<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1995.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from N/A to N/A.
Commission file number: 0-15253
KEMPER FINANCIAL COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3451068
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kemper Drive
Long Grove, Illinois 60049-0001
(Address of principal executive offices) (Zip Code)
708-320-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1995, 43,268,038 shares of Class A Common Stock (all held by an
affiliate, Kemper Corporation) and 5,831 shares of Class B Common Stock were
outstanding.
<PAGE> 2
KEMPER FINANCIAL COMPANIES, INC.
FIRST-QUARTER 1995
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheet -
March 31, 1995 and December 31, 1994............................3
Consolidated Statement of Operations -
Three months ended March 31, 1995 and 1994......................4
Consolidated Statement of Cash Flows -
Three months ended March 31, 1995 and 1994......................5
Notes to Consolidated Financial Statements.........................6
Management's Discussion and Analysis -
Results of Operations...........................................9
Investments ...................................................23
Liquidity and Capital Resources................................35
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................39
Signatures........................................................40
</TABLE>
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<PAGE> 3
KEMPER FINANCIAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
-------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1995, $3,650,118; 1994, $3,711,839) $3,533,070 $3,468,214
Short-term investments 154,105 204,164
Joint venture mortgage loans 439,804 407,540
Third-party mortgage loans 285,833 323,696
Other real estate-related investments 262,136 242,086
Policy loans 278,903 277,743
Other invested assets 152,405 55,363
---------- -----------
Total investments 5,106,256 4,978,806
Cash 149,042 199,917
Other accounts and notes receivable 477,126 321,494
Reinsurance recoverable 603,067 642,801
Deferred insurance acquisition costs 318,592 310,466
Deferred investment product sales costs 159,704 166,397
Fixed assets, at cost less accumulated depreciation 43,849 84,603
Other assets 11,146 63,393
Net assets of discontinued operations 132,183 249,033
Assets of separate accounts 1,578,325 1,507,984
---------- ----------
Total assets $8,579,290 $8,524,894
========== ==========
LIABILITIES
Future policy benefits $4,709,586 $4,843,690
Other accounts payable and liabilities 937,467 910,593
Notes payable 1,101,416 1,095,128
Convertible debentures 32,699 33,113
Liabilities of separate accounts 1,578,323 1,507,984
---------- ----------
Total liabilities 8,359,491 8,390,508
---------- ----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Class A common stock-$.10 par value
authorized 135,000,000 shares; outstanding 1995 and 1994, 43,268,038 shares 4,327 4,327
Additional paid-in capital 442,828 442,828
Unrealized loss on foreign currency translations (23,002) (22,512)
Unrealized loss on investments (104,047) (237,957)
Retained deficit (100,307) (52,300)
---------- ----------
Total stockholders' equity 219,799 134,386
---------- ----------
Total liabilities and stockholders' equity $8,579,290 $8,524,894
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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KEMPER FINANCIAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1995 1994
---- ----
<S> <C> <C>
REVENUE
Investment management and other fees $ 83,631 $ 94,587
Commissions 12,939 19,701
Investment income 92,279 75,241
Securities gain (loss), net 122 (726)
Realized investment gain 38,843 5,578
Other income 12,398 12,093
-------- --------
Total revenue 240,213 206,475
-------- --------
EXPENSES
Operating expenses 68,250 72,650
Benefits and interest credited to policyholders 61,424 62,607
Commissions 19,418 27,556
Deferral of mutual fund and insurance acquisition costs (16,553) (23,904)
Amortization of mutual fund and insurance acquisition costs 26,561 18,892
Interest expense 25,012 15,035
-------- --------
Total expenses 184,113 172,838
-------- --------
Earnings from continuing operations before
income tax 56,100 33,637
Income tax expense 34,857 12,190
-------- --------
Income from continuing operations 21,242 21,446
Income (loss) from discontinued operations, net of tax (3,215) 2,677
Loss on divestiture of discontinued operation, net of tax (66,034) -
-------- --------
Net income (loss) $(48,007) $ 24,123
======== ========
Income per share from continuing operations $ .49 $ .49
Loss per share from discontinued operations (1.60) .06
-------- --------
Net income (loss) per share $ (1.11) $ .55
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
KEMPER FINANCIAL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (48,007) $ 24,124
Reconcilement of net income (loss) to net cash provided:
Realized investment gain (10,004) (5,579)
Future policy benefits 59,831 61,033
Accounts payable and liabilities (26,874) 48,904
Accounts and notes receivable 155,632 (8,088)
Deferred insurance acquisition costs 3,315 (5,862)
Deferred investment product sales costs 6,692 850
Amortization of discount and premium on investments 878 680
Other (93,922) (28,416)
--------- ---------
Net cash provided from operating activities 47,541 87,646
--------- ---------
Cash flows from operating activities
Cash from investments sold or matured:
Fixed maturities held to maturity 29,447 14,957
Fixed maturities sold prior to maturity 55,238 287,794
Mortgage loans, policy loans and other invested assets 37,178 142,495
Cost of investments purchased:
Fixed maturities (23,662) (637,361)
Mortgage loans, policy loans and other invested assets (43,456) (68,360)
Net change in receivable/payable for securities sold/purchased (22,930) (71,812)
Short-term investments, net 50,077 232,678
Discontinued operations 2,750 (13,000)
Other (868) (3,366)
--------- ---------
Net cash provided from (used in) investing activities 83,774 (115,975)
--------- ---------
Cash flows from financing activities
Policyholder account balances:
Deposits 50,826 61,559
Withdrawals (243,729) (147,003)
Increase in notes payable, net 6,288 108,143
Other 4,425 5,312
--------- ---------
Net cash provided from (used in) financing activities (182,190) 28,011
--------- ---------
Net decrease in cash (50,875) (318)
Cash, beginning of period 199,917 169,715
--------- ---------
Cash, end of period $ 149,042 $ 169,397
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
KEMPER FINANCIAL COMPANIES, INC. 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 (loss) per share is based on the weighted average number of
common shares and common share equivalents outstanding during the
periods. The calculation of net income (loss) per share is as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31
-----------------
(in thousands, except per share data) 1995 1994
---- ----
<S> <C> <C>
Net income (loss) reported $(48,007) $24,123
Add back:
Interest and amortization expense on convertible
debentures, net of tax * 638
-------- -------
Total $(48,007) $24,762
======== =======
Average common shares outstanding 43,274 43,276
Average common share equivalents outstanding * 1,993
-------- -------
Average common and equivalent shares outstanding 43,274 45,269
======== =======
Net income per share $ (1.11) $ .55
======== =======
</TABLE>
* The effect of employee interests in the Company and the related costs are
anti-dilutive for the 1995 period; accordingly, the net loss and common
shares outstanding are not adjusted.
3. Certain accounts receivable are stated less an allowance for doubtful
accounts of $2.6 million at March 31, 1995.
4. Restricted cash at March 31, 1995 totaled $0.0 million.
5. Federal income tax paid to Kemper Corporation under the tax allocation
arrangement for the three months ended March 31, 1995 and 1994
amounted to $2.3 million and $5.9 million, respectively. Interest
payments for the same periods totaled $24.8 million and $14.6 million,
respectively.
6. Pursuant to Statement of Financial Accounting Standards ("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 Kemper Corporation's
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<PAGE> 7
consolidated federal income tax return or a change in circumstances
which causes the recognition of the benefits to become more likely
than not. During the first three months of 1995, the valuation
allowance was decreased by $44.1 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 give rise to significant
portions of the Company's net deferred federal tax liability from
continuing operations (included in "Other assets" in the consolidated
balance sheet) were as follows:
<TABLE>
<CAPTION>
March 31 December 31
(in thousands) 1995 1994
-------- -----------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related $115,168 $ 112,667
Unrealized losses on investments 49,091 93,211
Life policy reserves 48,567 51,519
Other investment-related 18,931 19,275
Accrued employee benefits 7,990 8,899
Accrued expenses 3,294 5,027
Other 10,248 9,625
-------- ---------
Total deferred federal tax assets 253,289 300,223
Valuation allowance (83,129) (127,249)
-------- ---------
Total deferred federal tax assets after valuation allowance 170,160 172,974
-------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 111,507 108,663
Deferred investment product sales costs 55,897 58,239
Other investment-related 26,983 4,346
Depreciation and amortization 20,190 20,055
Other 8,984 9,837
-------- ---------
Total deferred federal tax liabilities 223,561 201,140
-------- ---------
Net deferred federal tax liability $(53,401) $ (28,166)
======== ========
</TABLE>
The tax returns through the year 1986 have been examined by the
Internal Revenue Service ("IRS"). Changes proposed are not material
to the Company's financial position. The tax returns for the years
1987 through 1990 are currently under examination by the IRS.
7. During the three months ended March 31, 1995, Kemper Financial Services,
Inc. sold its 50 percent interest in Investors Fiduciary Trust Company
and announced a definitive agreement to sell the business operations
of its wholly owned subsidiary, Supervised Service Company, Inc. See
"RESULTS OF OPERATIONS - Asset Management" in this Form 10-Q.
8. On April 3, 1995, Kemper Corporation and Kemper Financial Companies, Inc.
announced their plan to divest the securities brokerage segment. As a
result, these operations have been classified as part of discontinued
operations at and for the periods ended March 31, 1995 and 1994. The
following table sets forth selected financial information regarding
the discontinued securities brokerage operations:
- 7 -
<PAGE> 8
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
(in millions) -------- --------
<S> <C> <C>
Revenue $ 125.8 $ 151.4
======== ========
Income (loss), net of tax $ (3.2) $ 2.7
Loss on divestiture, net of tax (66.0) -
-------- --------
Net income (loss) $ (69.2) $ 2.7
======== ========
March 31, 1995 December 31, 1994
-------------- -----------------
Total assets $1,639.3 $1,641.8
Total liabilities 1,507.1 1,392.8
-------- --------
Net assets $ 132.2 $ 249.0
======== ========
</TABLE>
9. On April 10, 1995, Kemper Corporation entered into an agreement in
principle to be acquired in a merger transaction. See "Management's
Discussion and Analysis" on the following page.
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<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
On April 3, Kemper Corporation ("Kemper") and Kemper Financial Companies, Inc.
("KFC") approved a plan to divest the securities brokerage segment. The plan
has resulted in the segment being reclassified as a component of discontinued
operations.
On April 10, Kemper entered into an agreement in principle whereby Kemper would
be acquired by an investor group comprised of Zurich Insurance Company,
Insurance partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. in a
merger transaction. On May 8, 1995, the parties agreed to extend until May 15,
1995 the May 8, 1995 termination date in the agreement in principle. Although
there can be no assurance that a definitive agreement will be reached as
expected in May, the transaction would be expected to close in the fourth
quarter of 1995. Including the estimated value to be received from the
divestiture of the securities brokerage segment, the total value to Kemper
common stockholders from these transactions should approximate $51.00 per
share. Both the securities brokerage divestiture plan and the agreement in
principle were further described in a Form 8-K filed by KFC on April 13, 1995,
which descriptions are incorporated herein by reference.
On a fully converted basis, KFC is approximately 97 percent owned by Kemper.
KFC and its subsidiaries are referred to herein as the "Company".
RESULTS OF OPERATIONS
The following table is a summary of the Company's results by category for the
first quarters of 1995 and 1994:
Summary of Income (Loss) by Category
(in millions)
<TABLE>
<CAPTION>
Three months ended March 31
-------------------------------------------------------------------------
1995 1994
--------------------------------- -----------------------------------
Net Net
realized Net realized Net
Operating investment income Operating investment income
earnings(1) results(2) (loss) earnings(1) results(2) (loss)
---------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Continuing operations:
Asset management $ 13.6 $ 10.9 $ 24.5 $21.0 $ - $21.0
Life insurance 15.8 (.9) 14.9 12.9 3.9 16.8
Real estate (3.3) - (3.3) (7.7) (.1) (7.8)
Other (14.9) - (14.9) (8.3) (.3) (8.6)
------ ------ ------ ----- ----- -----
Total 11.2 10.0 21.2 17.9 3.5 21.4
Discontinued operations (3.2) (66.0) (69.2) 2.7 - 2.7
------ ------ ------ ----- ----- -----
Total operations $ 8.0 $(56.0) $(48.0) $20.6 $ 3.5 $24.1
====== ====== ====== ===== ===== =====
</TABLE>
(1) Net income (loss) excluding realized investment results.
(2) See following table for realized investment results.
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<PAGE> 10
Realized investment gain (loss)
(in millions)
<TABLE>
<CAPTION>
Three months ended March 31
----------------------------
1995 1994
------ ------
<S> <C> <C>
Real estate-related losses $ - $(12.5)
Other gains and losses, net 38.8 18.2
------ ------
Realized investment gain from
continuing operations 38.8 5.6
Income tax expense 28.8 2.0
------ ------
Net realized investment gain
from continuing operations 10.0 3.5
Loss on divestiture of discontinued operations,
net of tax (66.0) -
------ ------
Total $(56.0) $ 3.5
====== ======
</TABLE>
Continuing operations
In the first quarter of 1995, operating earnings of the asset management
segment declined, largely due to reduced management fees, distribution and
redemption fees and commission income. This decline, however, was somewhat
offset by the earnings increase in the life insurance segment, primarily
reflecting a continuation of improved spreads (between investment income and
benefits credited to policyholders) and effective expense control. The real
estate segment's operating loss declined as a result of sales, refinancings and
restructurings.
The other operations and corporate category consists of the holding company
income and expenses of KFC. This category reported an operating loss of $14.9
million for the first quarter of 1995, compared with $8.3 million for the same
period of 1994. The loss increased in 1995 primarily due to an increase in
interest expense over 1994 on increased borrowings from Kemper.
Total operations
Including discontinued operations, the Company's net loss totaled $48.0 million
for the first quarter of 1995, compared with net income of $24.1 million for
the first quarter of 1994. Net loss per share for the first quarter of 1995
was $1.11, compared with net income per share of $.55 in the first quarter of
1994.
Discontinued operations consist of the Company's securities brokerage
subsidiaries, for which a plan for divestiture was announced in April 1995. In
the first quarter of 1995, the net loss from discontinued operations totaled
$69.2 million, primarily due to a $66.0 million loss related to the announced
divestiture. In the first quarter of 1994, the net gain from discontinued
operations totaled $2.7 million, reflecting securities brokerage operating
earnings.
Book value per share, on a fully converted basis, was $6.83 at March 31, 1995,
compared with $3.85 at year-end 1994, as the change in unrealized gain on
investments of $133.9 million, or $3.00 per share, in the first quarter of 1995
more than offset the net loss per share. Taking into account results for the
trailing 24 months ended March 31, 1995, the formula purchase price per share
was a negative $0.45 at March 31, 1995, compared with a negative $3.29 at
December 31, 1994.
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<PAGE> 11
Net income (loss) per share in the following segment discussions is on a
primary basis.
- 11 -
<PAGE> 12
Asset management
The asset management segment principally consists of Kemper Financial Services,
Inc. ("KFS") and its subsidiaries, including Kemper Service Company ("KSvC")
and INVEST Financial Corporation ("INVEST").
<TABLE>
<CAPTION>
Selected financial highlights
(in millions, except per share data) Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
STATEMENT OF INCOME
Investment management fees $ 50.0 $ 57.2
Commission income 14.1 21.9
Distribution and redemption fees 14.9 19.0
Transfer agent revenue 18.7 18.2
Realized investment gain 40.2 -
Investment and other income 5.4 4.0
------ ------
Total revenue 143.3 120.3
------ ------
Operating expenses 59.6 64.2
Commission expense 15.4 22.3
Deferral of mutual fund
commissions and sales expense (7.1) (12.1)
Amortization of deferred mutual
fund commissions and sales expense 13.8 12.9
------ ------
Total expenses 81.7 87.3
------ ------
Earnings before income tax 61.6 33.0
Income tax 37.1 12.0
------ ------
Net income $ 24.5 $ 21.0
====== ======
Realized investment gain, net of tax $ 10.9 $ -
====== ======
Operating earnings $ 13.6 $ 21.0
====== ======
Per share:
Operating earnings $ .31 $ .46
====== ======
Net income $ .57 $ .46
====== ======
</TABLE>
The asset management segment's net income for the first quarter of 1995
increased $3.5 million from the first quarter of 1994. This increase was
primarily due to a net realized investment gain of $11.6 million in the first
quarter of 1995 from the sale of Investors Fiduciary Trust Company ("IFTC").
On January 31, 1995, KFS sold its 50 percent interest in IFTC to State Street
Boston Corporation ("State Street") in exchange for 2,986,111 shares of State
Street stock with a market value of $98.2 million at the date of sale. IFTC
accounted for $0.6 million and $1.5 million of the segment's net income in the
first quarters of 1995 and 1994, respectively.
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<PAGE> 13
In March 1995, KSvC entered into a definitive agreement with DST Systems, Inc.
("DST") to sell 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 will be
significantly downsized. The net impact of the sale to DST and KSvC's
write-down was immaterial to the segment's financial results. The transaction
closed in April 1995. SSC accounted for a net operating loss of $0.1 million
in the first quarter of 1995 and net loss of $0.7 million in the first quarter
of 1994.
The segment's net income was reduced by $0.7 million in the first quarter of
1995 by the credit enhancing arrangements Kemper and the Company established in
the period and in the fourth quarter of 1994 pursuant to which the Company
bears the risk of loss associated with $198 million of Orange County,
California notes held by five non-government, taxable, money market mutual
funds managed by KFS. Orange County, which filed for bankruptcy protection in
December 1994, has made the monthly interest payments on the notes to date.
The notes mature July 10, 1995, although Orange County has indicated it may
seek an extension of the maturity date. In March 1995, the five Kemper money
market funds commenced litigation against the underwriter of the notes seeking
rescission of their purchases and other relief.
The asset management segment's operating earnings of $13.6 million in the first
quarter of 1995 were improved over operating earnings of $12.0 million in the
fourth quarter of 1994, but were lower than the segment's operating earnings of
$21.0 million in the first quarter of 1994.
Reduced management fees, distribution and redemption fees, and commission
income were the primary reasons for the segment's $7.4 million decrease in
operating earnings. These revenue reductions of $19.1 million were partially
offset by $11.5 million of reduced operating and commission expenses.
The decrease of $7.2 million in investment management fees from the first
quarter of 1994 to the first quarter of 1995 was primarily due to a $5.6
billion reduction in mutual fund average assets under management. Bond funds
accounted for $4.5 billion of this decrease, while stock funds and money market
funds were responsible for decreases of $0.9 billion and $0.2 billion,
respectively.
Commission income was $14.1 million in the first quarter of 1995, compared with
$21.9 million for the same period last year, due to lower sales of most
products. At INVEST, the segment's principal producer of commission revenue,
commissions on the sale of mutual fund products declined $5.8 million in the
first three months of 1995 from the same period in 1994. Also adversely
affecting revenue were lower commissions on annuity products of $1.9 million in
the first quarter of 1995, compared with the first quarter of 1994, due to
decreased sales.
Distribution and redemption fee revenue decreased $4.1 million in the first
quarter of 1995 compared with the first quarter of 1994. Distribution fees,
based on assets managed in KFS' spread load mutual
- 13 -
<PAGE> 14
funds, were approximately $3.5 million lower as spread load assets declined due
to market depreciation, redemptions of mutual fund shares and the conversion of
spread load assets to front-end load shares which are exempt from distribution
fees. Receipt of contingent deferred sales charges from redemption activity
also declined as redemptions of spread load assets were lower in the 1995
period.
Transfer agent revenue increased $0.5 million in the first quarter of 1995 from
the year-ago period primarily due to increased fees from SSC. KSvC accounted
for transfer agent revenue of $15.4 million and $16.6 million in the first
quarters of 1995 and 1994, respectively. SSC accounted for transfer agent
revenue of $3.3 million and $1.6 million in the first quarters of 1995 and
1994, respectively.
Investment and other income increased by $1.4 million from the first quarter of
1994, compared with the first quarter of 1995. This increase was primarily due
to additional interest and dividend income on investments of approximately $2.5
million, which was largely offset by reduced income from IFTC of $0.8 million
due to its previously mentioned sale in first-quarter 1995.
Operating expenses decreased by $4.6 million in the first quarter of 1995 from
the first quarter of 1994. Expense reductions of approximately $1.1 million
occurred in advertising, literature and sales promotion of mutual fund
products, and personnel expenses decreased approximately $3.5 million due to
staff reductions and reductions in production-related compensation due to lower
sales. In addition, remote processing fees were $1.5 million lower during the
1995 period due to the above-mentioned processing agreement with DST.
Professional services increased by approximately $1.3 million primarily due to
litigation-related expenses in the first quarter of 1995, and registration and
filing fees increased by approximately $0.6 million primarily due to the May
1994 implementation of a multiple class structure for most of the long-term
mutual funds managed by KFS.
Commission expense decreased to $15.4 million in the first three months of 1995
compared with $22.3 million in the first three months of 1994 due to lower
sales, with a related decrease in the deferral of such mutual fund commissions
and sales expense. Amortization of deferred mutual fund commission and sales
expense increased during the same period. The increase was due to increased
redemption activity and market value declines in 1994, and to a shortening of
the amortization period in 1995 for expenses related to sales of front-end load
mutual funds at net asset value.
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<PAGE> 15
<TABLE>
<CAPTION>
Assets under management
(in billions)
3/31/95 12/31/94 9/30/94 6/30/94 3/31/94
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mutual funds:
Bond $21.0 $20.6 $21.9 $22.9 $23.9
Stock 8.9 8.7 9.0 8.7 9.2
Money market 12.1 12.2 12.3 12.2 12.7
Investment advisory 4.5 5.0 5.6 4.8 4.9
Kemper Corporation
affiliates 9.1 9.3 9.6 9.6 9.7
The Kemper National
Insurance Companies 6.6 6.9 7.0 6.9 7.0
----- ----- ----- ----- -----
Total $62.2 $62.7 $65.4 $65.1 $67.4
===== ===== ===== ===== =====
</TABLE>
Bond and stock mutual fund assets under management increased $0.6 billion from
December 31, 1994 primarily due to market value appreciation. Bond and stock
funds had asset appreciation of $1.7 billion in the first quarter of 1995,
compared with asset depreciation of approximately $1.1 billion in the first
quarter of 1994. Redemptions of stock and bond funds totaled $1.4 billion in
the first three months of 1995, while sales totaled $0.5 billion. Comparable
three-month 1994 redemptions and sales totals were $1.5 billion and $0.9
billion, respectively. Bond funds made up 64 percent of the redemption volume
in the first quarter of 1995, down from 75 percent in the same period last
year. Sales of stock mutual funds represented 44 percent of total stock and
bond fund sales in the first three months of 1995, up from 42 percent in the
first three months of 1994.
Money market fund assets under management were virtually flat in the first
quarter of 1995, as net redemptions offset increases from reinvested dividends.
The decline in investment advisory assets was primarily due to the loss of
clients in the first quarter of 1995 because of uncertainties with respect to
the Company's ownership, portfolio management turnover, performance and foreign
repatriation issues. Organizational stability is an important aspect affecting
the relationship with institutional clients and the retention of their assets.
The Kemper National Retirement Plan, representing approximately $0.3 billion in
assets under management, was transferred from Kemper Corporation affiliates to
the investment advisory area in the first quarter of 1995. Prior periods in
the table above have been restated.
The first-quarter 1995 declines in assets managed for the Kemper National
Insurance Companies and Kemper Corporation affiliates were primarily due to
decreases in real estate-related assets. These decreases do not affect the
asset management segment's revenue or net income (see "Real estate" below).
On May 2, 1995, KFS announced the signing of a definitive agreement to acquire
substantially all of the assets of Dreman Value Management, L.P. ("DVM"). The
planned acquisition would broaden KFS' retail and institutional product
offerings to include the value style of equity
- 15 -
<PAGE> 16
investing, to complement KFS' current growth style. DVM currently has 37
employees, approximately $1.5 billion in institutional assets under management
and $60.0 million in assets managed for three value style equity mutual funds
and one fixed income fund. Consummation of the transaction is subject to,
among other conditions, regulatory approvals and approvals by the boards of
directors and shareholders of the mutual funds managed by DVM. The transaction
is expected to close in the third quarter of 1995.
- 16 -
<PAGE> 17
Life insurance
The life insurance segment consists of Kemper Investors Life Insurance Company
("KILICO") and its subsidiaries.
Selected financial highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
------- -------
<S> <C> <C>
STATEMENT OF INCOME
Investment income $90.2 $ 82.3
Other income 8.9 8.0
Realized investment gain (loss) (1.4) 6.0
----- ------
Total revenue 97.7 96.3
----- ------
Benefits to policyholders 61.4 62.6
Commissions, taxes, licenses and fees 5.8 7.7
Operating expenses 4.9 6.2
Deferral of policy acquisition costs (9.5) (11.9)
Amortization of deferred policy acquisition costs 12.8 6.0
----- ------
Total benefits and expenses 75.4 70.6
----- ------
Earnings before income tax 22.3 25.7
Income tax expense 7.4 8.9
----- ------
Net income $14.9 $ 16.8
===== ======
Realized investment gain (loss), net of tax $ (.9) $ 3.9
===== ======
Operating earnings $15.8 $ 12.9
===== ======
Per share:
Operating earnings $ .37 $ .29
===== ======
Net income $ .34 $ .37
===== ======
</TABLE>
The life insurance segment reported net income in the first quarter of 1995 of
$14.9 million, compared with net income of $16.8 million in the first quarter
of 1994. The decline in net income in the first quarter of 1995, compared with
the first quarter of 1994, was primarily due to realized investment losses in
1995, compared with realized investment gains in 1994.
The segment's after-tax realized investment results included real
estate-related losses of $0.0 million and $9.0 million in the first quarters of
1995 and 1994, respectively, and after-tax write-downs and restructurings of
certain below investment-grade securities totaling $0.0 thousand and $56
thousand in the first quarters of 1995 and 1994, respectively. The segment had
other net realized investment gains (losses) of $(0.9) million and $13.0
million during the first quarters of 1995 and 1994, respectively, primarily
from the sale of fixed maturities in 1995 and common stocks in 1994. (See
"INVESTMENTS" below.)
Operating earnings for the life insurance segment improved to $15.8 million in
the first quarter of 1995, compared with $12.9 million in the first quarter of
1994, primarily due to increased spread income and lower operating expenses.
These improvements were partially offset by an increase in the amortization of
deferred policy acquisition costs.
Continuing a strategy implemented during 1992, the life insurance segment
improved spread income by both increasing investment income and reducing
crediting rates on certain existing blocks of fixed annuity and interest-
- 17 -
<PAGE> 18
sensitive life insurance products through most of 1994. Operating earnings
improved as crediting rates declined at a faster rate than the segment's
investment income. Beginning in late 1994, as a result of rising interest
rates and other competitive market factors, the life insurance segment
increased crediting rates on such products. Although the life insurance segment
continues to manage spread revenue, future increases in crediting rates could
adversely impact future operating earnings but could also help to improve sales
and the overall persistency of such products.
Investment income was positively impacted in the first quarter of 1995,
compared with the first quarter of 1994, from the benefits of $82.5 million of
capital contributions in 1994, and from reductions in the level of
nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty
companies. These sales totaled $3.5 million in the first quarter of 1995 and
$154.0 million in 1994 and resulted in no realized gain or loss to the life
insurance segment. Investment income in 1995 also benefited from rising
investment yields on new money and from a repositioning of the life insurance
segment's fixed maturity investment portfolio in September 1994. The
repositioning of the life insurance segment's investment portfolio resulted in
the sale of $330.7 million of fixed maturity investments, which consisted of
lower yielding investment-grade corporate securities and collateralized
mortgage obligations. The $306.9 million of proceeds from the repositioning,
together with $275.0 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>
Three months ended March 31
---------------------------
1995 1994
-------- --------
<S> <C> <C>
Annuities:
General account $50.8 $ 61.1
Separate account 48.4 77.4
----- ------
Total annuities 99.2 138.5
Interest-sensitive life insurance - .5
----- ------
Total sales $99.2 $139.0
===== ======
</TABLE>
Sales of annuity products consist of deposits received. The decreases in
general account (fixed annuity) sales and interest-sensitive life insurance
sales reflected the Company's continuing strategy to direct its sales efforts
toward separate account (variable annuity) products, which increase
administrative fees earned and pose minimal investment risk for the Company as
policyholders invest in one or more of several underlying investment funds.
Despite this strategy, separate account sales declined in the first quarter of
1995, compared with the first quarter of 1994. This decline was due to
competitive conditions in certain distribution channels, in part reflecting the
life insurance subsidiaries' financial strength and performance ratings,
uncertainty concerning the Company's ownership and the underlying investment
fund performance.
Included in other income are administrative fees received from the segment's
separate account products of $5.1 million in the first quarter
- 18 -
<PAGE> 19
of 1995, compared with $5.2 million in the first quarter of 1994. Other income
also included surrender charge revenue of $2.7 million in the first quarter of
1995, compared with $1.6 million in the first quarter of 1994, as total general
account and separate account policyholder surrenders and withdrawals increased
to $310.4 million in the first quarter of 1995, compared with $163.2 million in
the first quarter of 1994. Policyholder withdrawals increased reflecting
rising interest rates which caused the segment's renewal crediting rates to be
lower than new money crediting rates and uncertainty concerning the Company's
ownership. The Company's crediting rate increases in late 1994 and in 1995
were designed to reduce the level of future withdrawals.
Operating expenses decreased by $1.3 million, or 21.4 percent, in the first
quarter of 1995, compared with the first quarter of 1994, as a result of
expense control and the sale of one of the segment's majority owned subsidiaries
in the fourth quarter of 1994.
Commissions, taxes, licenses and fees and the deferral of policy acquisition
costs were lower in the first quarter of 1995, compared with the first quarter
of 1994, primarily reflecting lower annuity sales. The amortization of policy
acquisition costs increased in the first quarter of 1995, compared with the
first quarter of 1994, primarily as a result of an increase in policyholder
withdrawals and increasing renewal crediting rates. Policyholder withdrawals
and increasing renewal crediting rates adversely impact the amortization of
deferred policy acquisition costs as both would be expected to decrease the
segment's projected future estimated gross profits.
Since year-end 1990, the segment has taken many steps to improve its earnings,
financial strength and competitive marketing position. 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 $646.0
million of certain real estate-related investments to the Company's real estate
subsidiaries through March 31, 1995, third-party sales and refinancings of
certain mortgage loans and other real estate loans, approximately $900 million
in annuity reinsurance transactions with an affiliated mutual life insurance
company, a parental guarantee of indebtedness, and capital contributions of
$342.5 million through March 31, 1995. The segment's statutory surplus ratio
improved to 10.9 percent at March 31, 1995 from 10.2 percent at December 31,
1994, 8.2 percent at December 31, 1993, 6.6 percent at December 31, 1992, 6.5
percent at December 31, 1991 and 4.0 percent at December 31, 1990.
- 19 -
<PAGE> 20
The following tables reflect selected balance sheet data of the life insurance
segment:
<TABLE>
<CAPTION>
Invested assets and cash
(in millions) March 31 December 31
1995 1994
------------- -------------
<S> <C> <C>
Cash and short-term investments $ 152 3.1% $ 227 4.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 2,622 53.4 2,569 52.2
NAIC(1) Class 2 769 15.7 760 15.5
Performing below investment-grade(2) 138 2.8 135 2.8
Equity securities 15 0.3 15 0.3
Joint venture mortgage loans(3)(4) 374 7.6 351 7.1
Third-party mortgage loans(3)(4) 289 5.9 319 6.5
Other real estate-related investments(4) 250 5.1 237 4.8
Other 303 6.1 304 6.2
------ ----- ------ -----
Total(3) $4,912 100.0% $4,917 100.0%
====== ===== ====== =====
</TABLE>
(1) National Association of Insurance Commissioners ("NAIC").
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
(2) Excludes $49.9 million, or 1.0 percent, at both March 31, 1995 and
December 31, 1994, 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 and its affiliates have
disposed of their related equity interest in that venture.
(4) See table captioned "Summary of gross and net real estate investments"
below.
(5) See "INVESTMENTS" below.
Other selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
-------- -----------
<S> <C> <C>
Deferred insurance acquisitions costs $ 319 $ 310
Assets of separate accounts 1,578 1,508
Total assets 7,590 7,537
Life policy benefits, net of ceded reinsurance 4,710 4,844
Unrealized loss on investments (102) (236)
Stockholder's equity 583 434
</TABLE>
- 20 -
<PAGE> 21
Real estate
This segment consists of the Company's real estate subsidiaries. These
subsidiaries include companies which act as general or limited partners in and
lenders to various joint ventures. Loans held by these subsidiaries are
subordinate to loans held by the Company's life insurance subsidiary.
Selected financial highlights
(in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
STATEMENT OF INCOME ------ ------
<S> <C> <C>
Joint venture operating losses $ (3.7) $(11.4)
Investment income and other 2.4 3.6
Realized investment loss - (.2)
------ ------
Total revenue (1.3) (8.0)
------ ------
Operating expenses 3.3 3.4
Interest expense .4 .6
------ ------
Total expenses 3.7 4.0
------ ------
Loss before income tax (5.0) (12.0)
Income tax benefit (1.7) (4.2)
------ ------
Net loss $ (3.3) $ (7.8)
====== ======
Realized investment loss,
net of tax benefit $ - $ (.1)
====== ======
Operating loss $ (3.3) $ (7.7)
====== ======
Per share:
Operating loss $ (.08) $ (.17)
====== ======
Net loss $ (.08) $ (.17)
====== ======
</TABLE>
The $7.7 million joint venture operating loss decline in the first quarter of
1995 from the level in the year-ago period was primarily due to sales and
restructurings that were completed with respect to certain joint ventures,
reducing the level of operating losses the Company was required to record. In
the first quarter of 1994, such sales included real estate investment trust
("REIT") transactions, and such restructurings included a transaction in which
the interest payment terms of certain loans held by the Company, Fidelity Life
Association and the Kemper National Insurance Companies were amended, effective
January 1, 1994, to make interest payments contingent on cash being available.
This restructuring transaction reduced joint venture operating losses in 1994
by $6.5 million and was recorded in the second half of 1994.
In addition, joint venture operating losses declined in the first quarter of
1995 as a result of $3.9 million in adjustments to certain ventures 1994
operating losses relating to interest on third-party debt previously expensed
in 1994 which was capitalized in the first quarter of 1995.
Investment and other income decreased $1.2 million in the first quarter of 1995
primarily due to a reduction in real estate management fee income as a result
of a lower level of real estate assets under management. This decrease was in
part due to the Kemper National Insurance Companies engaging a third-party real
estate asset manager effective January 1, 1995. In the first quarter of 1994,
this segment recorded $0.4 million of real estate management fee revenue from
managing real estate assets of
- 21 -
<PAGE> 22
the Kemper National Insurance Companies.
In the first quarter of 1994, sales and other transfers to third parties of
certain equity investments in real estate, which had negative carrying values,
generated realized gains in excess of the real estate segment's additions to
reserves and write-downs. In the first quarter of 1995, the segment generated
realized gains at a level equal to additions to reserves and write-downs. See
"INVESTMENTS-Provisions for real estate-related losses" below.
The following table reflects selected balance sheet data of the real estate
segment:
Selected balance sheet data
(in millions)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
-------- -----------
<S> <C> <C>
Cash and short-term investments $ 6 $ 9
Joint venture mortgage loans (1) 71 61
Third-party mortgage loans (1) (3) 5
Other real estate-related investments (1) 12 5
Other 5 4
---- ----
Total invested assets and cash (2) $ 91 $ 84
==== ====
Net deferred federal tax asset $ 57 $ 52
Total assets 231 234
Long-term debt 13 13
Stockholder's equity 177 181
</TABLE>
(1) See the table captioned "Summary of gross and net real estate investments"
below.
(2) See "INVESTMENTS" below.
- 22 -
<PAGE> 23
INVESTMENTS
The Company's invested assets predominately reflect investments of its life
insurance and real estate subsidiaries. The Company's principal investment
strategy is to maintain a balanced, well-diversified portfolio supporting
insurance contracts written by its life insurance subsidiary. The Company's
subsidiaries make shifts in their investment portfolios depending on, among
other factors, the interest rate environment, liability durations and changes
in market and business conditions.
<TABLE>
<CAPTION>
Invested assets and cash
(in millions) March 31 December 31
1995 1994
------------- -------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 303 5.9% $ 404 7.8%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 2,621 49.9 2,569 49.6
NAIC(1) Class 2 769 14.6 760 14.7
Performing below investment-grade(2) 143 2.7 139 2.7
Joint venture mortgage loans 440 8.4 407 7.9
Third-party mortgage loans 286 5.4 324 6.2
Other real estate-related investments(3) 262 5.0 242 4.7
Policy loans 279 5.3 278 5.4
Other 152 2.9 55 1.1
------ ----- ------ -----
Total $5,255 100.0% $5,179 100.0%
====== ===== ====== =====
</TABLE>
(1) National Association of Insurance Commissioners ("NAIC").
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
(2) Excludes $78.0 million, or 1.5 percent, and $80.0 million, or 1.5 percent,
at March 31, 1995 and December 31, 1994, respectively, of bonds carried in
other real estate-related investments.
(3) A joint venture mortgage loan is recharacterized in the current period as
a third-party mortgage loan when the Company and its affiliates have
disposed of their related equity interests 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 effect. The
aggregate unrealized depreciation on fixed maturities at March 31, 1995 was
$117.1 million, or $2.63 per share, compared with unrealized depreciation of
$243.6 million or $5.45 per share, at December 31, 1994. The Company has not
recorded a deferred tax benefit for the aggregate depreciation on investments.
Market values are sensitive to movements in interest rates and other economic
developments and can be expected to fluctuate, at times significantly, from
period to period.
At March 31, 1995, investment-grade fixed maturities and cash and short-term
investments accounted for 70.3 percent of the Company's invested assets and
cash, compared with 72.1 percent at December 31, 1994. Approximately 70.0
percent of the Company's NAIC Class 1 bonds were rated AAA or equivalent at
March 31, 1995.
Approximately 49.5 percent of the Company's investment-grade fixed maturities
at March 31, 1995, were mortgage-backed securities. These investments consist
primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the
- 23 -
<PAGE> 24
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation and other investment-grade securities collateralized by mortgage
pass-through securities issued by these entities. The Company has not made any
investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. The Company's mortgage-backed investments are
generally of AAA credit quality, and the markets for these investments have
been and are expected to remain liquid.
Future investment income for 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 predominately date since 1992, the
current interest rate environment is not expected to cause any material
extension of the average maturities of these investments. With the exception
of many of the life insurance segment's September 1994 purchases of such
investments, most of these investments were purchased by the Company at
discounts. Prepayment activity on such securities purchased at a discount is
not expected to result in any material losses to the Company because
prepayments would generally accelerate the reporting of the discounts as
investment income. Prepayment activity resulting from a decline in interest
rates on such securities purchased at a premium would accelerate the
amortization of premiums which would result in reductions of investment income
related to such securities. At March 31, 1995, the Company has unamortized
discounts and premiums of $19.5 million and $14.1 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 11 issuers at March 31, 1995, totaled less than 3
percent of cash and invested assets at March 31, 1995 and December 31, 1994.
Below investment-grade securities are generally unsecured and often
subordinated to other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers. Over the last four years,
the Company significantly reduced its exposure to below investment-grade
securities. This strategy takes into account the more conservative nature of
today's consumer and the resulting demand for higher-quality investments in the
life insurance and annuity marketplace.
Real estate-related investments
The $987.8 million real estate portfolio constituted 18.8 percent of the
Company's cash and invested assets at March 31, 1995, compared with $973.3
million, or 18.8 percent, at December 31, 1994. The real estate portfolio
consists of joint venture and third-party mortgage loans and other real
estate-related investments. The majority of the Company's real estate loans
are on properties or projects where the Company or its affiliates have taken
ownership positions in joint ventures with a small number of partners.
- 24 -
<PAGE> 25
Summary of gross and net real estate investments
(in millions)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------------------------- -----------------------------
Life Real Life Real
insurance estate insurance estate
Total segment segment Total segment segment
------ ---------- --------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Investments before reserves,
write-downs, foreign
currency translation
adjustments and net joint
venture operating losses:
Joint venture mortgage loans $ 463 $ 375 $ 88 $ 454 $ 353 $ 101
Third-party mortgage loans 326 320 6 358 353 5
Other real estate-related
investments 850 362 488 828 351 477
------ ------ ----- ------ ------ -----
Subtotal 1,639 1,057 582 1,640 1,057 583
Reserves (125) (40) (85) (134) (43) (91)
Write-downs (360) (94) (266) (362) (97) (265)
Foreign currency translation
adjustments (23) - (23) (23) - (23)
Cumulative net operating
losses of joint ventures
owned (143) (15) (128) (148) (15) (133)
------ ------ ----- ------ ------ -----
Net real estate investments $ 988 $ 908 $ 80 $ 973 $ 902 $ 71
====== ====== ===== ====== ====== =====
</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 $358.0 million at March 31, 1995. This
amount represented a net decrease of $24.7 million since year-end 1994, largely
due to fundings in the first quarter of 1995. As of March 31, 1995, the
Company expects to fund approximately $70.2 million of these 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 continued weakness in real estate markets and fairly restrictive
lending practices by other lenders in this environment, the Company expects
that all or most loans maturing in 1995 will be rolled over, restructured or
foreclosed.
Excluding the $78.3 million of real estate owned and a $49.1 million deficit in
the Company's net equity investments in joint ventures, the Company's real
estate loans (including real estate-related bonds) totaled $958.6 million at
March 31, 1995, after reserves and write-downs. Of this amount, $628.1 million
are on accrual status with a weighted average interest rate of 8.0 percent. Of
these accrual loans, 50.5 percent have terms requiring current periodic
payments of their full contractual interest, 33.8 percent require only partial
payments or payments to the extent of cash flow of the borrowers, and 15.7
percent defer all interest to maturity.
- 25 -
<PAGE> 26
The deficit in equity investments in real estate, at March 31, 1995, consisted
of $85.2 million of loans to Spanish projects (described below), $43.1
million of unsecured loans to joint ventures treated as equity investments, a
$154.9 million deficit in the Company's other equity investments in joint
ventures and $22.5 million of reserves. The deficit includes the Company's
share of periodic operating results. The Company, as an equity owner, has the
ability to fund, and historically has elected to fund, operating requirements
of certain joint ventures.
The Company's real estate owned included $3.7 million of foreclosures, $69.8
million of deeds in lieu of foreclosure and $4.8 million of certain purchased
properties at March 31, 1995. Real estate owned was net of $116.4 million of
write-downs at March 31, 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 $407.5 $323.7 $80.0 $149.2 $72.8 $(59.9) $973.3(1)
Additions (deductions):
Fundings 16.0 1.4 - 0.9 2.2 6.2 26.7
Interest added to principal 2.1 - - - - - 2.1
Sales/paydowns/distributions (13.4) (5.3) - (0.4) (2.7) (2.2) (24.0)
Maturities - - - (0.4) - - (0.4)
Rollovers at maturity:
Principal - - - 0.4 - - 0.4
Operating loss - - - - - (3.8) (3.8)
Transfers to real estate owned (3.6) - - - 3.6 - -
Realized investment gain (loss) 19.6 (9.5) (2.1) (24.4) (0.6) 17.0 -
Net transfers 18.3 (25.4) - 7.1 - - -
Other transactions, net (6.7) 0.9 0.1 22.6 3.0 (6.4) 13.5
------ ------ ----- ------ ----- ------ ------
Balance at March 31, 1995 $439.8 $285.8 $78.0 $155.0 $78.3 $(49.1) $987.8(4)
====== ====== ===== ====== ===== ====== ======
</TABLE>
(1) Net of $496.5 million reserve and write-downs. Excludes $39.0 million of
real estate-related accrued interest.
(2) The Company's real estate-related bonds, all of which are presently rated
below investment-grade, were issued to the Company by real estate finance
or development companies generally to provide financing for the Company's
joint ventures for such purposes as land acquisition,
construction/development, refinancing debt, interest and other operating
expenses.
(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 $484.3 million reserve and write-downs. Excludes $40.3 million of
real estate-related accrued interest.
As reflected in the preceding table, the Company's cash fundings in the first
quarter of 1995 exceeded the cash received by the Company from
sales/paydowns/distributions in the same period by $2.7 million.
Real estate concentrations
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
- 26 -
<PAGE> 27
Geographic distribution Distribution by property type
as of March 31, 1995 as of March 31, 1995
<TABLE>
<S> <C> <C> <C>
California 26.0% Land 23.6%
Illinois 24.6 Office 19.6
Texas 9.7 Retail 14.0
Spain 8.3 Industrial 13.6
Ohio 6.1 Hotel 11.2
Hawaii 5.0 Apartment 4.9
Colorado 3.1 Residential 4.2
Washington 2.9 Mixed use 3.5
Indiana 2.6 Other 5.4
Oregon 2.5 -----
Other(1) 9.2 Total 100.0%
----- =====
Total 100.0%
=====
</TABLE>
(1) No other single location exceeded 2.0 percent.
Real estate markets have been depressed in recent periods in areas where most
of the Company's real estate portfolio is located. Approximately one-half of
the Company's real estate holdings are in California and Illinois. California
real estate market conditions have continued to be worse than in many
other areas of the country. Northern California and Illinois currently reflect
some stabilization and improvement.
At March 31, 1995, the Company's real estate portfolio also included $85.2
million of loans carried as equity investments in real estate (net of $119.4
million of cumulative write-downs, $22.9 million of foreign currency
translations and $21.4 million of cumulative operating losses) related to land
for office and retail development and residential projects located in
Barcelona, Spain. Such equity investments in Spain totaled $79.2 million at
December 31, 1994, after accounting for net fundings by Company subsidiaries of
$27.0 million during 1994. The Spanish projects accounted for $5.3 million of
net fundings, $2.1 million of foreign currency translation losses and operating
income of $2.8 million during the first quarter of 1995 and represented
approximately 8.3 percent of the Company's real estate portfolio at March 31,
1995. These investments, which began in the late 1980s, accounted for $20.0
million of the March 31, 1995 off-balance-sheet legal commitments, of which the
Company expects to fund approximately $7.3 million.
Undeveloped land, including the Spanish projects, represented approximately
23.6 percent of the Company's real estate portfolio at March 31, 1995. To
maximize the value of certain land and other projects, additional development
is proceeding or is planned. Such development of existing projects may
continue to require substantial funding, either from the Company or third
parties. In the present real estate markets, third-party financing can require
credit enhancing arrangements (e.g., standby financing arrangements and loan
commitments) from the Company. The values of development projects are
dependent on a number of factors, including the Company's plans with respect
thereto, obtaining necessary permits and market demand for the permitted use of
- 27 -
<PAGE> 28
the property. There can be no assurance that such permits will be obtained as
planned or at all, nor that such expenditures will occur as scheduled, nor that
the Company's plans with respect to such projects may not change substantially.
At March 31, 1995, the Company's loans to and investments in projects with the
Prime Group, Inc. or its affiliates, based in Chicago, represented
approximately $271.7 million, or 27.5 percent, of the Company's real estate
portfolio (including the previously mentioned Spanish projects, which are Prime
Group-related). This amount reflected $5.3 million in fundings during the
first quarter of 1995 and $31.9 million during the same period of 1994. The
Company also received cash from Prime Group-related
sales/paydowns/distributions totaling $1.0 million in the first quarter of
1995. Prime Group-related commitments accounted for $205.4 million of the
off-balance-sheet commitments at March 31, 1995, of which the Company expects
to fund $27.3 million.
Effective January 1, 1993, Kemper and its subsidiaries, including the Company,
formed a master limited partnership ("MLP") with Lumbermens and its
subsidiaries. The assets of the MLP consist of the equity interests each
partner or its subsidiaries previously owned in projects with Peter B. Bedford
or his affiliates ("Bedford"), a California-based real estate developer. As
MLP partners, Kemper and Lumbermens have participated in funding certain cash
needs of the MLP projects. During the first quarter of 1995, the Company
provided $17.7 million of fundings to the MLP projects, compared with fundings
of $6.4 million in the same period of 1994. The Company also received cash
from MLP-related sales/paydowns/distributions and refinancings of $12.2 million
in the first quarter of 1995. At March 31, 1995, projects in the MLP accounted
for $37.1 million of the Company's off-balance-sheet legal commitments, of
which the Company expects to fund $29.8 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. Of the Company's real
estate portfolio at March 31, 1995, approximately $295.6 million, or 29.9
percent, represented loans to and investments in MLP-owned ventures.
Pursuant to agreements entered into in January 1994, Bedford transferred to the
MLP and a Kemper affiliate all of Bedford's ownership interest in ventures in
which Bedford, the Company, Kemper, Lumbermens and their respective
subsidiaries previously shared ownership interests. Bedford was released from
certain recourse liabilities owed to the MLP, the ventures, Lumbermens, the
Company, Kemper and certain of their respective subsidiaries. Because the
Company's reserve methodology does not take any credit for such recourse and
because the Kemper subsidiaries, including the Company, since 1993 had already
been recording 50 percent of the operating results of the related ventures,
this transaction, which simplified the management of the Company's portfolio,
did not have any material adverse impact on the Company's results of operations
or financial condition.
Provisions for real estate-related losses
The Company monitors its real estate portfolio and identifies changes in the
relevant real estate marketplaces, the economy and each borrower's
circumstances. The Company establishes its provisions for real estate-
- 28 -
<PAGE> 29
related losses (both reserves and write-downs) on the basis of its valuations
of the related real estate, estimated in light of current economic conditions
and calculated in conformity with Statement of Financial Accounting Standards
("SFAS") 114, "Accounting by Creditors for Impairment of a Loan". The Company
evaluates its real estate-related assets (including accrued interest) by
estimating the probabilities of loss utilizing various projections that include
several factors relating to the borrower, property, term of the loan, tenant
composition, rental rates, other supply and demand factors and overall economic
conditions. Because the Company's real estate review process includes
estimates, there can be no assurance that current estimates will prove accurate
over time due to changing economic conditions and other factors.
The deficit in (i.e., the negative carrying value of) the Company's equity
investments in real estate is considered in the Company's periodic evaluations
of, and serves to reduce the level of, its provisions for real estate-related
losses. In 1994 and the first quarter of 1995, because certain negative
carrying values were eliminated due to 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 the gains from
such sales and transfers.
The Company decreased the net amount of its real estate reserves and
write-downs in the first quarter of 1995 and throughout 1994, primarily
reflecting sales and transfers to third parties. While the real estate
subsidiaries as equity owners recognized gains on sales and other transactions
during 1995 and 1994, additions to reserves and increases in write-downs have
affected both the life insurance segment (where most of the Company's loans are
held) and the real estate segment. The Company's real estate reserve was
allocated as follows:
<TABLE>
<CAPTION>
Real estate reserve
(in millions)
Joint venture Other real
and third-party estate-related
mortgage 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 $17.1 $ 39.8 $25.5 $51.8 $42.6 $91.6
Change in reserve (0.4) (14.2) (2.5) 7.8 (2.9) (6.4)
----- ------ ----- ----- ----- -----
Balance at 3/31/95 $16.7 $ 25.6 $23.0 $59.6 $39.7 $85.2
===== ====== ===== ===== ===== =====
</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 totaling $360.0 million (life insurance segment, $94.0 million;
real estate segment, $266.0 million) at March 31, 1995, and $362.3 million
(life insurance segment, $96.6 million; real estate segment, $265.7 million) at
December 31, 1994. Reserves decreased in the first quarter of 1995 primarily
due to sales of real estate-related assets which carried reserves at the time
of sale.
Real estate outlook
The Company's real estate experience could continue to be adversely
- 29 -
<PAGE> 30
affected by overbuilding and weak economic conditions in certain real estate
markets and by tight lending practices by banks and other lenders. Stagnant or
worsening economic conditions in the areas in which the Company has made loans,
or additional adverse information becoming known to the Company through its
regular reviews or otherwise, could result in higher levels of problem loans or
potential problem loans, reductions in the value of real estate collateral and
adjustments to the real estate reserve. The Company's net income and
stockholders' equity could be materially reduced in future periods if real
estate market conditions remain stagnant or worsen in areas where the Company's
portfolio is located.
Current conditions in the real estate markets 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 a partner's ability to meet its financial commitments,
the Company considers the amount of all applicable debt and the value of all
properties within that portion of the Company's portfolio consisting of loans
to and investments in joint ventures with such partner. In 1993, the Company
began recognizing 100 percent of the operating results of certain joint
ventures. The additional operating results will be recorded primarily by the
Company's real estate subsidiaries, which are the equity holders in such
ventures.
The following table is a summary of the Company's troubled real estate-related
investments:
Troubled real estate-related investments
(before reserves and write-downs, except for real estate owned)
(in millions)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
----------------------------- ----------------------------
Life Real Life Real
insurance estate insurance estate
segment segment Total segment segment Total
--------- ------- ----- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Potential problem loans(1) $ 58.0 $ 0.3 $ 58.3 $ 57.9 $ 0.2 $ 58.1
Nonaccrual loans(2) 258.8 210.2 469.0 274.6 199.3 473.9
Restructured loans(3)
(currently performing) 45.2 0.7 45.9 50.5 0.8 51.3
Real estate owned(4) 64.2 14.1 78.3 57.3 15.4 72.7
------ ------ ------ ------ ------ ------
Total(5)(6) $426.2 $225.3 $651.5 $440.3 $215.7 $656.0
====== ====== ====== ====== ====== ======
</TABLE>
(1) These are real estate-related investments where the Company, based on
known information, has serious doubts about the borrowers' abilities to
comply with present repayment terms and which the Company anticipates may
go into nonaccrual, past due or restructured status.
(2) The Company does not accrue interest on real estate-related investments
when it judges that the likelihood of collection of interest is doubtful.
The 1995 decrease in nonaccrual loans primarily reflected sales and
foreclosures as well as write-offs of certain fully reserved loans.
(3) The Company defines a "restructuring" of debt as an event whereby the
Company, for economic or legal reasons related to the debtor's financial
difficulties, grants a concession to the debtor it would not otherwise
consider. Such concessions either stem from an agreement between the
Company and debtor or are imposed by law or a court. By this definition,
restructured loans do not include any loan that, upon the expiration of
its term, both repays its principal and pays interest then due from the
proceeds of a new loan that the Company, at its option, may extend (roll
over).
(4) Real estate owned is carried at fair value and includes foreclosures,
deeds in lieu of foreclosure and certain purchased property. Cumulative
write-downs to fair value were $116.4 million and $115.8 million at March
31, 1995 and December 31, 1994, respectively.
(5) Total reserves and cumulative write-downs were 56.5 percent of total
troubled real estate-related investments and 27.1 percent of the Company's
total real estate portfolio before reserves and
- 30 -
<PAGE> 31
write-downs at March 31, 1995.
(6) Equity investments in real estate are not defined as part of, and
therefore are not taken into account in calculating, total troubled real
estate because the negative carrying value of equity investments would
reduce the total. The Company's equity investments also involve real
estate risks. See "Real estate concentrations" above.
Based on the level of troubled real estate-related investments the Company has
experienced, the Company anticipates additional foreclosures and deeds in lieu
of foreclosure in 1995 and beyond. Any consolidation accounting resulting from
foreclosures would add the related ventures' assets and senior third-party
liabilities to the Company's balance sheet and eliminate the Company's loans to
such ventures.
Due to the adverse real estate environment affecting the Company's portfolio in
recent years, the Company has continued to devote significant attention to its
real estate portfolio, enhancing monitoring of the portfolio and formulating
specific action plans addressing nonperforming and potential problem credits.
Since 1991, the Company has intensified its attention to evaluating the asset
quality, cash flow and prospects associated with each of its projects. The
Company continues to analyze various potential transactions designed to reduce
both its joint venture operating losses and the amount of its real
estate-related investments. Specific types of transactions under consideration
(and previously utilized) include loan sales, property sales, mortgage
refinancings and real estate investment trusts. However, there can be no
assurance that such efforts will result in continued improvements in the
performance of the Company's real estate portfolio.
Investment income from invested assets
The following table shows each segment's contribution to the Company's net
investment income:
Net investment income before taxes
<TABLE>
<CAPTION>
(dollars in millions) Three months ended March 31
---------------------------
1995 1994
------ ------
<S> <C> <C>
Life insurance segment $ 90.2 $ 82.3
Real estate segment (3.0) (10.1)
Other and eliminations 1.6 1.4
------ ------
Total from invested assets 88.8 73.6
Asset management 3.5 1.6
------ ------
Consolidated $ 92.3 $ 75.2
====== ======
Investment yields:
Life insurance segment 6.90% 6.01%
====== ======
Consolidated 7.08% 5.55%
====== ======
</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 $3.8 million
and $11.5 million in the first quarters of 1995 and 1994, respectively. These
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.
- 31 -
<PAGE> 32
The Company's total foregone investment income before tax on nonaccrual real
estate-related investments was as follows:
Foregone investment income
(dollars in millions)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1995 1994
----- -----
<S> <C> <C>
Real estate-related investments:
Life insurance segment $ 5.2 $ 9.2
Real estate segment .5 (1.1)
----- -----
Total $ 5.7 $ 8.1
===== =====
Basis points:
Life insurance segment 40 70
===== =====
Consolidated 44 60
===== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of the Company's share of interest expense on these loans
excluded from the Company's share of joint venture operating results. Based on
the level of nonaccrual real estate-related investments at March 31, 1995, the
Company estimates foregone investment income in 1995 will decrease slightly
compared with the 1994 level. Any increase in 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.
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 Company's results from continuing operations are after-tax
realized investment losses of $10.0 million for first-quarter 1995, compared
with realized investment gains of $3.5 million for first-quarter 1994. Real
estate-related losses decreased during first-quarter 1995, compared with the
same period in 1994, primarily due to sales, refinancings and restructurings in
1994. Other after-tax realized losses of $0.9 million (primarily from the
sales of fixed maturities) and realized gains of $13.0 million (primarily from
the sale of equities) in the first quarters of 1995 and 1994, respectively,
were also taken in the life insurance segment. In the first quarter of 1995,
the asset management segment reported an after-tax realized investment gain of
- 32 -
<PAGE> 33
$10.9 million primarily due to the sale of IFTC. (See "RESULTS OF OPERATIONS -
Asset management" above.)
Unrealized gains and losses on fixed maturity investments are not reflected in
the Company's results of operations. These changes in unrealized value are
included as a separate component of stockholders' equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an
other-than-temporary decline in value, however, such security is written down
to net realizable value, and the write-down adversely impacts net income.
The Company regularly monitors its investment portfolio and as part of this
process reviews its assets for possible impairments of carrying value. Because
the review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance was established under SFAS 109 (and is evaluated as of
each reported period end) to reduce the deferred tax asset for investment
losses to the amount that, based upon available evidence, is in management's
judgment more likely than not to be realized.
Interest rates
Interest rate fluctuations affect KILICO. 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 1994 and once during the first quarter of
1995. Interest rates have subsequently declined through the remainder of 1995.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its 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
KILICO by charging decreasing surrender fees when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately one-half of
the Company's fixed annuity liabilities as of March 31, 1995, however, are no
longer subject to significant surrender fees.
- 33 -
<PAGE> 34
As interest rates rose during 1994, KILICO's capital resources were adversely
impacted by unrealized loss positions from its fixed maturity investments. As
interest rates declined in the first quarter of 1995, KILICO's capital
resources were positively impacted from reductions in its unrealized loss
positions on its fixed maturity investments.
- 34 -
<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
Holding company
As a parent holding company, KFC regularly reviews the strategic fit of all its
businesses and may consider the acquisition or disposition of its and its
subsidiaries' assets, and the Company may consider entering into joint venture,
reinsurance and other transactions. Since KFC 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).
KFC receives from its subsidiaries dividends and interest on loans.
Distributions to KFC from its subsidiaries are restricted. KFC has used these
resources and its line of credit from Kemper for dividends to stockholders,
corporate interest and other holding company expenses, additional investments
in subsidiaries and purchases of real estate-related assets from KILICO. In
1995, the Company purchased $5.0 million of certain real estate-related
investments from KILICO. In 1994, the Company purchased $154.0 million of
certain real estate-related investments from KILICO and contributed $82.5
million to KILICO's capital. The Company's purchases of such investments from
KILICO were consummated at the carrying values of such investments at the dates
of the purchases.
Consolidated
KFC and each of its subsidiaries carefully monitor cash and short-term money
market investments to maintain adequate balances for timely payment of
policyholder benefits, 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, borrowings from
Kemper, deposits for annuities and interest-sensitive life contracts,
investment income other operating revenue and cash provided from maturing or
sold investments. (See "INVESTMENTS" above.)
In the life insurance segment, policyholder deposits decreased to $50.8 million
for the first of quarter 1995 from $61.6 million for the first quarter of 1994.
Policyholder withdrawals increased to $243.7 million for the first of quarter
1995 from $147.0 million for the first quarter of 1994, primarily due to
increased competition, rising interest rates which caused the life insurance
segment's renewal crediting rates to be lower than new money crediting rates.
KILICO's late 1994 increases in crediting rates are designed to maintain or
increase policyholder deposits and reduce withdrawals.
The asset management segment sold its 50 percent interest in IFTC in January
1995 and the business operations of SSC in April 1995. (See
- 35 -
<PAGE> 36
"RESULTS OF OPERATIONS - Asset management" above).
Insurance company ratings
Ratings have become an increasingly important factor in establishing KILICO's
competitive position. Rating organizations continue to review the financial
performance and condition of all life insurers and their investment portfolios.
Kemper's senior debt ratings and KILICO's financial strength/performance
ratings are under review by the various rating organizations, reflecting the
fact that Kemper is pursuing alternatives to maximize its stockholder value.
Such alternatives may result in a change of control of the Company and/or
certain of its subsidiaries. Any reductions in Kemper's senior debt ratings
could adversely impact Kemper's financial flexibility by limiting Kemper'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. Such circumstances could accelerate or increase the real estate
subsidiaries purchases of real estate-related assets from KILICO to further
support its statutory capital position.
A credit rating is not a recommendation to buy, sell or hold securities. Each
rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. On
April 11, 1995, following the announcement of an agreement in principle to sell
the Company, Standard & Poor's Corporation ("S&P") announced that it revised
its BBB senior debt and BB+ preferred stock ratings of the Company, which S&P
had placed under "CreditWatch with 'negative' implications" in 1994, to BB+ and
BB-, respectively, and placed these ratings on "CreditWatch with 'developing'
implications"; Moody's Investors Service announced that it changed the
direction of its review of its Baa2 senior debt and Baa3 preferred stock
ratings of the Company and Baa1 insurance financial strength ratings of the
Company's life insurance subsidiaries to under review "with direction
uncertain" from "for possible downgrade"; Duff & Phelps Credit Rating Co.
advised 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."
Notes payable
The major portion of the Company's $1,101.4 million of notes payable at March
31, 1995 consisted of KFC's borrowings from Kemper of $1,097.2 million,
compared with $1,091.0 million of such borrowings at December 31, 1994, when
notes payable totaled $1,095.1 million. The increase was principally due to
the purchase of certain real estate-related investments from KILICO to improve
its financial strength and competitive position. These borrowings are drawn
against a line of credit totaling $1.2 billion at March 31, 1995, extended to
KFC by Kemper. The interest
- 36 -
<PAGE> 37
rate on the Kemper line of credit is equal to the corporate base rate announced
from time to time by The First National Bank of Chicago (the "Bank").
The other portion of notes payable consisted of short-term notes payable
totaling $4.2 million at March 31, 1995 and December 31, 1994.
Convertible debentures
Obligations under the convertible debentures of KFC decreased to $32.7 million
at March 31, 1995 from $33.1 million at December 31, 1994 primarily as a result
of debentures becoming subject to mandatory redemption due to terminations of
employment. "Other accounts payable and liabilities" on the Company's
consolidated balance sheet included KFC's obligation of $5.7 million to holders
of debentures whose employment with the Company terminated during 1994 and the
first quarter of 1995. Approximately $7.5 million of debentures are scheduled
to mature in the remainder of 1995. The Company anticipates that as each
additional series of debentures matures, its cash needs would increase, and
that internal and external sources of capital will be used to fund the
maturities.
Interest on the convertible debentures is payable quarterly at a fluctuating
rate per annum equal to (i) 1/8 percent over the corporate base rate announced
from time to time by the Bank for Series D-E, I-J, M-O and Q-T, (ii) the
corporate base rate for Series U-Y, and (iii) 0.7 percent over the Eurodollar
base rate announced from time to time by the Bank for Series AA-EE. This
interest totaled $0.8 million in the first quarter of 1995, compared with $1.0
million for the same period of 1994.
At its option, KFC may call the debentures in connection with a public offering
of its common stock or at any time on or after the fifth anniversary of the
date the debentures are issued. If employment with KFC and its subsidiaries of
an employee to whom debentures initially are issued terminates or an employee
holder becomes subject to certain insolvency or bankruptcy events, his or her
then-outstanding debentures become subject to mandatory redemption. All of the
debentures are subject to KFC's right to call. KFC is considering calling all
outstanding debentures for redemption by year-end 1995 or in early 1996.
Redeemable securities
KFC's redeemable securities consisted of convertible preferred stock and Class
B common stock and are included in the consolidated balance sheet line item
"Other accounts payable and liabilities." The convertible preferred stock was
redeemed December 1, 1993. The redemption price paid by KFC equaled the
approximately $3.1 million par value, which was the carrying value of the
securities on the Company's balance sheet.
At March 31, 1995, there were 5,831 shares of Class B common stock outstanding,
and no elections to sell shares to KFC were made in 1995. Shares of Class B
common stock which are outstanding and not subject to mandatory redemption
receive dividends equally with those declared and paid on KFC's Class A common
stock, all presently held by Kemper.
- 37 -
<PAGE> 38
Common stock dividends
No common stock dividends were declared in the first quarter of 1995 or in
1994. While KFC's board of directors does not presently intend to declare
quarterly cash dividends on the common stock in 1995, future declarations, if
any, and the amounts of such dividends will depend upon, among other factors,
the earnings of the Company, its financial condition, its capital requirements
and general business conditions.
Stockholders' equity
Stockholders' equity totaled $219.8 million at March 31, 1995, compared with
$134.4 million at December 31, 1994. The 1995 increase reflected a $133.9
million reduction in the unrealized loss position of the Company's investments,
primarily fixed maturities of KILICO, due to declining interest rates.
Stockholders' equity in 1995 also reflected a net loss of $48.0 million during
the first quarter.
- 38 -
<PAGE> 39
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS.
Exhibit Number
27 Financial data schedule is filed herewith.
99.1 Agreement in principle dated April 10, 1995 among Kemper
Corporation, Zurich Insurance Company, Insurance Partners,
L.P. and Insurance Partners Offshore (Bermuda), L.P. is
incorporated herein by reference to exhibit 10.1 to Kemper
Corporation's Form 8-K filed April 12, 1995.
99.2 Agreement dated May 8, 1995 extending termination date of
agreement in principle is incorporated herein by reference
to exhibit 99.2 to Kemper Corporation's Form 10-Q filed
May 12, 1995.
(b) REPORTS ON FORM 8-K.
During the three months ended March 31, 1995, the Company filed one
current report on Form 8-K. Dated January 26, 1995, this Form 8-K
reported, under Item 5 thereof, the sale of the Company's 50 percent
interest in Investors Fiduciary Trust Company and revisions to the
Orange County credit enhancements.
In the second quarter of 1995 through the date of the filing of this Form
10-Q, the Company filed one current report on Form 8-K. Dated April
3, 1995, this Form 8-K reported, under Item 5 thereof, the Company's
announcement of its plan to divest its securities brokerage operations
and an agreement in principle pursuant to which Kemper Corporation
would be acquired in a merger transaction.
- 39 -
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEMPER FINANCIAL COMPANIES, Inc.
(Registrant)
Date: May 12, 1995
/s/J. H. FITZPATRICK
--------------------
J. H. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Date: May 12, 1995
/s/J. R. SITAR
--------------------
J. R. Sitar
Senior Vice President and
Chief Accounting Officer
- 40 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 3,533,070
<DEBT-CARRYING-VALUE> 3,533,070
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0
0
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0
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</TABLE>
