ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
Incorporated in Delaware in 1967 as a nonoperating holding company with subsidiaries primarily in the property-casualty insurance business, Kemper Corporation ("Kemper") today is a financial services holding company with continuing operations in four business segments: asset management, life insurance, securities brokerage and real estate. Certain financial information by segment is set forth in ITEM 1(b) below. Selected consolidated financial data of Kemper and its subsidiaries (the "Company") for the last five fiscal years is provided in ITEM 6. The business operations of the Company's four segments are described in ITEM 1(c).
The Company has entered 1994 with approximately 6,335 employees, more than 10 percent fewer than its continuing operations had one year earlier, as all three of its core businesses -- asset management, life insurance and securities brokerage -- reduced their employee counts. In addition, there were more than 2,200 employees of subsidiaries the Company divested during 1993.
RECENT DIVESTITURES
During 1993, the Company exited the property-casualty insurance, reinsurance and risk management businesses. These businesses comprise the Company's discontinued operations as reported in this Form 10-K, including those portions of the Kemper Corporation 1993 Annual Report to Stockholders (the "Annual Report") expressly incorporated herein by reference.
The Company's discontinued property-casualty insurance operations consisted of two regional companies which write primarily personal automobile and homeowners insurance, Economy Fire & Casualty Company ("Economy") and Federal Kemper Insurance Company ("FKI"). In late 1992, the Company announced its intent to sell Economy and FKI. On August 31, 1993, the Company sold Economy to St. Paul Fire and Marine Insurance Company in a transaction valued at $420 million. On December 31, 1993, the Company sold FKI to Anthem P&C Holdings, Inc. (part of the Associated Group) for $95 million in cash. The Company recorded $92.2 million in after-tax gains from these sales.
On August 2, 1993, Kemper exchanged the stock of its reinsurance and risk management subsidiaries for 17.4 million shares of Kemper's common stock previously held by Lumbermens Mutual Casualty Company ("Lumbermens"), the Company's former parent. The exchange transaction was valued at $610.2 million. The Company recorded a $204.7 million tax-free gain on the exchange. This transaction reduced the number of common shares outstanding by more than one-third. It also reduced Lumbermens' ownership of Kemper common stock to approximately 4 percent. Lumbermens' ownership had been approximately 38 percent since April 1989 when Lumbermens' ownership declined from approximately 49 percent in another stock exchange transaction. In the 1989 transaction, Lumbermens acquired the Company's national, primarily commercial lines, property-casualty subsidiary, American Motorists Insurance Company ("AMICO").
Lumbermens, AMICO, a subsidiary of AMICO and American Manufacturers Mutual Insurance Company are known as the Kemper National Insurance Companies ("KNIC"). As a result of the 1989 AMICO transaction, the Company and KNIC established separate managements. In 1990, the two organizations established differing boards of directors and distinct employee groups. In 1992, Kemper and KNIC ceased to have a common chairman of the board. In connection with the 1993 exchange transaction, Kemper and Lumbermens agreed that each of the Company and KNIC generally may not, for a period of five years, compete with each other in their respective primary businesses. The two organizations are not considered affiliated for securities and insurance law purposes beginning in August 1993.
STRATEGIC INITIATIVES
In addition to divesting its discontinued operations in 1993, the Company in the early 1990s took the following actions to streamline management, control costs and improve profitability. In 1990, the Company consolidated its five regional securities brokerage subsidiaries into a single firm focused mainly on its retail sales operations. Although profitability of the Company's securities brokerage operations was hurt in 1992 and 1993 by supplemental additions to legal reserves (mainly for litigation predating the 1990 consolidation), these operations settled certain significant litigation matters within established reserves in late 1993 and early 1994.
Since late 1991, the Company intensified its management of real estate-related investments due to adverse markets and recorded real estate-related reserves, writedowns and operating losses totaling in excess of $1 billion. The Company has implemented strategies to reduce its real estate-related investments. Effective January 1, 1993, the Company contributed the equity real estate joint venture interests it held with its largest (now former) joint venture partner to a master limited
partnership with Lumbermens and its subsidiaries, which partnership in early 1994 acquired the former partner's equity interests. At December 31, 1993, the Company's real estate related-investments were 17.7 percent of its total invested assets and cash, down from a peak of 28.1 percent at September 30, 1991. The Company received net cash loan repayments of more than $275 million in December 1993 and $100 million in March 1994 in connection with the formations of a real estate mortgage investment conduit and a real estate investment trust, respectively.
In 1991, Kemper announced its parental guarantee of any future indebtedness of its life insurance subsidiaries. During 1992 and 1993, the Company purchased from its life insurance subsidiaries real estate-related assets for $639.4 million in cash. During 1991, 1992 and 1993, the Company also contributed $275.8 million to the capital of the life insurance subsidiaries. Focusing on their term life and variable annuity products, these subsidiaries also ceded approximately $900 million of fixed-rate annuity liabilities in reinsurance transaction effected in 1991 and 1992. In 1992 and 1993, the Company integrated the management and operations of its two life insurance subsidiaries. Further addressing the quality of the life companies' investment portfolios, the Company reduced holdings of below investment-grade securities (excluding real estate-related investments) from 22.0 percent of its total invested assets and cash at year-end 1990 to 2.7 percent at year-end 1993.
In 1992, the Company contributed its risk management operations to a partnership with Lumbermens. Lumbermens acquired these operations in their entirety in the 1993 exchange transaction.
Anticipating the $438 million reduction of Kemper's stockholders' equity from the acquisition of 17.4 million treasury shares in the 1993 exchange transaction, Kemper raised $260 million of equity capital through private placements of preferred stock in the second quarter of 1993. In addition, Kemper issued $29 million of common stock during 1993, as well as an aggregate of $42.6 million in 1992 and 1991. These amounts were in addition to $100 million of preferred stock sold to Lumbermens at year-end 1992.
In another private placement during 1993, Kemper raised $200 million of long-term debt, primarily to repay short-term debt incurred mainly to finance purchases of real estate-related assets from the Company's life insurance subsidiaries. In late 1993, in anticipation of the scheduled expiration of certain lines of credit, Kemper renegotiated with certain banks its committed but undrawn lines of credit totaling $325.0 million.
MANAGEMENT RESTRUCTURING
Under a reorganization of management structure commenced in late 1993, the Company is replacing reporting channels divided by subsidiary with reporting channels organized by function. Historically, each subsidiary generally acted as its own company with autonomous policies, procedures and priorities. The new management structure establishes five functional operating groups -- asset management, life insurance and annuities, sales and distribution, information and customer service, and real estate -- and four major staff groups -- finance, administration, legal and planning. The Company believes this configuration will encourage actions based on what would be best for the corporate whole, thereby making Kemper and its subsidiaries more competitive and more profitable.
The new unified management structure has not changed the Company's segmentation for reporting purposes, although management of components within each segment can differ and overlap. The asset management and life insurance and annuities operating groups produce, or "manufacture," the Company's financial and insurance products, which the sales and distribution operating group markets. The "manufacturing" groups roughly coincide with the respective asset management and life insurance segments, except that the sales and distribution (including marketing to distributors), information and customer service (including technology) and finance (including accounting) functions are managed under different executive vice presidents, and the other staff functions cross all segment and subsidiary lines of authority. The sales and distribution group includes most of the Company's securities brokerage segment, the life insurance segment's sales function and the asset management segment's sales company and its financial institutions distributor. The information and customer service group also includes the Company's securities clearing and mutual fund transfer agency functions. The real estate operating group manages the life insurance and real estate segments' real estate-related investments, utilizing the information and customer service operating function as well as the staff groups.
Certain of the above-described divestitures, initiatives and other actions and developments are further described by segment in the business descriptions in ITEM 1(c) below and in Management's Discussion and Analysis which is incorporated by reference into ITEM 7 below from the Annual Report.
RECENT DEVELOPMENTS
On March 14, 1994, General Electric Capital Corporation ("GECC") announced an unsolicited proposal to acquire the outstanding common stock of Kemper for $55 per share. On March 17, 1994, the board of directors of Kemper rejected the bid, stating that the Company is not for sale at this time. On March 20, 1994, GECC requested a list of Kemper's
stockholders. On March 24, 1994, GECC filed a preliminary proxy statement with the Securities and Exchange Commission in connection with GECC's solicitation of proxies to elect four of its nominees to the board of directors of Kemper. On March 28, 1994, Kemper filed its preliminary proxy statement, including therein Kemper's nominees for reelection to the board of directors, and mailed it to stockholders together with the Annual Report. See Part III of this Form 10-K.
In connection with GECC's announcement, on March 15, 1994, Moody's Investors Service placed "under review with direction uncertain" its Baa2 senior debt rating and Baa3 preferred stock rating of Kemper and its Baa1 financial strength ratings of both of the Company's life insurance subsidiaries; Standard & Poor's Corporation placed "on Credit Watch with 'developing' implications" its BBB senior debt rating and BB+ preferred stock rating of Kemper; and Duff & Phelps Credit Rating Co. placed "on Rating Watch -- Uncertain" Kemper's A- senior debt rating, Federal Kemper Life Assurance Company's AA- claims-paying ability rating and Kemper Investors Life Insurance Company's A+ claims-paying ability rating.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The following table shows the Company's net income (loss) by category over the last five years (in millions):
The amounts of revenue, earnings (loss) from continuing operations, before income tax and cumulative effect of changes in accounting principles, and assets attributable to each of the Company's segments, as well as the other operations and corporate category, for the three years ended December 31, 1993 are set forth in the note, incorporated herein by reference, captioned "Segment information" of the Notes to Consolidated Financial Statements in the Annual Report. Certain selected financial information of the discontinued operations category is included in the note, incorporated herein by reference, captioned "Discontinued operations" of the Notes to Consolidated Financial Statements in the Annual Report.
(C) NARRATIVE DESCRIPTION OF BUSINESS AND GENERAL DEVELOPMENT OF SUBSIDIARIES.
REGULATION
The Company's asset management and securities brokerage subsidiaries, as investment advisers and broker-dealers, are generally subject to regulation by the Securities and Exchange Commission (the "SEC"), the Commodity Futures Trading Commission (the "CFTC"), the National Association of Securities Dealers, Inc. and/or the exchanges of which the firms are members, as well as the securities commissions of the states in which the firms are licensed to do business. The New York Stock Exchange, Inc. (the "NYSE") is the primary regulatory body for its member firms, including the Company's securities brokerage operations. These regulators are charged with assuring that the firms maintain adequate net capital and comply with a variety of approved sales practices and operational standards, and the regulators oversee the licensing, registration and/or approval of the firms' employees, representatives and, in some circumstances, owners. The regulators make periodic examinations and review annual, quarterly, monthly and other reports on the financial condition and operations, including market practices, of each individual firm. In addition, variable annuities offered and variable universal life products planned to be offered by one of the Company's life insurance subsidiaries, and the related separate accounts, are subject to regulation by the SEC.
The Company's two life insurance subsidiaries are generally subject to regulation and supervision by the insurance departments of Illinois, their domiciliary state, and the other jurisdictions in which the companies are licensed to do business. These departments enforce laws and regulations designed to assure that life insurance companies maintain adequate capital and surplus, manage investments according to prescribed character, standards and limitations and comply with a variety of operational standards. The departments also make periodic examinations of individual companies and review annual and other reports on the financial condition of each company operating within their respective jurisdictions. Regulations, which often vary from state to state, cover most aspects of the insurance business,
including market practices, forms of policies and accounting and financial reporting procedures. In 1992, the National Association of Insurance Commissioners (the "NAIC") announced, and in 1993 Illinois adopted, risk-based capital requirements for life insurance companies. See "LIFE INSURANCE SEGMENT - -- Risk-Based Capital" below. These requirements are not expected to have any material regulatory impact on the Company's life insurance subsidiaries.
Insurance holding company laws enacted in many states grant additional powers to state insurance commissioners to regulate acquisitions of and by domestic insurance companies, to require periodic disclosure of relevant information and to regulate certain transactions with related companies. These laws also impose prior approval requirements for certain transactions with affiliates and generally regulate dividend distributions by an insurance subsidiary to its holding company parent.
Broker-dealer risk assessment rules enacted in 1991 also relate to affiliate transactions. These rules provide for periodic reporting of certain relationships among, and financial information regarding, the Company's asset management and securities brokerage subsidiaries and certain of their affiliates.
The Company believes it is in compliance in all material respects with all applicable regulations. For information on regulatory and other dividend restrictions, see ITEM 5(c).
ASSET MANAGEMENT SEGMENT
The asset management segment primarily consists of Kemper Financial Services, Inc. ("KFS") and its subsidiaries, including INVEST Financial Corporation ("INVEST"), Kemper Asset Management Company and Kemper Service Company ("KSvC").
Kemper Financial Services, Inc.
KFS, founded in 1948, is incorporated in Delaware and is a registered investment adviser and broker-dealer. KFS and its subsidiaries manage mutual fund, insurance company and other institutional investment portfolios. Headquartered in Chicago, KFS is one of the largest asset managers in the country. The Company's share of the industry's total mutual fund sales in the United States was 1.0 percent in 1993, 2.3 percent in 1992 and 2.1 percent in 1991, based on Investment Company Institute ("ICI") data. A February 7, 1994 U.S. News and World Report article ranked the Kemper mutual fund family among the top 10 of the 28 largest fund families in the United States based on the magazine's proprietary index. At December 31, 1993 and 1992, assets under management by KFS and its subsidiaries totaled $69.3 billion. Of this amount, bond, stock and money market mutual fund assets accounted for $47.4 billion at December 31, 1993 and $48.1 billion at December 31, 1992. See the table, incorporated herein by reference, on page 23 of the Annual Report setting forth assets under management by category at December 31, 1993, 1992 and 1991.
Bond mutual fund assets under management increased $1.1 billion in 1993 after increasing $3.1 billion in 1992. The 1993 increase was primarily due to investment appreciation. The 1992 increase was primarily due to sales as certain investors sought to maintain both a level of security and higher returns, relative to money funds, in a low interest rate environment.
The interest rate environment also contributed to strong sales of stock mutual funds in 1993 and 1992. Stock mutual fund assets increased $1.0 billion in 1993 after increasing $1.9 billion in 1992. Sales of stock mutual funds in 1993 were down from record 1992 sales in part due to both investment performance in an environment generally adverse to KFS' growth stock orientation and the increased number of new competitor funds. Sales of stock mutual funds accounted for approximately 35 percent of the segment's total open-end mutual fund sales in 1993, compared with 32 percent in 1992 and 18 percent in 1991. Stock mutual fund assets as a percentage of the Company's total stock and bond mutual fund assets under management totaled 27 percent at December 31, 1993, up from 17 percent three years earlier.
Including its international mutual funds sold in the United States (see "Foreign Activities" below), the segment's total bond and stock mutual fund asset market share at December 31, 1993 was 2.19 percent of the United States marketplace, compared with 2.77 percent and 3.05 percent at December 31, 1992 and 1991, respectively, based on ICI data. The decreases reflected increasing competition from securities brokerage and advisory firms, as well as financial institutions, all emphasizing sales of their proprietary products. The 1993 decrease also reflected the loss of the contract to manage approximately $1.0 billion of assets (primarily no-load stock mutual funds) previously managed by Selected Financial Services, Inc., a KFS subsidiary. A new third-party manager of these funds was appointed effective May 1, 1993.
In 1993 and 1992, money market assets under management declined by $2.8 billion and $2.5 billion, respectively, in a low interest rate environment. Some of this amount was reinvested in the segment's other mutual funds, as KFS and its subsidiaries strive to have mutual funds for virtually every economic environment. The 1993 decrease also reflected the year-end loss of a $1.5 billion account withdrawn by a nonaffiliated broker. Money fund assets fell $7.3 billion in 1991, primarily reflecting the loss of KFS' then-largest nonaffiliated account which began managing its own assets. Based on ICI
data, the Company's money fund assets under management represented a 2.18 percent share of the United States money fund marketplace at December 31, 1993, compared with 2.72 percent at year-end 1992 and 3.21 percent at year-end 1991. Of the $12.3 billion in money fund assets managed at December 31, 1993, $4.1 billion was in the Kemper Money Market Fund -- Money Market Portfolio, making it the 12th largest money fund in the country.
Chicago-based Kemper Asset Management Company and London-based Kemper Investment Management Company Limited manage most of the segment's institutional investment business. Investment advisory business accounted for $4.7 billion of assets under management at December 31, 1993 and $4.3 billion of assets under management at December 31, 1992. The Company is taking a number of steps to increase this business domestically and internationally. Sales efforts over the last few years have been targeted at both public sector retirement plans and investment management consultants.
For Kemper mutual fund customers in the qualified plan (401(k)) market, the Company also offers "KemFlex," a computerized account service system. KemFlex facilitates sales and servicing and is being successfully marketed mainly to employers with fewer than 1,000 employees.
The $69.3 billion in assets managed by KFS and its subsidiaries at December 31, 1993 included $9.8 billion of assets of Kemper affiliates and $7.4 billion of assets of KNIC and others. See the note, incorporated herein by reference, captioned "Related-party transactions" of the Notes to the Consolidated Financial Statements in the Annual Report.
INVEST Financial Corporation
INVEST was incorporated in Delaware in 1982. KFS owns approximately 95 percent of INVEST. Headquartered in Tampa, Florida, and licensed as a broker-dealer in 50 states, the District of Columbia and Puerto Rico, INVEST sells through registered representatives at more than 700 offices of banks, thrifts and credit unions nationwide. In each of the last three years, INVEST was the second largest distributor of KFS' mutual fund products and the largest single distributor of the annuity products of Kemper Investors Life Insurance Company ("KILICO"). In 1993, INVEST accounted for 19.0 percent of the revenue and $4.8 million of the net income of the asset management segment.
Kemper Service Company
KSvC was incorporated in Delaware in 1986. Located in Kansas City, Missouri, and at KFS' Chicago headquarters, KSvC and its subsidiary, Supervised Service Company, Inc., provide hardware, software and back-office administrative services, including transfer agent-related functions, for KFS' mutual fund business. In addition, KSvC provides certain computer service bureau functions, facilities and office and/or telecommunications services for the Company's asset management, securities brokerage, life insurance and real estate segments.
ASSET MANAGEMENT STRATEGIES
One of the segment's marketing strategies is to sell through diverse channels. Financial intermediaries market most of the segment's products, except for the Kemper Money Market Fund which KFS sells directly to the public. The major portion of the segment's 1993 and 1992 open-end mutual fund sales were through nonaffiliated regional and national securities brokerage firms, while financial institutions such as banks and thrifts, financial planners and other specialty distributors of financial products have accounted for increasing proportions of the segment's sales in recent years. INVEST and the Company's securities brokerage segment accounted for approximately 20.2 percent and 8.5 percent, respectively, of KFS' 1993 open-end mutual fund sales. See "SECURITIES BROKERAGE SEGMENT" below.
In recent years, certain of KFS' money market products have been marketed under distributors' private labels, with KFS specified as the manager. In early 1994, KFS announced plans to offer a new family of five funds, under the name Sterling Funds, through banks and other financial institutions. Like the use of INVEST, the Sterling Funds strategy is designed to take advantage of the increasing opportunities for sales of mutual funds through banks. The Company expects the primary market for the Sterling Funds family will be customers of small to medium size institutions which, unlike certain larger institutions, do not offer their own proprietary funds. In 1993, financial institutions accounted for approximately 27 percent of KFS' gross mutual fund sales.
Another key strategy is to offer an extensive array of mutual fund products. During 1993, KFS added a new spread load fund to its 12b-1 Kemper Investment Portfolios product and two stock and bond funds to its retirement fund series. As of March 1, 1994, KFS and its subsidiaries had open-end and closed-end mutual fund offerings representing 59 separate investment portfolios.
By mid-1994, KFS is planning to establish for many of its funds, subject to approval by the shareholders of such funds, a multiple class structure to provide fund shareholders with the choice of either (i) the traditional front-end load option, or (ii) a spread load (contingent deferred sales charge) fund charging annual 12b-1 distribution fees (certain of KFS'
funds already provide a variation of this option), or (iii) a level load plan charging annual service and 12b-1 fees with no advance commission on the sale. Under this structure, KFS would be offering a broad product line with 21 stock and bond funds, each in three configurations, in place of 33 stock and bond funds currently offered. In addition, KFS would offer for qualifying investors (mainly institutions making large investments) a no-load and no distribution fee option. The Company believes the multiple class structure will, among other consequences, encourage additional investment in the funds and help maintain the competitive position of such funds in relation to other funds which offer or may offer such choices.
The Company strives to have competitive products for its customers' needs in any economic environment. In the recent low interest rate environment, KFS has been emphasizing its stock and bond mutual fund products to respond to investors' search for higher yields and real returns.
FOREIGN ACTIVITIES
Although business from outside the United States is not presently material to the segment's operations, internationalization is an emerging development affecting asset management business strategies. KFS entered the global marketplace in 1980 with the launching of the Kemper International Fund. At December 31, 1993, the segment's international products accounted for $1.3 billion in assets under management, compared with $1.3 billion at December 31, 1992 and $1.5 billion at December 31, 1991.
KFS is targeting U.S. investors' interest in foreign markets as well as overseas interest in U.S.-based investments. In 1994, KFS plans to launch the International 2004 Fund, a principal guarantee target maturity equity fund, to offer an international option complementing KFS' five domestic equity funds which feature principal guarantees.
In 1989, KFS' direct parent company, Kemper Financial Companies, Inc. ("KFC"), entered into a cooperative arrangement with Banco Santander, one of Spain's largest banks in terms of assets. Pursuant to the arrangement, KFC and the bank have jointly developed financial services business activities in the U.S. and Europe. In 1990, KFS and Banco Santander introduced the Growth Fund of Spain, a closed-end fund which invests in equity securities of Spanish companies. The fund was underwritten by a syndicate which included the Company's securities brokerage operations.
OTHER ASSET MANAGEMENT FACILITIES.
KFS owns 50 percent of IFTC Holdings, Inc., which wholly owns Investors Fiduciary Trust Company, a state-chartered trust company. KFS wholly owns Kemper International Management, Inc., a registered investment adviser, and Kemper Sales Company, which assists representatives distributing KFS' financial products and KILICO's annuity products. KFS owns 15.6 percent of Dimensional Fund Advisors, Inc., an investment management company offering quantitative or passive investment products to the tax-exempt institutional investment community.
COMPETITION
The Company's asset management operations compete with other asset managers, other brokerage and advisory firms that manage assets or produce financial products such as mutual funds similar to those produced by KFS, and other financial institutions such as banks, thrifts and insurance companies that market other types of investment products.
The Company stresses the relative size and balance between its production and distribution capabilities and emphasizes diversity among products, services and income sources. The Company focuses on increasing assets under management, controlling operational costs, establishing alternative distribution outlets and matching products and services with economic conditions. The segment increased advertising efforts in each of the last three years to enhance its competitive position.
The asset management industry is becoming increasingly competitive, with banks and securities brokerage firms offering proprietary products and with the proliferation of products being offered in the marketplace through multiple distribution channels. The numbers of competitors and their products have increased significantly for several years, as barriers to entry, such as capital requirements, are low relative to other regulated businesses. Individuals are also assuming greater control over their savings and retirement dollars and are placing greater emphasis on asset allocation and controlling risk. The Company has adopted certain business strategies to address these competition issues, such as brand name marketing emphasizing long-term investment performance, distribution through diversified channels, and cost control and improved service through internalization of its shareholder accounting system (scheduled for completion in late 1994).
EMPLOYEES
At December 31, 1993, KFS employed approximately 690 persons, and KSvC employed 1,040. INVEST has approximately 340 employees but also utilizes the services of approximately 1,200 registered representatives at subscribing banks, thrifts and credit unions.
LIFE INSURANCE SEGMENT
The Company's life insurance business, produced by Federal Kemper Life Assurance Company ("FKLA") and Kemper Investors Life Insurance Company ("KILICO"), primarily consists of a variety of term and interest-sensitive (mostly universal) life insurance products and fixed-rate and variable annuity contracts. Each company has emphasized different products and distribution methods. Both companies are licensed in the District of Columbia and all states except New York. In early 1992, the Company named a common chairman and chief executive officer for both FKLA and KILICO who is charged with increasing their efficiencies. During 1992 and 1993, the Company integrated the two life companies' operations and their strategic directions.
Changing marketplace dynamics affected the life insurance industry over the last three years. To accommodate customers' increased preference for safety over higher yields, the Company reduced investment risk and strengthened the capital position of the life insurance segment. Investments are an integral part of the Company's life insurance business. See the discussion captioned "Investments," incorporated herein by reference, on pages 29 through 36 of the Annual Report.
For life insurance sales by product, see the table, incorporated herein by reference, on page 26 of the Annual Report. Life insurance sales include both new and renewal net premiums written for term and ordinary life products as well as deposits received on certain long-duration contracts such as annuity and interest-sensitive life products.
The segment's total life insurance in-force grew to $91.3 billion at December 31, 1993, compared with $84.2 billion and $73.4 billion at year-end 1992 and 1991, respectively. The segment issued new life insurance business in 1993 of $17.5 billion in face amount, down from $21.5 billion in 1992, due in part to competitive conditions. The decreases of $250.5 million in 1993 and $147.4 million in 1992 in general account (fixed-rate annuity) sales reflected the segment's continuing strategy to direct its sales efforts toward separate account (variable annuity) products, which pose minimal investment risk for the Company and increase administrative fees earned.
The following table shows selected relative contributions of FKLA and KILICO to the life insurance segment for the three years ended December 31, 1993 (in millions):
Federal Kemper Life Assurance Company
FKLA, founded in 1905, is incorporated under the insurance laws of Illinois. FKLA markets a selected range of life insurance and annuity products primarily through independent general agents and brokerage general agents.
In 1993, term and ordinary life products together accounted for 49.7 percent of FKLA's sales, and interest-sensitive life products accounted for 25.0 percent. The face value of its term, ordinary and interest-sensitive life insurance sold in 1993 was $17.5 billion, compared with $21.5 billion in 1992 and $26.5 billion in 1991. FKLA's total life insurance in-force at December 31, 1993 rose to $89.6 billion from $82.4 billion at year-end 1992 and from $71.6 billion at year-end 1991 after taking into account lapses (nonrenewals) of $8.8 billion in 1993, $9.1 billion in 1992 and $10.0 billion in 1991.
Although the persistency of interest-sensitive life products suffered in each of the last three years in large part due to a declining interest rate environment and asset quality issues, persistency on term and ordinary life products in recent years was helped in part by a tightening of agency requirements (further described below) and a shift over the past few years to marketing term products with level premiums and longer premium guarantees. The NAIC, however, has proposed a model regulation which would require higher reserves on policies with longer premium guarantees. If the regulation is adopted in its present form, it would not apply to policies issued prior to its effective date, such date would be no earlier than 1995, and in response, the Company and the industry would likely market products with shorter premium guarantees.
To help increase sales and profitability, FKLA continues to design new life insurance products. In 1993 and 1992, most of FKLA's new sales came from Kemper Certain-T and Kemper Super-T, two low-cost term life insurance products offering ten-and 15-year premium guarantees, and from Kemper CVT (Cash Value Term), a flexible premium, adjustable, universal life insurance policy offering term-like premiums guaranteed to remain level for the first 20 policy years. In 1993, FKLA lowered the minimum face amount (policy size) requirements on these products to make them more affordable for more customers as well as including an accelerated death benefit rider for policy holders.
For its mortality-based products, FKLA establishes a measure of protection through careful underwriting and reinsurance arrangements. The Company believes FKLA's normal underwriting and reserving practices take into account all known mortality risks, including the acquired immune deficiency syndrome (AIDS). Virtually all new applicants for FKLA's mortality-based policies are tested for the AIDS virus, and the majority of FKLA's in-force business has been tested.
In recent years, FKLA has tightened agency requirements, reducing the number of general agents while increasing sales through these larger, more consistent producers. In addition, FKLA increasingly utilizes other marketing organizations such as agents associated with financial institutions, securities brokerage firms and property-casualty insurance agencies. FKLA has also developed marketing arrangements with other life insurance companies that do not participate in the low-cost term marketplace. Such arrangements help FKLA increase sales by allowing other companies to market its products.
Most of the preceding distribution channels also handle FKLA's annuity products. Annuities accounted for 25.3 percent of FKLA's 1993 sales, 38.0 percent of its 1992 sales and 43.8 percent of its 1991 sales. Annuities also accounted for approximately $1.3 billion of FKLA's invested assets at both December 31, 1993 and 1992. FKLA has sold its annuity products primarily through its general agency force. FKLA has expanded its presence in the bank and thrift market with annuity products designed to compete with certificates of deposit. In recent years, FKLA also enhanced its annuity line to focus on sales of products to school districts and municipalities. The Company is planning to enlarge its life insurance companies' distribution to this and other marketplaces by utilizing relationships established by its securities brokerage operations.
In addition to developing innovative, low-cost products, FKLA utilizes advanced computer systems to provide quality service while keeping expenses at a minimum. For many years, FKLA has utilized a "team underwriting" approach. By organizing its underwriters and related personnel into small work groups that make extensive use of systems technology, FKLA has developed what it believes is a significant cost advantage in the life insurance marketplace. FKLA also captures policy information electronically at its source (the producer) and makes it available to various parties in the process of underwriting and handling the life insurance business.
Kemper Investors Life Insurance Company
KILICO, founded in 1947, is incorporated under the insurance laws of Illinois. KILICO's lines of insurance and annuity products complement the offerings of the Company's asset management segment. KILICO offers both individual fixed-rate (general account) and individual and group variable (separate account) annuity contracts, as well as individual universal life and variable life insurance products, through various channels. Financial institutions, nonaffiliated and affiliated securities brokerage firms, insurance agents and financial planners are important distribution channels for KILICO products.
Annuities accounted for approximately 99 percent of KILICO's sales in recent years. KILICO's annuities generally have disappearing surrender charges that are a specified percentage of policy values and decline as the policy ages. General account annuity and interest-sensitive life policies are guaranteed to accumulate at specified interest rates but allow for periodic crediting rate changes. KILICO's separate account assets totaled $1.50 billion at December 31, 1993 and $1.14 billion at December 31, 1992.
In the recent low interest rate environment, and to reduce its exposure to investment risk, KILICO is placing more emphasis on marketing its separate account products. Unlike fixed-rate annuity business where KILICO manages spread revenue, variable annuities pose minimal investment risk for KILICO and increase administrative fee revenue. KILICO's sales of its separate account annuities were $263.7 million in 1993, after having risen 142.2 percent to $275.9 million in 1992 from $113.9 million in 1991. In 1992, KILICO introduced Kemper PASSPORT, a variable and market value adjusted annuity featuring a choice of investment portfolios, an increasing estate benefit, tax-free transfers and a selection of guaranteed rates for a variety of terms. The January 1994 Money magazine ranked a KILICO variable annuity, Kemper Advantage III, ninth of the top 20 variable annuities based on, among other factors, returns and fees. Separate account annuities represented 51.7 percent of KILICO's total sales in 1993, compared with 38.5 percent in 1992 and 16.8 percent in 1991.
The drop in interest rates and certain strategic reductions in crediting rates lowered general account annuity sales for KILICO in the last three years. KILICO's sales also were hurt by fixed-rate annuity buyers' focus on investment risk. General account annuities represented $244.2 million, or 47.9 percent, of KILICO's total sales in 1993, compared with $435.6 million, or 60.8 percent, in 1992, and $557.2 million, or 82.0 percent, in 1991.
KILICO's sales of interest-sensitive life products decreased again in 1993, to $2.0 million, from $5.0 million in 1992 and $8.0 million in 1991, for the same reasons its sales of general account annuities declined. Overall, sales of interest-sensitive life products represented less than 1 percent of KILICO's total sales in 1993, 1992 and 1991.
KILICO maintains a broad product selection designed to appeal to annuity and life insurance policyholders in diverse economic environments. KILICO structures its products to offer guaranteed returns, investment opportunities or a combination of both to help policyholders meet multiple insurance and financial objectives.
Cost control is another key business strategy. KILICO is using enhanced software and benefiting from the integration of its operations with those of FKLA. Under the Company's management restructuring announced in late 1993, KILICO and FKLA are further coordinating their distribution functions with the capabilities of the securities brokerage and asset management segments.
NAIC RATIOS
The NAIC annually calculates certain statutory financial ratios for most insurance companies in the United States. These calculations are known as the Insurance Regulatory Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The primary purpose of the ratios is to provide an "early warning" of any negative developments. The NAIC reports the ratios to state regulators who may then contact the companies if three or more ratios fall outside the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1993, FKLA had one ratio and KILICO had five ratios outside the usual ranges. FKLA's adequacy of investment income ratio was adversely affected by lower investment income. KILICO's net change in capital and surplus as well as its net gain to total income ratios were adversely affected by realized investment losses. See the discussion captioned "Investments," incorporated herein by reference, on pages 29 through 36 of the Annual Report. KILICO's change in premium, change in product mix and change in reserving ratios reflected its strategic reductions of general account business, including the below-described fixed-annuity reinsurance transactions. Other than certain states requesting quarterly financial reporting and/or explanations of the underlying causes for certain ratios, no state regulators have taken any action due to FKLA's or KILICO's IRIS ratios for 1993 or earlier years.
RISK-BASED CAPITAL
In the early 1990's, reflecting a recessionary environment and the insolvencies of a few large life insurance companies, both state and federal legislators have increased scrutiny of the existing insurance regulatory framework. While various initiatives, such as a new model investment law, are being considered for future implementation by the NAIC, it is not presently possible to predict the future impact of potential regulatory changes on the Company.
Under asset adequacy and risk-based capital rules adopted in 1993 in Illinois (the domiciliary state of the Company's life insurance subsidiaries), state regulators may mandate remedial action for inadequately reserved or inadequately capitalized companies. The new asset adequacy rules are designed to assure that reserves and assets are adequate to cover liabilities under a variety of economic scenarios. The focus of the new capital rules is a risk-based formula that applies prescribed factors to various risk elements in an insurer's business and investments to develop a minimum capital requirement designed to be proportional to the amount of risk assumed by the insurer. FKLA and KILICO have reserves and capital levels exceeding any which would mandate action under the new rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of the Company's reserves for life policy benefits by product type at December 31, 1993, 1992 and 1991 (in millions):
Ceded life policy benefits shown above reflect coinsurance (indemnity reinsurance) transactions in which KILICO reinsured liabilities of approximately $500 million in 1992 and $400 million in 1991 with Fidelity Life Association ("FLA"), an affiliated mutual insurance company. FLA shares management, operations and employees with FKLA and KILICO, but produces separate life insurance and annuity products, including whole life policies not produced by FKLA or KILICO as well as other policies similar to certain FKLA policies. At December 31, 1993, KILICO's reinsurance recoverable from FLA related to these coinsurance transactions totaled approximately $746 million. KILICO remains
primarily liable to its policyholders for this amount. Utilizing FKLA's employees, KILICO is the servicing company for this coinsured business and is reimbursed by FLA for the related servicing expenses. Excluding this coinsurance, KILICO, because it is primarily an annuity company, reinsures only a very limited portion of its business. KILICO has immaterial exposure to mortality losses.
FKLA's maximum retention on any single mortality policy risk is $300 thousand. FLA is one of FKLA's primary reinsurers of mortality coverages written by FKLA prior to 1992. In 1992, FKLA began to reinsure risks over FKLA's retention limits with nonaffiliated insurers. At December 31, 1993, FKLA's reinsurance recoverable from FLA for its mortality reinsurance totaled approximately $48 million. FKLA remains primarily liable to its policyholders for the face amount of its reinsured mortality coverages. See the note, incorporated herein by reference, captioned "Reinsurance" of the Notes to the Consolidated Financial Statements in the Annual Report.
COMPETITION
The life insurance subsidiaries are in a highly competitive business and compete with a large number of other stock and mutual life insurance companies, many of which are larger financially, although none is truly dominant in the industry. FKLA primarily competes in the low-cost mortality products marketplace, although annuities have constituted a sizable portion of FKLA's sales and profits in recent years. KILICO, with its emphasis on annuity products, competes for savings dollars in many of the same marketplaces as KFS, which has complementary products. See "ASSET MANAGEMENT SEGMENT--Competition" above in this ITEM 1(c). Like KFS and the Company's securities brokerage operations, KILICO is wholly owned by KFC, which in turn was approximately 96 percent owned by Kemper on a fully converted basis at December 31, 1993.
The life insurance companies' principal methods of competition continue to be innovative products, often designed for selected distribution channels and economic conditions, as well as appropriate product pricing, careful underwriting, expense control and the quality of services provided to policyholders and agents. Certain of their financial strength ratings and claims-paying/performance ratings, however, were lower in 1993 than in earlier years and impacted sales efforts in certain markets.
To address its competition, the segment has adopted certain business strategies. These include additional reductions of real estate-related assets; continued focus on existing and new term and variable annuity products; distribution through diversified channels, with new emphasis on financial institutions and the Company's securities brokerage operations' retail base; and ongoing efforts to continue as a low-cost provider of insurance products and high-quality services to agents and policyholders through the use of technology.
RANKINGS AND RATINGS
FKLA ranked 13th in ordinary life insurance issued and 19th in ordinary life insurance in-force at year-end 1992 of the 135 U.S. life insurance companies reported in the June 21, 1993 Best's Insurance Management Reports--Life/Health. According to Best's Agents Guide to Life Insurance Companies, 1993, as of December 31, 1992, FKLA and KILICO, respectively, were ranked 104th and 54th of 1,370 life insurers by admitted assets; 35th and 442nd of 1,239 by insurance in-force; and 156th and 220th of 1,299 by net premiums written.
A.M. Best Company, an industry analyst, has assigned an A- ("Excellent") rating to both FKLA and KILICO (lowered from A during 1993); Moody's Investors Service has assigned an insurance financial strength rating of Baa1 ("adequate") to both companies (unchanged in 1993); and Duff & Phelps Credit Rating Co. has assigned claims-paying ability ratings of AA- ("very high") to FKLA and A+ ("high") to KILICO (lowered from AAA and AA, respectively, during 1993). See "Recent Developments" in ITEM 1(a) of this Form 10-K.
EMPLOYEES
At December 31, 1993, FKLA had approximately 390 employees, which it shares with KILICO and FLA.
SECURITIES BROKERAGE SEGMENT
The Company's securities brokerage business chiefly consists of retail brokerage (sales, consulting and research) and also includes institutional brokerage, investment banking and securities underwriting services. Services are provided to individuals and institutions primarily by Kemper Securities, Inc. ("KSI"), which commenced operations in the third quarter of 1990 as Kemper Securities Group, Inc. upon the merger and restructuring of the Company's five regional securities brokerage operations: Bateman Eichler, Hill Richards, based in California; Blunt Ellis & Loewi, Milwaukee; Boettcher & Company, Denver; Lovett Underwood Neuhaus & Webb, Houston; and Prescott, Ball & Turben, Cleveland and New York. The unified firm adopted its present name in July 1992, retiring the names of its five divisions at that time. KSI can trace its foundations back to 1910.
Kemper Securities, Inc.
Based in Chicago and incorporated in Delaware, KSI is a NYSE member firm licensed as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia. KSI is also a registered investment adviser. KSI is one of the largest distributors of KFS' mutual fund products. KSI is primarily retail oriented, as more than 80 percent of its revenue in each of the last three years was from retail sales operations. KSI's operations, however, maintain a measure of diversification in the areas of investment banking, municipal finance and institutional sales.
In addition to tracking certain widely followed companies, KSI's equity and fixed-income research analysts follow certain local companies not usually covered by other large brokerage firms. KSI's regional focus is marketed to those investors who may prefer to invest in companies in their own communities. This focus also serves KSI in providing investment banking services to selected financial institutions and local governments. The Company believes KSI enjoys close, value-added relationships with its customers.
According to the Securities Industry Yearbook 1993-1994, published by the Securities Industry Association, KSI ranked tenth nationwide by number (164) of offices, tenth by number (1,475) of retail investment consultants (registered representatives), twelfth by total number (1,565) of retail and institutional investment consultants and fifteenth by number (4,260) of employees (including employees of KSI subsidiaries) at year-end 1992.
At December 31, 1993, KSI had 161 offices and a total of 1,321 investment consultants. The Company believes the number of investment consultants decreased in 1993 primarily due to rumors that KSI was for sale. In 1993, the Company reinforced, through public statements, compensation arrangements and its new management structure, its commitment to KSI as a core distributor of the Company's financial and insurance products. A 14 percent increase in commission revenue per investment consultant in 1993, compared with 1992, offset the reduced number of consultants. KSI was able to improve profitability in 1993 because of continued participation in strong markets, the increased productivity of investment consultants, ongoing focus on KSI's core retail business and a cost reduction program. That program included substantial reductions in staff, as the segment ended the year with 460, or 11 percent, fewer employees than at the beginning of 1993.
In 1993 and 1992, KSI incurred net losses due to several factors including litigation-related expenses. See the discussion captioned "Securities brokerage," incorporated herein by reference, on pages 26 and 27 of the Annual Report. Reflecting improved markets and expense savings from the 1990 KSI restructuring, the securities brokerage operations returned to profitability in 1991 for the first time since the bull market of 1986. KSI exited the risk arbitrage business in late 1990 and reduced its inventory positions to minimize exposure to trading losses.
Beginning in the mid to late 1980s, the Company implemented certain programs for cost control and joint efficiencies, including utilization of a joint clearing operation, Kemper Clearing Corp. ("KCC"), and data processing support through Beta Systems Inc.("Beta"). KCC is a subsidiary, and Beta is a sister company, of KSI. KSI has an objective of shifting as much as possible from fixed to variable expenses which rise and fall with volumes of business, especially market volume. Such steps are designed to reduce the volatility of the securities firm's earnings.
Kemper Clearing Corp.
KCC was incorporated in Delaware in 1984. A NYSE member firm, KCC is based in Milwaukee and also has a presence in New York. KCC executes and clears trades of securities and commodities for KSI and INVEST. KCC also provides selected services to certain unaffiliated firms. KCC accounted for $10 million of the 1993 revenue of the securities brokerage segment. The clearing and administrative functions of KCC improve efficiencies for the Company and services for the firms' customers.
Beta Systems Inc.
Beta licenses software and provides data processing services to affiliated and nonaffiliated securities firms on a service bureau basis. This company also markets an on-line service, BETAQUOTE, which combines real time quote data with customer account information. Beta accounted for $14 million of the 1993 revenue of the securities brokerage segment.
COMPETITION
KSI is in a highly competitive business and competes with a large number of other brokerage firms, many having greater financial resources. Some are national firms offering products competing with those of KFS as well as providing securities brokerage, investment banking and other financial services. Other competitors include brokerage firms that sell primarily to financial institution customers as well as financial institutions that increasingly offer proprietary products such as mutual funds through brokerage subsidiaries. The Company's subsidiaries in the securities brokerage segment compete using innovative products, appropriate pricing and quality service to customers. The segment is also focusing on its retail business strength.
EMPLOYEES
At December 31, 1993, KSI employed approximately 3,170 persons, KCC 480 persons and Beta 150 persons.
REAL ESTATE SEGMENT
Subsidiaries within this segment were part of the Company's other operations and corporate category in 1992 and 1991 before being reclassified to this segment when it was established in 1993. In addition, certain of the Company's equity investments in real estate were accounted for in the insurance company subsidiaries before the equity was transferred to the Company's real estate subsidiaries in mid-1992. This segment also includes virtually all of the Company's 50 percent ownership interest in a master limited partnership (the "MLP") between subsidiaries of the Company and subsidiaries of Lumbermens as well as 50 percent of Kemper Real Estate Management Company ("KREMCO"). See the discussion captioned "Real estate," incorporated herein by reference, on page 28 of the Annual Report.
REAL ESTATE SUBSIDIARIES
The Company's real estate subsidiaries include Kemper Portfolio Corp., which is wholly owned by Kemper ("KPC"); KPC's wholly owned subsidiary, FKLA Realty Corporation ("FKLA Realty"); KFC Portfolio Corp., which is wholly owned by KFC ("KFCPC," which, together with KPC, is referred to below as the "portfolio companies"); and KFCPC's wholly owned subsidiaries, KILICO Realty Corporation ("KILICO Realty"), Kemper/Cymrot, Inc. and Kemper Real Estate, Inc. (which three subsidiaries, together with FKLA Realty, are referred to below as the "realty companies"). The realty companies act as general or limited partners in various joint ventures. The majority of the Company's real estate loans are on properties or projects where subsidiaries of Kemper or Lumbermens have taken ownership positions with a small number of partners.
Historically, these properties or projects have been managed by the partners' organizations, and most are still so managed today. The Company, however, has intensified its management of real estate over the last two years. Also, in the third quarter of 1992, the Company formed KREMCO, and KREMCO then assumed management of the properties in which the Company, Lumbermens or their respective affiliates shared interests with Peter B. Bedford or his affiliates. These properties are located primarily in the Pacific region of the United States. In connection with the agreement to form the MLP, Lumbermens acquired 50 percent of KREMCO from the Company in March 1993.
During 1993 and 1992, the Company contributed $639.4 million in cash to the capital of its portfolio companies, which then acquired from the Company's insurance subsidiaries most of the Company's equity interests in real estate and subordinated real estate loans. Given the subordination of such loans to the Company's life insurance segment's loans and the recourse to the realty companies of loans held by the insurance companies, the real estate segment recorded most of the Company's 1993 and 1992 provisions for real estate-related losses. Given its equity ownership, the segment also recorded most of the real estate operating losses. For additional real estate disclosures, see the discussion captioned "Investments," incorporated herein by reference, on pages 29 through 36 of the Annual Report, and see the notes, also incorporated herein by reference, captioned "Summary of significant accounting policies--Invested assets and related income," "Related party transactions," "Invested assets and related income ," "Unconsolidated investees," "Concentration of credit risk" and "Financial instruments--off-balance-sheet risk" of the Notes to the Consolidated Financial Statements in the Annual Report.
EMPLOYEES
At December 31, 1993, KREMCO had approximately 200 employees, and the Company's real estate personnel included approximately 70 employees of KFS.
OTHER OPERATIONS AND CORPORATE CATEGORY
This category primarily consists of holding company overhead. The other operations and corporate category also included a 30-person, New York-based investment banking firm, Peers & Co., until its sale to a third party in March 1993.
EMPLOYEES
At December 31, 1993, Kemper had approximately 75 holding company employees.
(D) FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The foreign operations of the Company are not material to its overall results.
ITEM 2.
ITEM 2. PROPERTIES
As set forth below, Kemper Corporation and certain of its subsidiaries have both capital leases, for which the financial commitments are not material, and operating leases. For its holding company headquarters, Kemper Corporation leases from Lumbermens 32,000 sq. ft. in Long Grove, Illinois. See the two notes, incorporated herein by reference, captioned "Related-party transactions" and "Commitments and contingent liabilities" of the Notes to Consolidated Financial Statements in the Annual Report. The Company believes its current and planned facilities are adequate for its present needs.
ASSET MANAGEMENT SEGMENT
KFS leases 530,000 sq. ft. of office space in Chicago, Illinois. Most of this space is leased through December 31, 1996, with renewal options. KFS is exploring the possibility of leasing replacement office space in Chicago beginning in 1995 or 1996. KSvC leases 230,000 sq. ft. in Kansas City, Missouri. INVEST leases 38,500 sq. ft. in Tampa, Florida. The companies comprising this segment also rent office space in various other locations from which they transact business.
LIFE INSURANCE SEGMENT
FKLA and KILICO lease from Lumbermens 72,000 sq. ft. of office space in Long Grove, Illinois. KILICO also utilizes certain space leased by KFS in Chicago.
SECURITIES BROKERAGE SEGMENT
For its office space, KSI leases 277,000 sq. ft. in two locations in Chicago, Illinois; 153,000 sq. ft. in one location in Denver, Colorado; 115,000 sq. ft. in one location in Houston, Texas; 49,000 sq. ft. in one location in Cleveland, Ohio; 30,000 sq. ft. in one location in Los Angeles, California; 118,000 sq. ft. in two locations in Milwaukee, Wisconsin; 38,000 sq. ft. in two locations in New York City; and 709,000 sq. ft. in 139 other locations nationwide. KSI owns a 90,000 sq. ft. building in Cleveland, Ohio. Beta leases 44,000 sq. ft. in Milwaukee. KCC leases 24,000 sq. ft. in New York City.
REAL ESTATE SEGMENT
The real estate subsidiaries utilize KFS' facilities in Chicago. KREMCO leases 45,000 sq. ft. from MLP ventures and 30,000 sq. ft. from unrelated parties in the various locations from which it does business.
(All sq. ft. figures in this ITEM 2 are approximate.)
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the fourth quarter of 1992, the SEC issued a formal order of private investigation authorizing the SEC staff to investigate the Company's real estate-related accounting and disclosure practices since January 1, 1989. This investigation is an outgrowth of the earlier informal inquiry that the Company previously disclosed. The Company continues to cooperate with the staff as the investigation proceeds. The staff has not advised the Company whether it intends to recommend that the SEC authorize an enforcement action against the Company, and the Company does not know whether any such action will ultimately result.
ASSET MANAGEMENT
In August 1993, a class action styled Tabankin, et al. v. Kemper Short-Term Global Income Fund, et al. was filed in federal court in the Northern District of Illinois on behalf of various investors in the Kemper Short-Term Global Income Fund during the period from October 29, 1990 to December 31, 1992, and in the Short-Term Global Income Portfolio of Kemper Investment Portfolios (collectively with the Global Income Fund, the "Funds") during the period from February 1, 1991 to December 31, 1992. The complaint alleges violations of various federal securities laws and common law fraud based on alleged material misstatements or omissions concerning the investment strategies of the Funds arising out of declines in the share price (net asset value) of the Funds when the value of the U.S. dollar rose against a number of European currencies in the aftermath of the rejection of the Maastricht Treaty, the collapse of the Exchange Rate Mechanism, and the resulting devaluation of European currencies in the fall of 1992. Plaintiffs' claim for damages is unspecified.
In January 1994, the defendants' motion to dismiss was granted and judgment entered with a memorandum opinion finding, among other things, that the Funds' prospectuses adequately disclosed both the risks associated with the Funds' investment strategies and the risks to net asset value which could arise from currency devaluations. Plaintiffs moved for leave to file an amended complaint. In March 1994, the district court granted plaintiffs' motion. The Company believes it has meritorious defenses and intends to vigorously defend this class action.
SECURITIES BROKERAGE
In December 1993, a federal district court in Portland, Oregon entered judgment on a May 1993 jury verdict against Boettcher & Company, a predecessor firm of KSI, in a class action lawsuit filed in 1988 by persons who purchased securities of Melridge, Inc. between November 1983 and 1987. If upheld on appeal, the judgment could result in liability of up to approximately $57 million, depending on various factors including the amount of written claims actually filed by class members, exclusive of any interest and attorneys' fees that may be awarded on certain claims. In its verdict, the jury found Boettcher 30 percent at fault for violations of federal and state securities laws in connection with certain public offerings of Melridge common stock and convertible debentures in the mid-1990, as well as secondary market transactions in both securities. Certain former Melridge executives were found 30 percent at fault for the violations, and other defendants who had settled with the plaintiffs were found 40 percent at fault. KSI has appealed the judgment and intends to vigorously pursue all available legal remedies.
In the opinion of the Company's management, based on the advice of legal counsel, the resolution of the preceding and other pending legal proceedings is not expected to have a material adverse effect on the Company and its subsidiaries taken as a whole.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1993, no matters were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT AS OF MARCH 30, 1994
KEMPER CORPORATION
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) The common stock ($5 par value) of Kemper Corporation is traded on the New York Stock Exchange under the symbol KEM. The following table shows the range of high and low sales prices for each quarterly period during 1993 and 1992:
(B) At March 1, 1994, there were approximately 12,700 holders of record of Kemper Corporation common stock. This number includes approximately 6,500 persons who hold shares only through the Kemper Corporation Dividend Reinvestment and Stock Purchase Plan.
(C) Kemper Corporation has paid quarterly cash dividends on its common stock since 1968. The annual dividend paid in each of 1993 and 1992 was $.92 per share, or $.23 per quarter.
RESTRICTIONS ON DIVIDENDS
The Second Restated Certificate of Incorporation, as amended, of Kemper Corporation restricts its ability to pay cash dividends on its common stock by requiring the prior payment of all cumulative and current cash dividends on the outstanding shares of its preferred stock. See the note, incorporated herein by reference, captioned "Preferred stock" of the Notes to Consolidated Financial Statements in the Annual Report.
As a Delaware corporation, Kemper Corporation may only declare and pay dividends from its surplus or from its net profits for the fiscal year in which the dividends are declared and/or the preceding year.
Dividend distributions to stockholders from an insurance company are restricted by state insurance laws. In Illinois, where Kemper's life insurance subsidiaries are domiciled, if such dividend, together with other distributions during the 12 preceding months, would exceed the greater of (a) ten percent of the insurer's surplus as regards policyholders as of the preceding December 31, or (b) the statutorily adjusted net income for the preceding calendar year, then such proposed dividend must be reported to the director of insurance at least 30 days prior to the proposed payment date and may be paid only if not disapproved. In Illinois, insurance laws also permit payment of dividends only out of earned surplus, exclusive of all or most unrealized capital gains.
Dividend distributions from securities brokerage firms are restricted by federal and state securities laws, the rules or regulations thereunder and/or the rules and regulations of an exchange of which a firm is a member. The Company's registered broker-dealer and investment adviser subsidiaries cannot lawfully pay dividends that would either reduce their respective net capital amounts below the minimum amounts required or cause certain net capital decreases without prior regulatory approval.
Additional information relative to dividend restrictions may be found in the note, incorporated herein by reference, captioned "Stockholders' equity--retained earnings" of the Notes to Consolidated Financial Statements in the Annual Report.
(D) While it is the intention of the directors to continue quarterly cash dividends, future declarations and the amounts of such dividends will be dependent upon, among other factors, the earnings of Kemper Corporation, its financial condition, its capital requirements and general business conditions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made both to the Eleven-Year Consolidated Summary, incorporated herein by reference only for the five years ended December 31, 1993, and to the Notes to the Consolidated Financial Statements, incorporated herein by reference, contained in the Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The section captioned MANAGEMENT'S DISCUSSION AND ANALYSIS on pages 21 through 38 of the Annual Report is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Kemper Corporation hereby incorporates by reference the following statements and notes from the Annual Report:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Kemper Corporation:
Under date of March 7, 1994, we reported on the consolidated balance sheet of Kemper Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the year 1993.
In connection with our audits of the aforementioned consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK Chicago, Illinois March 7, 1994
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Kemper Corporation:
We consent to incorporation by reference in the Registration Statements No. 33-50736 on Form S-8 and No. 2-71680 on Form S-3 of Kemper Corporation of our report dated March 7, 1994, relating to the consolidated balance sheet of Kemper Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993, which report appears in the December 31, 1993 Annual Report on Form 10-K of Kemper Corporation.
KPMG PEAT MARWICK Chicago, Illinois March 30, 1994
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) IDENTIFICATION OF DIRECTORS.
The section captioned ELECTION OF DIRECTORS of Kemper Corporation's Proxy Statement scheduled to be mailed on or about April 8, 1994 for the annual meeting of stockholders to be held May 11, 1994 is incorporated herein by reference.
(B) IDENTIFICATION OF EXECUTIVE OFFICERS.
The section captioned EXECUTIVE OFFICERS OF THE REGISTRANT included in Part I of this Annual Report on Form 10-K is incorporated herein by reference.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES--not applicable.
(D) FAMILY RELATIONSHIPS--none.
(E) BUSINESS EXPERIENCE--see ITEMS 10(a) and 10(b).
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS--none.
(G) PROMOTERS AND CONTROL PERSONS--not applicable.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned COMPENSATION OF EXECUTIVE OFFICERS and COMPENSATION OF DIRECTORS of Kemper Corporation's Proxy Statement scheduled to be mailed on or about April 8, 1994 for the annual meeting of stockholders to be held May 11, 1994 are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The section captioned GENERAL INFORMATION of Kemper Corporation's Proxy Statement scheduled to be mailed on or about April 8, 1994 for the annual meeting of stockholders to be held May 11, 1994 is incorporated herein by reference.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The section captioned SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS of Kemper Corporation's Proxy Statement scheduled to be mailed on or about April 8, 1994 for the annual meeting of stockholders to be held May 11, 1994 is incorporated herein by reference.
(C) CHANGES IN CONTROL.
There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of Kemper Corporation. In March 1994, however, GECC made an unsolicited proposal to acquire the Company. See "Recent Developments" in Part I of this Form 10-K, and see the sections, incorporated herein by reference, captioned GECC'S UNSOLICITED PROPOSAL and CERTAIN LEGAL PROCEEDINGS of Kemper Corporation's Proxy Statement scheduled to be mailed on or about April 8, 1994 for the annual meeting of stockholders to be held May 11, 1994.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS--None.
(B) CERTAIN BUSINESS RELATIONSHIPS--not applicable.
(C) INDEBTEDNESS OF MANAGEMENT--not applicable.
(D) TRANSACTIONS WITH PROMOTERS--not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
Kemper Corporation has incorporated by reference from the Annual Report (see ITEMS 6 and 8 above) the following consolidated financial statements of the Company:
(A)(2) SCHEDULES
The following schedules are supplemental to the financial statements of Kemper Corporation and subsidiaries and are located in this Form 10-K on the pages indicated. All other schedules are omitted because the information required to be stated therein is included in the financial statements or notes thereto or because they are inapplicable.
- --------------- * This schedule for the years ended December 31, 1992 and 1991 is incorporated by reference to Kemper Corporation's Form 10-K Annual Reports (File No. 1-10242) already on file with the SEC.
(A)(3) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits at pages 33 through 37 below are filed as part of this Form 10-K.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1993. On January 18, 1994, Kemper Corporation filed a current report on Form 8-K which reported, under item 5 thereof, (A) a December 22, 1993 refinancing of $275.3 million of mortgage and other real estate-related loans and related accrued interest; (B) a January 1994 transaction with a former joint venture real estate partner; (C) the December 30, 1993 sales of certain equity investments, resulting in after-tax gains of $37.8 million; (D) the December 31, 1993 sale of Federal Kemper Insurance Company; (E) the settlement of certain litigation matters during December 1993 and January 1994; (F) the termination on January 12, 1994 of a line of credit; and (G) a reorganization of management structure.
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints John H. Fitzpatrick, Executive Vice President and Chief Financial Officer, and Kathleen A. Gallichio, Senior Vice President, General Counsel and Corporate Secretary, his true and lawful attorney-in-fact with authority together or individually to execute in the name of each such signatory, and with authority to file with the Securities and Exchange Commission, any and all amendments to this Annual Report on Form 10-K, together with any exhibits thereto and other documents therewith, necessary or advisable to enable Kemper Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such other changes in the Annual Report on Form 10-K as the aforesaid attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Kemper Corporation has duly caused this Annual Report on Form 10-K for the fiscal year ended December 31, 1993 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Long Grove, State of Illinois, on the 29th day of March, 1994.
KEMPER CORPORATION By: /s/ DAVID B. MATHIS ------------------------- David B. Mathis Chairman of the Board and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KEMPER CORPORATION IN THE CAPACITIES INDICATED ON THE 29TH DAY OF MARCH, 1994.
SCHEDULE I
KEMPER CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
DECEMBER 31, 1993 (in thousands)
Summary of investments, other than broker-dealer trading accounts, at December 31, 1993 are detailed as follows:
- --------------- (a) Investments in fixed maturities (bonds and redeemable preferred stocks) are carried at market value. For fixed maturity securities, market value is determined by using market quotations, or independent pricing services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics, or fair value as determined in good faith by the Company's portfolio manager. Equity securities of nonrelated companies are generally carried at market value using the closing prices as of the balance sheet date derived from either a major securities exchange or the National Association of Securities Dealers Automated Quotations system. Mortgage loans and other real estate-related investments are carried at original cost, reduced by repayments, write-downs and valuation reserves. (b) Fixed maturities at original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts and other-than-temporary declines in value.
See Notes to Consolidated Financial Statements of Kemper Corporation and Subsidiaries.
SCHEDULE III
KEMPER CORPORATION
CONDENSED BALANCE SHEET (REGISTRANT ONLY) (dollars in thousands)
(a) Authorized 20,000,000 shares.
(b) Issued December 31, 1993, 23,998 shares; December 31, 1992, 25,044.
(c) Issued December 31, 1993, 2,000,000 shares; December 31, 1992, 2,000,000 shares.
(d) Issued December 31, 1993, 66,638.53 shares.
(e) Issued December 31, 1993, 4,600,000 shares.
(f) Authorized 200,000,000 shares: issued December 31, 1993, 64,620,863 shares; December 31, 1992, 63,653,600 shares.
(g) December 31, 1993, 31,717,505 shares; December 31, 1992, 14,334,708 shares.
See Notes to Consolidated Financial Statements of Kemper Corporation and Subsidiaries.
SCHEDULE III CONTINUED
KEMPER CORPORATION
CONDENSED STATEMENT OF OPERATIONS (REGISTRANT ONLY) (in thousands)
See Notes to Consolidated Financial Statements of Kemper Corporation and Subsidiaries.
SCHEDULE III CONTINUED
KEMPER CORPORATION
CONDENSED STATEMENT OF CASH FLOWS (REGISTRANT ONLY) (in thousands)
See Notes to Consolidated Financial Statements of Kemper Corporation and Subsidiaries.
SCHEDULE IV
KEMPER CORPORATION AND SUBSIDIARIES
INDEBTEDNESS OF AND TO RELATED PARTIES--NOT CURRENT
YEAR ENDED DECEMBER 31, 1993 (in millions)
- ------------------------- (1) Among other items, additions and deductions include rollovers of maturing loans as described in the table captioned "Real Estate Portfolio" incorporated by reference into Item 7 of the 1993 Form 10-K from the section captioned, "Management's Discussion and Analysis," of the Annual Report to Stockholders.
(2) Included in loans to real estate joint ventures are joint venture mortgage loans, real estate-related bonds and other real estate-related loans, net of reserves and write-downs.
YEAR ENDED DECEMBER 31, 1992 (in millions)
- ---------------- (1) Among other items, additions and deletions include rollovers of maturing loans as described in the table captioned "Real Estate Portfolio" incorporated by reference into Item 7 of the 1993 Form 10-K from the section captioned, "Management's Discussion and Analysis," of the Annual Report to Stockholders.
(2) Included in loans to real estate joint ventures are joint venture mortgage loans, real estate-related bonds and other real estate-related loans, net of reserves and write-downs.
SCHEDULE V
KEMPER CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1993 (in thousands)
- ------------------------- (1) Includes $836.0 million of ceded life policy benefits.
SCHEDULE V CONTINUED
KEMPER CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1992 (in thousands)
SCHEDULE V CONTINUED
KEMPER CORPORATION AND SUBSIDIARIES (CONTINUING OPERATIONS)
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1991 (in thousands)
SCHEDULE VI
KEMPER CORPORATION AND SUBSIDIARIES
REINSURANCE
THREE YEARS ENDED DECEMBER 31, 1993 (dollars in thousands)
SCHEDULE VIII
KEMPER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
TWO YEARS ENDED DECEMBER 31, 1993 (in thousands)
- --------------- (1) Charged to Realized investment gain (loss) in the Consolidated Statement of Operations.
(2) Transferred to real estate owned and equity investments in real estate.
SCHEDULE IX
KEMPER CORPORATION AND SUBSIDIARIES
SHORT-TERM BORROWINGS
YEAR ENDED DECEMBER 31, 1993 (dollars in thousands)
- --------------- (a) Bank loans are short-term borrowings with interest rates that generally vary with short-term money market rates.
(b) The maximum amount outstanding during 1993 was computed using the balances outstanding at each month end.
(c) The average amount outstanding during 1993 was computed using the average daily balances outstanding.
(d) The weighted average interest rate incurred during 1993 was computed using interest expense incurred to the average principal outstanding during the year.
INDEX TO EXHIBITS
* Asterisked exhibits constitute management contracts or compensatory plans or arrangements.