The following table is a summary of the Company's results by category, for the three years ended December 31, 1994, 1993 and 1992:
(1) Net income (loss) excluding realized investment results. See the discussion captioned "INVESTMENTS--Net investment income" on page 39.
Operating earnings from continuing operations totaled $138.9 million in 1994, compared with $96.3 million and $30.6 million in 1993 and 1992, respectively. As reflected in the table above, results for 1993 and 1992 include adjustments to reflect the cumulative effects of changes in accounting principles. Primary operating earnings per share from continuing operations rose to $3.34 in 1994, compared with $1.81 in 1993 and $.63 in 1992.
In 1994, operating earnings of the asset management segment declined, largely due to market conditions in a rising interest rate environment which contributed to a lower level of assets under management. This decline, however, was more than offset by the substantial earnings increase in the life insurance segment, primarily reflecting a continuation of improved spreads (between investment income and benefits credited to policyholders) and better mortality results. The securities brokerage segment's 1994 operating loss decreased slightly from the 1993 level. This segment too was impacted by adverse market conditions. The real estate segment's operating loss declined significantly in 1994 as a result of sales, refinancings and restructurings.
All segments other than real estate showed improvements in 1993 over 1992. The improved operating results of the asset management and securities brokerage segments reflected then better stock, bond and credit market conditions, although securities brokerage results were adversely impacted by litigation-related expenses in both 1993 and 1992 and tax adjustments in 1992. In 1993, as in 1994, the life insurance segment accounted for most of the increase in the Company's operating earnings. Real estate joint venture operating losses adversely affected the life insurance segment in 1992 and the real estate segment in 1993 and 1992.
Including discontinued operations, the Company's net income totaled $91.4 million for 1994, compared with net income of $235.5 million in 1993 and a net loss of $203.4 million in 1992.
Net income (loss) per share in the following segment discussions is on a primary basis.
The asset management segment consists of KFS and its subsidiaries, including INVEST and KSvC.
In 1994, the segment's net income was $19.3 million less than its operating earnings due to an Orange County-related charge. Five non-government, taxable, money market mutual funds managed by KFS hold a total of $198.0 million of Orange County, California notes which mature July 10, 1995. Orange County filed for bankruptcy in December 1994. The Company has established a letter of credit arrangement pursuant to which the Company will bear the risk of loss associated with the money market mutual funds' investments in these notes. To date, Orange County has made the monthly interest payments on the notes. In connection with the credit enhancement of the Orange County notes, the Company recorded a $29.7 million charge in the fourth quarter of 1994 ($19.3 million after tax). (See the note captioned "Commitments and contingent liabilities" on page 66.) 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 1994 decrease of $22.9 million in investment management fees was primarily due to a $4.6 billion reduction in total average assets of KFS' mutual funds, resulting in a decrease in fees of approximately $11.6 million. The 1994 decrease in such fees also reflects the loss of fees from funds managed by Selected Financial Services, Inc. ("Selected"). In 1993 and 1992, Selected's fee revenue was $2.1 million and $6.9 million, respectively, and effective May 1, 1993, a third-party manager was appointed for the Selected funds. In addition, beginning January 1, 1994, revenue from real estate management fees are reported in the real estate segment. The real estate management fee revenue was approximately $9.7 million and $5.3 million in 1993 and 1992, respectively.
Certain affiliates in the securities brokerage and life insurance segments reduced their use of data processing and operations services of KSvC beginning late in 1992. As a result, other income in 1994 and 1993 declined approximately $6.6 million and $13.6 million, respectively. Such decreases were partially offset by reductions in related operating expenses.
Operating expenses decreased by $3.3 million in 1993, compared with 1992, despite the above-mentioned legal settlement in 1993. The 1993 decrease was primarily due to the above-mentioned KSvC service reductions, lower data processing maintenance expenses and reduced advertising and sales promotion expenses. Advertising and promotional expenses decreased $9.9 million in 1993, compared with 1992 when the segment was heavily promoting its no-load mutual fund business managed by Selected. Selected generated approximately $2.0 million and $6.7 million of net losses in the Company's asset management results during 1993 and 1992, respectively. In 1993, personnel expenses increased approximately $8.6 million, in part due to increased staffing for transfer agent operations, real estate investment management and systems development. Overall, however, the segment reduced its employee head count by 8.3 percent in 1993.
KFS' 12b-1 spread load mutual fund products in 1994 and 1993, market value declines of these products in 1994, and increased deferral of commissions and sales expenses in 1992.
Bond and stock mutual fund assets under management decreased $5.8 billion from year-end 1993 to year-end 1994, primarily due to net redemptions and market value declines. Bond and stock mutual fund assets under management increased $2.1 billion in 1993 over 1992 due to investment performance and $0.7 billion of sales, net of redemptions. Redemptions of stock and bond mutual funds totaled $6.1 billion in 1994, compared with $4.2 billion in 1993 and $3.3 billion in 1992. Bond mutual funds made up 77 percent of the redemption volume in 1994, largely caused by rising interest rates. Stock and bond mutual funds had asset depreciation of approximately $1.4 billion in 1994, compared with asset appreciation of $3.1 billion and $1.1 billion in 1993 and 1992, respectively. In 1994 and 1993, sales of bond mutual funds, particularly taxable bond mutual funds, and sales of stock mutual funds fell from the record 1992 levels. Sales of stock mutual funds represented 44 percent of total stock and bond fund sales in 1994, up from 35 percent in 1993 and 32 percent in 1992. Assets under management also reflected the 1993 loss of approximately $1.0 billion of assets (primarily stock mutual funds) previously managed by Selected.
In 1994, Kemper Corporation affiliates' and the Kemper National Insurance Companies' assets under management decreased from 1993 by $0.2 billion and $0.5 billion, respectively. Contributing to these decreases were reductions of real estate-related assets (managed by the real estate segment) totaling $0.3 billion for Kemper Corporation affiliates and $0.2 billion for KNIC. The 1993 decline in assets managed for Kemper Corporation affiliates reflected the transfer of $0.7 billion of the invested assets of reinsurance companies acquired by KNIC from Kemper and the $0.7 billion of invested assets of primary property-casualty insurance companies sold by Kemper in 1993 to companies which were not KFS clients.
The life insurance segment consists of FKLA, KILICO and their subsidiaries.
The life insurance segment reported improved net income in 1994 and 1993. The improvement in 1994 was primarily the result of increases in spread income, favorable mortality results, an increase in other income and an increase in the net deferral of policy acquisition costs. These improvements were partially offset by higher realized investment losses in 1994, compared with 1993. The improvement in 1993 net income, compared with 1992, was primarily the result of lower realized investment losses, increases in spread income, favorable mortality results and reductions in operating expenses.
The segment's after-tax realized investment results included real estate-related losses of $25.6 million, $65.8 million and $74.3 million for 1994, 1993 and 1992, respectively, write-downs and restructurings of certain below investment-grade securities totaling $0.1 million, $17.2 million and $27.5 million for 1994, 1993 and 1992, respectively, and other net realized investment losses from the sale of fixed maturity investments of $23.3 million in 1994 and other net realized investment gains of $72.6 million and $31.4 million for 1993 and 1992, respectively. The fixed maturity losses generated in 1994 arose primarily from the sale of $868.7 million of fixed maturity investments, consisting of lower yielding investment-grade corporate securities and collateralized mortgage obligations, related to a repositioning of the segment's fixed maturity investment portfolio in September 1994. The $810.6 million of proceeds from the repositioning, together with $325.0 million of cash and short-term investments, were 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" on page 32.)
Investment income was positively impacted in 1994 and 1993, compared with 1992, from the benefits of capital contributions to the segment and reductions in the level of nonperforming real estate-related investments, primarily from the sales of certain real estate-related investments to the Company's real estate subsidiaries. These sales totaled $222.8 million in 1994, $447.1 million in 1993 and $192.3 million in 1992 and resulted in no realized gain or loss to the segment. Investment income in 1994 also benefited from rising investment yields on new money, the above-mentioned repositioning of the segment's investment portfolio and an $8.7 million pre-tax adjustment related to the amortization of the discount or premium on mortgage-backed securities. Investment income for 1994, 1993 and 1992 has been impacted by a shift over the last several years to higher-quality, lower yielding investments and foregone income on nonperforming investments. Investment income in 1993, compared with 1992, was also reduced by a 1992 reinsurance transaction which transferred $515.7 million of policyholder liabilities and the related invested assets. (See the note captioned "Reinsurance" on page 65.)
Included in other income are administrative fees received from the segment's separate account products of $20.8 million in 1994, compared with $18.1 million and $14.3 million in 1993 and 1992, respectively. Administrative fee revenue increased in each of the last three years due to growth in average separate account assets. Other income also included surrender charge revenue of $13.4 million in 1994, compared with $11.8 million and $11.5 million in 1993 and 1992, respectively. The higher level of surrender charge revenue reflected an increase in policyholder withdrawals, primarily as a result of the planned reductions in crediting rates on fixed annuities and rising interest rates. The segment's crediting rate increases in 1994 were designed to reduce the level of future withdrawals. Other income in 1992 also included a $12.0 million ceding commission resulting from the earlier described reinsurance transaction.
Operating expenses in 1994, compared with 1993, increased only slightly, despite a 16.1 percent increase in the number of term life insurance policies sold, as a result of expense control and the integration of the two life insurance subsidiaries' operations and management beginning in 1992. Primarily as a result of the integration of the two life companies, operating expenses in 1993 declined by approximately 27 percent, compared with the 1992 level.
Since year-end 1990, the Company has taken many steps to improve the earnings, financial strength and competitive marketing position of its life insurance subsidiaries. These steps included adjustments in crediting rates, reductions of operating expenses, reductions of below investment-grade securities, a strategy not to embark on new real estate projects, additional provisions for real estate-related losses, sales of $862.2 million of certain real estate-related investments to the Company's real estate subsidiaries through December 31, 1994, third-party sales and refinancings of certain mortgage and other real estate loans, approximately $900 million in annuity reinsurance transactions with an affiliated mutual life insurance company, a parental guarantee of any indebtedness, and capital contributions of $275.8 million through December 31, 1994. The statutory surplus ratio for the segment improved to 10.3 percent at December 31, 1994 from 9.2 percent at December 31, 1993, 7.9 percent at December 31, 1992 and 1991, and 5.4 percent at year-end 1990.
(3) A joint venture mortgage loan is recharacterized in the current period as a third-party mortgage loan where the Company has disposed of its related equity interest in that venture.
(4) See table captioned "Summary of gross and net real estate investments" on page 33.
The securities brokerage segment reported decreasing net losses in 1994 and 1993, compared with 1992. The net losses for 1993 and 1992 include supplemental additions to the segment's litigation reserves of $19.8 million after tax and $13.2 million after tax, respectively. These reserve additions were based on management's evaluation of pending legal matters in light of then-current information. Subsequently, the segment settled certain significant litigation matters within established reserves. The 1994 results included benefits of $5.5 million from reevaluation of the segment's tax liabilities. The 1993 results included a charge of $5.5 million for the adoption of SFAS 109, and the 1992 results included an $11.0 million federal tax expense related to various tax issues.
The $35.2 million decline in joint venture operating losses in 1994 was primarily due to sales, refinancings and restructurings that were completed with respect to certain joint ventures, reducing the level of operating losses the Company was required to record. In 1994, such sales included real estate investment trust ("REIT") transactions (see the real estate portfolio table on page 34), and such restructurings included a transaction in which the interest payment terms of certain loans held by Fidelity Life Association and Lumbermens Mutual Casualty Company and its affiliates were amended, effective January 1, 1994, to make interest payments contingent on cash being available. This restructuring transaction reduced joint venture operating losses in 1994 by $9.2 million. In this restructuring transaction, the Company similarly amended interest payment terms on $187.1 million of its nonaccrual loans, and this amendment had no financial statement impact.
Investment and other income decreased in 1993, with a corresponding decrease in operating expenses, as Kemper Real Estate Management Company became 50 percent owned and unconsolidated in connection with the formation of a master limited partnership with Lumbermens. (See "INVESTMENTS--Real estate concentrations" beginning on page 35.) This segment's interest expense, which was primarily paid to the Company's life insurance subsidiaries, decreased in 1994 after increasing in 1993, reflecting lower settlement costs related to the levels of asset purchases from the life insurance subsidiaries. (See "LIQUIDITY AND CAPITAL RESOURCES" on page 41.)
--------------- (1) See the table captioned "Summary of gross and net real estate investments" on page 33.
(2) Excludes $168 million, or 2.2 percent, and $171 million, or 2.0 percent, at December 31, 1994 and 1993, respectively, of bonds carried in other real estate-related investments.
(4) See the note captioned "Financial instruments--off-balance-sheet risk" on page 67.
Approximately 50.2 percent of the Company's investment-grade fixed maturities at December 31, 1994 were mortgage-backed securities. These investments consist primarily of marketable mortgage pass-through securities issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and other investment-grade securities collateralized by mortgage pass-through securities issued by these entities. The Company has not made any material investments in interest-only or other similarly volatile tranches of mortgage-backed securities. The Company's mortgage-backed investments are generally of AAA credit quality, and the markets for these investments have been and are expected to remain liquid.
Below investment-grade securities holdings (NAIC classes 3 through 6) (representing securities of 15 issuers at December 31, 1994) totaled less than three percent of cash and invested assets at year-end 1994 and 1993. (See the note captioned "Invested assets and related income" on page 54.) 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 marketplace. The Company's below investment-grade holdings decreased through sales, maturities, restructurings, market value adjustments and write-downs.
As reflected in the table on the following page, the Company has continued to fund both existing projects and legal commitments. The future legal commitments were $510.8 million at December 31, 1994. This amount represented a net
decrease of $126.0 million since year-end 1993, largely due to fundings in 1994. (The commitments also reflect an asset guarantee of $55.8 million related to the 1993 sale of Kemper Reinsurance Company. See the note captioned "Discontinued operations" on page 56.) As of December 31, 1994, the Company expects to fund approximately $194.4 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. (See the note captioned "Financial instruments--off-balance-sheet risk" on page 67.)
(2) Reflects the 1994 formation of Prime Retail, Inc., a retail properties REIT affiliated with the Prime Group, Inc. See "Real estate concentrations" below.
(6) Net of $686.6 million reserve and write-downs. Excludes $56.3 million of real estate-related accrued interest.
As reflected in the preceding table, cash received by the Company from sales/paydowns/distributions and REIT transactions in 1994 exceeded the Company's cash fundings in 1994 by $98.1 million. Cash received from sales/paydowns/distributions and refinancings in 1993 exceeded the Company's cash fundings in 1993 by $181.6 million.
The Company's real estate portfolio is distributed by geographic location and property type, as shown in the following two tables:
Office.................................................................... 26.5% Land....................................................................... 21.8 Retail..................................................................... 11.8 Industrial................................................................. 11.3 Hotel...................................................................... 9.7 Residential................................................................ 5.9 Apartment.................................................................. 5.2 Mixed use.................................................................. 2.3 Other...................................................................... 5.5 Total................................................................100.0%
Real estate markets have been depressed in recent periods in areas where most of the Company's real estate portfolio is located. Approximately half of the Company's real estate holdings are in California and Illinois. Southern California shows signs of improvement, although real estate market conditions there have continued to be worse than in many other areas of the country. Northern California and Illinois currently reflect some stabilization and improvement.
development projects are dependent on a number of factors, including the Company's plans with respect thereto, obtaining necessary permits and market demand for the permitted use of the property. There can be no assurance that such permits will be obtained as planned or at all, nor that such expenditures will occur as scheduled, nor that the Company's plans with respect to such projects may not change substantially.
The Company monitors its real estate portfolio and identifies changes in the relevant real estate marketplaces, the economy and each borrower's circumstances. The Company establishes its provisions for real estate-related losses (both reserves and write-downs) on the basis of its valuations of the related real estate, estimated in light of current economic conditions and calculated in conformity with SFAS 114. (See the discussion of SFAS 114 on page 51 in the note captioned "Summary of significant accounting policies".) 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.
In addition to the reserve, the Company's provision for real estate-related losses (on assets held at the respective period end) included cumulative write-downs (both by the Company and including the Company's share of write-downs by joint ventures) totaling $503.4 million (life insurance segment, $106.7 million; real estate segment, $396.7 million) at December 31, 1994, and $298.5 million (life insurance segment, $96.0 million; real estate segment, $202.5 million) at December 31, 1993. The 1994 decrease in reserves was primarily due to write-downs which increased in 1994 as reserves for general real estate risks were allocated to certain specific loans and equity investments in real estate, particularly with respect to investments in land (including the Spanish projects). In 1993, the Company's real estate reserve and write-downs increased primarily due to declining valuations in the Company's real estate portfolio. The declining valuations in 1993 reflected the Company's view, based on economic data then available, that there will be slower than previously anticipated economic growth in the future and therefore slower absorption of real estate, particularly undeveloped land. Due to the Company's assessment for slower economic growth, its plans with respect to certain projects were changed to reflect deferrals of their commencement or completion.
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)
(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.
(6) Total reserves and cumulative write-downs on properties owned at December 31, 1994 (excluding fair value adjustments to real estate owned) were 58.8 percent of total troubled real estate-related investments and 28.8 percent of the Company's total real estate portfolio before reserves and write-downs.
Based on the level of troubled real estate-related investments the Company experienced in 1994 and 1993, 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.
(1) See the note captioned "Invested assets and related income" on page 54.
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 $48.3 million, $92.3 million and $72.6 million in 1994, 1993 and 1992, 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.
The Company's total foregone investment income before tax on both nonperforming fixed maturity investments and nonaccrual real estate-related investments was as follows:
Reflected in the results from continuing operations are after-tax realized investment losses of $53.2 million, $197.6 million and $245.3 million for 1994, 1993 and 1992, respectively. (See the note captioned "Invested assets and related income" on page 54.) The 1994 realized investment losses were primarily generated by the life insurance segment's third-quarter repositioning of its fixed maturity portfolio, which resulted in an after-tax loss of approximately $39.7 million. The $810.6 million of proceeds from the repositioning, along with $325.0 million of cash and short-term investments, were reinvested primarily in higher yielding U.S. government guaranteed mortgage pass-through securities. Fixed maturity write-downs were insignificant in 1994 due to the increased quality of the Company's fixed maturity portfolio. Other realized gains of $16.4 million, $72.6 million and $31.4 million in 1994, 1993 and 1992, respectively, were also taken in the life insurance segment. Also in 1994, in connection with the December 1994 bankruptcy filing by Orange County, the asset management segment recorded an after-tax charge of $19.3 million. Real estate-related losses declined in 1994 because certain real estate markets began to stabilize and sales and other transfers to third parties of certain equity investments in real estate, which had negative carrying values, generated realized gains offsetting most of the Company's additions to real estate-related reserves and write-downs.
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 within 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.
A valuation allowance was established upon adoption of 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. (See the note captioned "Income tax" on page 60.)
Interest rate fluctuations primarily affect the life insurance segment. The 1993 interest rate environment was characterized by very low short-term rates and a steeply sloped yield curve while 1994 saw rapidly rising short-term interest rates which resulted in a much flatter yield curve as the Federal Reserve Board raised rates five times during the year.
When maturing or sold investments are reinvested at lower yields in a low interest rate environment, the Company's life insurance subsidiaries can adjust their crediting rates on fixed annuities and other interest-bearing liabilities. However, competitive conditions and contractual commitments do not always permit the reduction in crediting rates to fully or immediately reflect reductions in investment yield, which can result in narrower spreads.
As interest rates rose during 1994, the life insurance subsidiaries' capital resources were adversely impacted by unrealized loss positions in their fixed maturity investments. The Company believes, however, that this decline in value should be offset by a decrease in the present value of the life insurance subsidiaries' policy liabilities and that their sales of fixed-rate annuity products could increase in a rising interest rate environment.
Kemper has used its available resources for dividends to stockholders, corporate interest and other holding company expenses, consolidated federal income tax payments, common stock repurchases (treasury stock), acquisitions of subsidiaries and additional investments in, or asset purchases from, subsidiaries. At December 31, 1994, the parent had $55.2 million in cash and short-term investments. Although not legally committed to do so, Kemper plans to use a significant portion of these funds for additional purchases of real estate-related investments from its life insurance subsidiaries to maintain and/or improve their regulatory capital positions and earnings capabilities. In 1994, the Company purchased $222.8 million of certain real estate-related investments from the life insurance subsidiaries and contributed $82.5 million to KILICO's capital, which contribution was funded by dividends from FKLA. In 1993, the Company provided $517.1 million in cash to the life insurance subsidiaries by purchasing from them $447.1 million of such real estate-related investments and contributing to KILICO's capital $90.0 million, $20.0 million of which was a dividend from FKLA. The Company's purchases of such investments from its life insurance subsidiaries were consummated at the carrying values of such investments at the dates of the purchases.
In the first quarter of 1995, KFS sold its 50 percent interest in IFTC and announced a definitive agreement to sell the business operations of SSC. (See "RESULTS OF OPERATIONS--Asset management" in this ITEM 7 and "ASSET MANAGEMENT SEGMENT" in ITEM 1(c).)
The Company has outstanding short-term loans with banks and other creditors at interest rates that vary with short-term money market rates. Short-term notes payable by the securities brokerage operations principally consist of collateralized bank loans. The level of these borrowings fluctuates daily depending upon market activity and customer margin activity levels.
Ratings have become an increasingly important factor in establishing the competitive position of life insurance companies. Rating organizations continue to review the financial performance and condition of life insurers and their investment portfolios, including those of the Company's life insurance subsidiaries. Any reductions in the life insurance subsidiaries' claims-paying ability or financial strength ratings could result in their products being less attractive to consumers. Any reductions in Kemper Corporation's senior debt ratings could adversely impact the Company's financial flexibility by limiting the Company's access to capital or increasing its cost of borrowings.
During 1993 and 1992, Kemper Corporation privately placed preferred stock in the amounts of $260.0 million and $100.0 million, respectively. At December 31, 1994, the Company's outstanding preferred stock totaled $360.4 million. Dividends paid on the preferred stock during 1994 totaled $23.6 million. (See the note captioned "Preferred stock" on page 53.)
During 1994, the Company received $34.0 million by issuing common stock through employee stock option plans and issued $29.0 million of common stock through the Kemper Corporation Dividend Reinvestment and Stock Purchase Plan. All employee stock options outstanding on December 31, 1994 are fully exercisable. (See the note captioned "Stock option plans" on page 64.) The Company expects to continue to receive proceeds from the exercise of employee stock options.
During 1993 and 1994, the quarterly dividend rate was $.23 per common share. The first-quarter 1995 dividend of $.23 per share was paid February 28, 1995. The aggregate common stock dividend payment was reduced by approximately 35 percent due to the August 1993 acquisition of 17.4 million shares of the Company's common stock in a stock exchange transaction with Lumbermens. (See the note captioned "Discontinued operations" on page 56.)
Stockholders' equity totaled $1.26 billion at December 31, 1994, compared with $1.62 billion and $1.77 billion at December 31, 1993 and 1992, respectively. The 1994 decrease reflects $478.2 million of unrealized losses on investments, primarily fixed maturities of the life insurance segment, due to rising interest rates. The 1994 unrealized losses were partially offset by the issuance of $63.0 million of common stock and net income of $91.4 million. The 1993 decrease in nominal dollar value of stockholders' equity was due to the Company's acquisition of approximately 17.4 million shares of its common stock valued at $610.2 million in exchange for the stock of the Company's reinsurance and risk management subsidiaries. This 1993 acquisition of treasury stock was offset in part by the issuances of $260.0 million of preferred stock and $29.0 million of common stock, net income of $235.5 million and an increase in unrealized appreciation on investments of $40.6 million during 1993.
Book value per common share decreased to $26.06 at December 31, 1994, compared with $38.24 and $33.77 at December 31, 1993 and 1992, respectively. The decrease in 1994 from the 1993 level primarily reflected the unrealized loss on investments during 1994 of $13.89 per share. The increase in 1993, compared with 1992, primarily reflected the reduced number of outstanding common shares and the Company's net income.
KEMPER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
KEMPER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
KEMPER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The statements include the accounts of Kemper Corporation and its subsidiaries (the "Company") on a consolidated basis. Unconsolidated companies between 20 percent and 50 percent owned are generally accounted for utilizing the equity method of accounting. The Company's share of earnings on such investments is recorded in revenue. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made in the financial statements for the years 1993 and 1992 to conform to 1994 reporting.
Commissions and certain operating expenses related to the sales of certain mutual funds have been deferred. These costs are being amortized in relation to projected revenue to be earned on these mutual funds. Revenue assumptions are periodically reviewed and updated.
Revenue for annuities and interest-sensitive life products consists of investment income and policy charges such as mortality, expense and surrender charges. Expenses consist of benefits and interest credited to contracts, policy maintenance costs and amortization of deferred policy acquisition costs.
Premiums for life policies, except for annuities and interest-sensitive life products, are reported as earned when due. Profits for such policies are recognized over the duration of the insurance policy by matching benefits and expenses to premium income. This matching involves a provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.
The costs of acquiring new life insurance business, principally commission expense and certain policy issuance and underwriting expenses, have been deferred to the extent they are recoverable from estimated future gross profits on the related contracts and policies. Except for annuities and interest-sensitive life products, these deferred acquisition costs are being amortized over the premium paying period of the related policies. Such costs are amortized in proportion to the ratio of the annual premium revenue to the anticipated total premium revenue. Such anticipated premium revenue was estimated using the same assumptions as were used for computing liabilities for future policy benefits. For general account annuities, separate account business and certain interest-sensitive life products, these deferred acquisition costs are being amortized over the contract life in relation to the present value of estimated gross profits. Beginning in 1994, deferred insurance acquisition costs reflect the estimated impact of unrealized gains or losses on available for sale securities in the investment portfolio, through a credit or charge to stockholders' equity, net of income tax.
Liabilities for future life policy benefits, except annuities and interest-sensitive life products, have been computed principally by a net level premium method. Anticipated rates of mortality are based principally on the 1975-1980 Select and Ultimate Table for 1988-1994 plans, the 1965-1970 Select and Ultimate Table for 1979-1987 plans and the 1955-1960 Select and Ultimate Table for other plans, all of which are modified by Company experience, including withdrawals. Estimated future investment yields by issue year are as follows: 1994 and 1993, generally 8 percent graded to 6 percent over 5 years; 1989-1992, generally 10 percent graded to 6 percent over 7 years; 1986-1988, generally 9 percent graded to 6 percent in 16 years; 1977-1985, 7 percent graded to 5 percent in 20 years; 1976 and prior, 4.5 percent to 5.0 percent.
Liabilities for life policy benefits related to annuities and interest-sensitive life contracts reflect net premiums received plus interest credited during the contract accumulation period and the present value of future payments for contracts that have annuitized. Current interest rates credited during the contract accumulation period range from 4 percent to 8.75 percent. Future minimum guaranteed interest rates vary from 4 percent to 8.75 percent for periods ranging from a portion of 1995 up to a portion of 1999 and are generally 3 percent to 4.5 percent thereafter. For contracts that have annuitized, interest rates that are used in determining the present value of future payments range principally from 3 percent to 11.25 percent.
Securities transactions and related commission revenue and expense are recorded on a trade-date basis. Underwriting and investment banking revenues are recognized as earned, which is generally the settlement date of the underlying securities issue.
Repurchase and resale agreements are carried at the amounts at which the securities will be subsequently reacquired or resold as specified in the respective agreements.
Securities held by securities brokerage firms are carried at market value. Realized and unrealized gains or losses on revaluation of these securities are included in net income. Investment income on these securities is included in "Securities brokerage income."
Investments in fixed maturities (bonds and redeemable preferred stocks) are carried at market value at December 31, 1994 and 1993, as they are currently considered available for sale.
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. Real estate reserves are established when declines in collateral values, estimated in light of current economic conditions and calculated in conformity with SFAS 114 (see next paragraph), indicate a likelihood of loss. Generally, the reserve is based upon the excess of the loan amount over the estimated future cash flows from the loan discounted at the loan's contractual rate of interest. Changes in the Company's real estate reserves and write-downs are included in revenue as realized investment gain or loss. (See "Real estate-related investments" on page 33.)
December 31, 1994 and 1993, respectively. (See the discussion captioned "INVESTMENTS -- Provisions for real estate-related losses" on page 36.)
The Company had an average balance of $522.7 million and $479.2 million in impaired loans for 1994 and 1993, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 1994 and 1993, loans on nonaccrual status amounted to $733.1 million and $1,127.8 million, respectively, before reserves and write-downs. Impaired loans are generally included in the Company's nonaccrual loans. The additional amount of nonaccrual loans in excess of impaired loans represents the Company's consideration of market risks associated with its real estate portfolio.
Upon adoption of SFAS 114, the Company determined that its previous disclosures relating to impaired loans and recorded real estate reserves were adequate. As such, restating prior quarters' operating results for the impact of SFAS 114 was not considered necessary.
Other loans and investments principally include policy loans carried at their unpaid balance.
Realized gains or losses on sales of investments, determined on the basis of identifiable cost on the disposition of the respective investment, recognition of other-than-temporary declines in value and changes in real estate-related reserves and write-downs are included in revenue. Unrealized gains or losses on revaluation of investments are credited or charged to stockholders' equity net of deferred income tax.
Upon adoption of SFAS 109, Accounting for Income Taxes, effective January 1, 1993, deferred taxes are provided on the temporary differences between the tax and financial statement basis of assets and liabilities. Deferred income tax previously was provided on the tax effects of timing differences between financial statement and taxable income. Foreign subsidiaries are taxed under applicable foreign statutes.
Each Series A share was originally issued in 1982; has a stated value of $25.00; accrues annual dividends of $2.00, payable on a semiannual basis; is presently convertible into 2.24718 common shares; and, beginning in May 1997, is redeemable by the Company for its stated value plus any accrued and unpaid dividends.
The Company completed a private placement of 66,638.5 shares of its Series D Index Exchangeable Preferred Stock totaling $30 million in 1993. Each Series D share has a stated value of $450.19; accrues dividends, payable monthly, in an amount per share presently equal to the sum of (i) the aggregate amount of dividends paid on one unit of the S&P 500 Index the calendar month preceding the applicable monthly dividend date plus (ii) an amount equal to $0.94; is exchangeable at the option of Kemper Corporation or the holder, subject to certain limitations, for shares of the Company's common stock based on the closing price on the exchange date of the S&P 500 Index relative to the closing price of the Company's common stock on that date; and is redeemable for cash at the option of the Company beginning December 1, 1995.
The Company completed a private placement of 4.6 million shares of its Series E Cumulative Convertible Preferred Stock totaling $230 million in 1993. Each Series E share has a stated value of $50.00; accrues dividends, payable quarterly, at an annual rate of 5.75 percent; and is convertible by holders thereof into approximately 4.8 million shares of Kemper Corporation common stock in the aggregate at a conversion price of $48.36 per share. Beginning May 31, 1996, the Series E preferred stock is redeemable at the option of the Company upon certain conditions for such number of shares of Kemper Corporation common stock as are issuable at a conversion rate of 1.0339 shares of common stock for each share of Series E preferred stock. The Series E preferred stock ranks on a parity with the outstanding Series A, Series C and Series D preferred stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up.
Fixed maturities are considered available for sale, depending upon certain economic and business conditions. The Company is carrying its fixed maturity investment portfolio 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 carrying value (estimated market value) of fixed maturities compared with amortized cost, adjusted for other-than-temporary declines in value, at December 31, 1994 and 1993, is as follows:
The Company's $1.4 billion real estate portfolio consists of joint venture and third-party mortgage loans and other real estate-related investments. (See "Real estate-related investments" on page 33.) At December 31, 1994, the Company had $898.6 million of mortgage loans and other real estate-related investments (net of reserves and write-downs) that were non-income producing for the preceding 12 months.
Proceeds from sales of investments in fixed maturities prior to maturity were $1.7 billion, $2.4 billion and $4.6 billion during 1994, 1993 and 1992, respectively. Gross gains of $12.8 million, $119.7 million and $98.7 million and gross losses of $98.2 million, $52.6 million and $150.4 million were realized on sales of fixed maturities in 1994, 1993 and 1992, respectively. Gross unrealized gains and gross unrealized losses on equity securities at December 31, 1994, were $1.1 million and $1.4 million, respectively.
The following table sets forth the maturity aging schedule of fixed maturity investments at December 31, 1994:
The sources of net investment income from continuing operations were as follows:
--------------- (1) See the note captioned "Commitments and contingent liabilities" on page 66.
Discontinued operations primarily include the Company's property-casualty insurance, reinsurance and risk management subsidiaries. These subsidiaries were divested in 1993.
On December 31, 1993, the Company sold Federal Kemper Insurance Company ("FKI") to Anthem P&C Holdings, Inc. The Company received $100 million in the transaction, approximately $95 million in cash and the balance in the form of a property dividend. The book value of FKI was $83.0 million at the closing date, and an after-tax net gain of $9.2 million was recorded. This gain included $5.1 million of after-tax realized investment gains from the disposition of investments in connection with the sale.
Selected financial information, as of December 31, 1994 and 1993, is presented below separately for the MLP, ventures with the Prime Group, Inc. or its affiliates ("Prime"), other real estate-related partnerships and IFTC. (See the note captioned "Concentration of credit risk" on page 59.) Such real estate-related information for 1994 and 1993 was based on unaudited financial information received by the Company from the respective entities.
(1) Excluded from the Company's share of operating and net losses and related net equity investment in real estate-related entities is interest expense related to loans by the Company which are on nonaccrual status and write-downs taken directly by the Company. Included in the Company's share of current year results are immaterial prior year audit adjustments by the respective entities.
Included in the immediately preceding and immediately following tables are real estate loans to partnerships or corporations in which the Company holds equity interests. At December 31, 1994, the Company had other joint venture-related loans totaling $197.9 million before reserves, not included in the table above, to partnerships in which the Company has options to acquire equity interests or has made loans with additional interest features. These joint venture-related loans totaled $257.1 million at December 31, 1993. Also, at December 31, 1994, the Company had joint venture-related loans totaling $72.3 million before reserves, not included in the table above, to partnerships in which Lumbermens and Fidelity Life Association, an affiliated mutual life insurance company ("FLA"), had equity interests. These joint venture-related loans totaled $113.4 million before reserves at December 31, 1993. (See the note captioned "Financial instruments--off-balance-sheet risk" on page 67.)
The Company had $390.1 million (5.1 percent of invested assets and cash), $379.8 million (5.0 percent of invested assets and cash), $139.4 million (1.8 percent of invested assets and cash) and $110.5 million (1.5 percent of invested assets and cash) of mortgage loans and other real estate investments in Illinois, California, Texas and Spain, respectively, at December 31, 1994. The majority of the Illinois and all of the Spanish loans and other investments are Prime-related. The majority of the California loans and other investments are MLP-related. (See the preceding note captioned "Unconsolidated investees.")
The Company had $369.1 million (4.8 percent of invested assets and cash) of below investment-grade securities (including real estate-related bonds) at December 31, 1994.
The following table shows the amounts of the Company's real estate portfolio at December 31, 1994, which consisted of loans to or investments in joint ventures with the MLP and Prime:
Kemper Corporation renegotiated the short-term portion of its committed lines of credit with certain banks effective October 27, 1994. The lines of credit total $317.5 million, with $155.0 million expiring October 22, 1995 and $162.5 million expiring November 1, 1996. These lines would not be available upon a change in control of the Company. At December 31, 1994, $110 million of these lines are reserved for the sole purpose of funding certain real estate commitments which the Company does not expect to fund. Interest rates on the Company's committed lines of credit would generally approximate short-term bank corporate rates. See "LIQUIDITY AND CAPITAL RESOURCES--Short-term debt" on page 42.
The Company adopted SFAS 109, Accounting for Income Taxes, as of January 1, 1993. SFAS 109 established new principles for calculating and reporting the effects of income taxes in financial statements. SFAS 109 replaced the income statement orientation inherent in APB Opinion 11 with a balance sheet approach. Under the new approach, deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. SFAS 109 allows recognition of deferred tax assets if future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be realized.
The implementation of SFAS 109 resulted in a one-time increase to earnings of $2.5 million in the first quarter of 1993. The cumulative effect on continuing operations was an expense of $11.9 million and on discontinued operations a benefit of $14.4 million. Prior years' financial statements have not been restated to apply the provisions of SFAS 109.
The tax effects of temporary differences that give rise to significant portions of the Company's net deferred federal tax asset (included in "Other assets" in the consolidated balance sheet) from continuing operations were as follows:
Pursuant to the deferred method under APB Opinion 11, deferred income taxes were recognized for income and expense items that were reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes were not adjusted for subsequent changes in tax rates. The sources of deferred tax (benefit) on continuing operations and their tax effect were as follows:
The Company defines cash as cash and money market accounts, and certain highly liquid short-term investments with original maturities of three months or less held by the brokerage firm subsidiaries.
Not reflected in the statement of cash flows are rollovers of mortgage loans, other loans and investments totaling $146.0 million, $213.4 million and $240.8 million in 1994, 1993 and 1992, respectively. Also not reflected in the statement of cash flows for 1993 is the acquisition of 17.4 million treasury shares valued at $610.2 million. (See the note captioned "Discontinued operations" on page 56.)
Reflected in the statement of cash flows is the 1992 sale of $515.7 million of reinsured life reserves for which the Company delivered an investment portfolio that included $151.4 million of mortgage loans, $294.8 million of fixed maturities and $69.5 million of other investments.
Prior to November 30, 1994, Kemper Corporation and certain of its subsidiaries actively maintained several defined benefit pension plans. The plans were noncontributory, and benefits were based upon an employee's career average benefit accrual, with an alternative minimum benefit formula based upon years of participation and final average pay. Vesting occurred after five years of service. The Company's funding policy for qualified pension plans was to contribute, at a minimum, the equivalent of the amount required under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. At November 30, 1994, for Kemper Corporation and Federal Kemper Life Assurance Company ("FKLA"), and as of the 1993 divestiture dates for Economy and FKI, the retirement plans for each respective company ceased accruing benefits and all employees participating in the plans became fully vested.
The assets of the plans are held in various separate accounts which are invested primarily in government bonds and bonds of other entities unrelated to Kemper Corporation. Upon settlement of the plans, it is expected that nonparticipating annuity contracts of an unrelated party will be purchased. The Company will fund any additional amounts necessary to provide benefits accrued up to the curtailment dates. In determining the accumulated benefit obligation as of December 31, 1994, it was assumed that the earnings rate of such annuity contracts will be 7.5 percent.
No gain or loss was recognized upon curtailment of the Kemper Corporation and FKLA plans. An immaterial loss associated with the Economy and FKI plans was included in the 1993 gain from the sales of the businesses. The liability for the pension plans of other divested operations was transferred with the companies. (See the note captioned "Discontinued operations" on page 56.)
The funded status of the plans at December 31, 1994 and 1993 was as follows:
The Company sponsors welfare plans that provide medical and life insurance benefits to its retired and active employees. The Company is self insured with respect to medical benefits, and the plan is not funded except with respect to certain disability-related medical claims. The medical plan provides for medical insurance benefits at retirement, with eligibility based upon age and the participant's number of years of participation attained at retirement. The plan is contributory for pre-Medicare retirees, and will be contributory for all retiree coverage for most current employees, with contributions generally adjusted annually. Postretirement life insurance benefits are noncontributory and are limited to $10,000 per participant.
The discount rate used in determining the postretirement benefit obligation was 8 percent and 7 percent for 1994 and 1993, respectively. The assumed health care trend rate used was based on projected experience for 1994 and 1995, 10 percent in 1996, gradually declining to 6 percent by the year 1999 and remaining at that level thereafter.
During 1994, the Company adopted certain severance-related policies to provide benefits, generally limited in time, to former or inactive employees after employment but before retirement. The effect of adopting these policies was immaterial.
The following is a summary of life insurance in force at December 31, 1994, 1993 and 1992:
The Company provides investment services to the Kemper National Insurance Companies. As compensation for these services, the Company earned revenue of approximately $9.4 million in 1993 and $8.3 million in 1992.
The Kemper National Insurance Companies have received from the Company's continuing operations approximately $3.2 million in premiums for various insurance coverages in each of 1993 and 1992. Kemper Corporation and certain of its continuing operations lease approximately 110,000 square feet of office space from Lumbermens. The lease terms, effective late in 1991 for a ten-year period, approximate market.
On December 30, 1992, the Company issued $100 million of preferred stock to Lumbermens. (See the note captioned "Preferred stock" on page 53.)
In the normal course of business, the securities brokerage operations execute and finance numerous securities and commodities transactions. These activities may expose the Company to off-balance-sheet risk in the event that the customer or counterparty is unable to fulfill its contractual obligations. The Company manages the risks associated with customer business by requiring customers to maintain margin collateral in compliance with regulatory guidelines. Required margin levels are monitored daily, and when necessary, customers are required to deposit additional collateral or to reduce positions. Credit limits are also employed to manage clients' activities in relation to futures transactions.
Securities sold, not yet purchased, represent obligations of the Company to deliver a specified security at a contracted price and thereby create a liability to repurchase such securities in the market at prevailing prices. Accordingly, these transactions result in off-balance-sheet risk as the Company's ultimate obligation to satisfy the sale of securities sold, not yet purchased, may exceed the amount in the consolidated financial statements reflected at then current values.
The Company is party to derivative financial instruments in the normal course of business for trading purposes and other than trading purposes to hedge exposures to fluctuations in the following risks: (i) interest rate fluctuations related to unit investment trust product originations and interest-sensitive securities in the securities brokerage trading inventory, (ii) interest rate fluctuations related to an office building project to which the Company is a lender, (iii) foreign currency fluctuations related to foreign securities held by the Company's life insurance subsidiaries, and (iv) fluctuations in the S&P 500 Index in connection with the Company's $30 million of Series D Preferred Stock ("SPEX"). The following table summarizes various information regarding these derivative financial instruments as of December 31, 1994 and 1993:
--------------- * Positive and negative values represent assets and liabilities, respectively.
The Company is party to two separate interest rate swap agreements relating to the financing of an office building owned by a partnership to which the Company is a lender. In addition to the loans made by the Company, the partnership borrowed money from third-party lenders in the form of variable rate debt. Under the terms of the first swap, this variable rate debt was swapped with the Company for fixed rate debt. The Company receives a fixed interest rate and pays a floating interest rate. To offset this position, the Company entered into a second swap with another institution. Under the terms of the second swap, the Company receives a floating interest rate and pays a fixed interest rate. Inasmuch as the nature of the swaps is designed to be offsetting, the market risk exposure relating to the variable
Continuing operations include the following segments: asset management, life insurance, securities brokerage and real estate. The Company's segmentation was redefined in 1993, and the 1992 presentation has been restated. The principal products and services of these segments are as follows:
Fair value disclosures are required under SFAS 107. Such fair value estimates are made at specific points in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. A significant portion of the Company's financial instruments are carried at fair value. (See the note captioned "Invested assets and related income" on page 54.) Fair value estimates for financial instruments not carried at fair value are generally determined using discounted cash flow models and assumptions that are based on judgments regarding current and future economic conditions and the risk characteristics of the investments. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could significantly affect the estimates, and such estimates should be used with care.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Fixed maturities: Fair values for fixed maturity securities carried at market value were 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, Kemper Financial Services, Inc.
Receivables from and payables to brokerage firms and customers: Fair values for receivables from and payables to brokerage firms and customers approximate the carrying values presented in the consolidated balance sheet.
Life policy benefits: Fair values of the life policy benefits regarding investments contracts (primarily deferred annuities) and universal life contracts were estimated by discounting gross benefit payments, net of contractual premiums, using the average crediting rate currently being offered in the marketplace for similar contracts with maturities consistent with those remaining for the contracts being valued. The Company had projected its future average crediting rate in 1994 and 1993 to be 5.6 percent and 5.0 percent, respectively, while the assumed average market crediting rate was 6.5 percent in 1994 and 5.25 percent in 1993.
Long-term debt: Fair values for long-term debt were estimated by discounting the scheduled cash flows using the current rates offered to the Company for debt of the same remaining maturities.
Convertible debentures: The carrying amounts reported in the consolidated balance sheet for these financial instruments approximate fair value.
The carrying values and estimated fair values of the Company's financial instruments at December 31, 1994 and 1993 were as follows:
Dividend distributions to Kemper Corporation from subsidiaries are restricted as to the amounts that may be paid without prior notice or approval by regulatory authorities in the asset management, securities brokerage and life insurance industries. The aggregate maximum dividend distribution that can be made by regulated subsidiaries during 1995 without prior approval is $153.4 million. The amount of dividends actually paid in cash by subsidiaries to Kemper Corporation during 1994 was $127.5 million.
Net income (loss) and stockholder's equity as determined in accordance with statutory accounting principles for the Company's life insurance subsidiaries are as follows: