrangements, and (E) certain real
estate asset sales.
- 43 -
<PAGE> 44
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: August 14, 1995
/s/J. H. FITZPATRICK
------------------------------------
J. H. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Date: August 14, 1995
/s/J. R. SITAR
------------------------------------
J. R. Sitar
Senior Vice President and
Chief Accounting Officer
- 44 -
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 5,425,143
<DEBT-CARRYING-VALUE> 5,425,143
<DEBT-MARKET-VALUE> 5,425,143
<EQUITIES> 29,890
<MORTGAGE> 994,969
<REAL-ESTATE> 318,384
<TOTAL-INVEST> 7,637,796
<CASH> 299,125
<RECOVER-REINSURE> 657,685
<DEFERRED-ACQUISITION> 666,186
<TOTAL-ASSETS> 11,718,877
<POLICY-LOSSES> 7,526,915
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 396,250
<COMMON> 332,678
0
360,355
<OTHER-SE> 882,192
<TOTAL-LIABILITY-AND-EQUITY> 11,718,877
77,910
<INVESTMENT-INCOME> 268,118
<INVESTMENT-GAINS> (27,808)
<OTHER-INCOME> 50,716
<BENEFITS> 244,566
<UNDERWRITING-AMORTIZATION> 52,309
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 86,672
<INCOME-TAX> 46,237
<INCOME-CONTINUING> 40,435
<DISCONTINUED> (68,811)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,376)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
