KFS leases 530,000 sq. ft. of office space in Chicago, Illinois. Most of this space is leased through December 31, 1996. In early 1995, KFS executed a 15-year lease for 300,000 sq. ft. of replacement office space in Chicago effective January 1, 1997. 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.
Money market fund assets under management were virtually flat in 1994 compared with 1993. Movement was volatile in 1994, however, as money fund assets under management peaked at $12.8 billion in April, decreased to $12.2 billion in June, returned to the $12.8 billion level in November, and declined back to $12.2 billion in December. During 1993 and 1992, Kemper money market fund assets decreased because of the lower interest rate environment, and late in 1993, a non-affiliated broker withdrew its $1.5 billion money market account. Based on ICI data, the Company's money funds' market share declined to 1.99 percent at December 31, 1994 from 2.18 percent at December 31, 1993 and 2.72 percent at December 31, 1992, due in part to the loss of the previously mentioned account and to increased competition.
The decreases over the last three years in general account (fixed annuity) sales and interest-sensitive life insurance sales reflected the Company's continuing strategy to direct sales efforts toward separate account (variable annuity) products, which increase administrative fees earned and pose minimal investment risk for the Company as policyholders invest in one or more of several underlying investment funds. Despite this strategy, separate account sales declined in 1994 and 1993, compared with 1992, due to competitive conditions in certain distribution channels, in part reflecting the life insurance subsidiaries' financial strength and performance ratings as well as the underlying investment fund performance, reflecting the economic environment of rising interest rates and overall poor stock and bond market conditions.
Equity investments in certain joint ventures were accounted for in the insurance company subsidiaries in first-half 1992 before the equity was transferred to the real estate subsidiaries. The segment's acquisition of these assets, along with the Company's treatment of certain loans as equity investments in real estate (see "INVESTMENTS--Real estate-related investments" on page 33), accounted for most of the $25.1 million increase in joint venture operating losses in 1993 over the 1992 level. Also in 1993, the Company began recognizing 100 percent of the operating results of certain joint ventures.
(5) The other real estate loans are notes receivable evidencing financing primarily to joint ventures, for purposes similar to those funded by real estate-related bonds.
The deficit in (i.e., the negative carrying value of) the Company's equity investments in real estate is considered in the Company's periodic evaluations of, and serves to reduce the level of, its provisions for real estate-related losses. In 1994, because certain negative carrying values were eliminated due to the sales or transfers of the Company's interests in the corresponding joint ventures, the Company generally added to its provisions for real estate-related losses an amount equal to most of the gains from such sales and transfers.
The Company's real estate experience could continue to be adversely affected by overbuilding and weak economic conditions in certain real estate markets and by fairly restrictive lending practices by banks and other lenders. Stagnant or worsening economic conditions in the areas in which the Company has made loans, or additional adverse information becoming known to the Company through its regular reviews or otherwise, could result in higher levels of problem loans or potential problem loans, reductions in the value of real estate collateral and adjustments to the real estate reserve. The Company's net income and stockholders' equity could be materially reduced in future periods if real estate market conditions remain stagnant or worsen in areas where the Company's portfolio is located.
Future net investment income, results of operations and cash flow will reflect the Company's current levels of investments in investment-grade securities, real estate fundings treated as equity investments, nonaccrual real estate loans and joint venture operating losses. The Company expects, however, that any adverse effects should be offset to some extent by certain advantages that it expects to realize over time from its other investment strategies, its life insurance product mix and its continuing cost control measures. Other mitigating factors include marketing advantages that could result from the Company having lower levels of investment risk and earnings improvements from its life insurance operations' ability to adjust crediting rates on annuities and interest-sensitive life products over time.
As a parent holding company, Kemper regularly reviews the strategic fit of all its businesses and may consider the acquisition or disposition of its and its subsidiaries' assets, and the Company may consider entering into joint venture, reinsurance and other transactions. Since Kemper is a holding company, its rights and the rights of its creditors to participate in the assets of any subsidiary upon the latter's liquidation or recapitalization will be subject to prior claims of the subsidiaries' creditors, including customers of asset management or securities brokerage subsidiaries, policyholders of insurance company subsidiaries and lenders with respect to real estate subsidiaries (except to the extent the Company itself may be a creditor with recognized or secured claims against the subsidiary). During 1993, the parent received $380.3 million in cash and 17.4 million shares of its common stock from dispositions of subsidiaries. (See the note captioned "Discontinued operations" on page 56.)
Kemper receives from its subsidiaries interest on loans and dividends of cash and property. (See the parent only financial statements included in Schedule II beginning on page 77.) Distributions to the parent are restricted. (See the note captioned "Stockholders' equity--retained earnings" on page 71.) The parent also receives from its subsidiaries payments for federal income tax. (See the note captioned "Income tax" on page 60.) Additionally, from time to time, Kemper borrows funds and issues securities for cash.
We have audited the consolidated balance sheet of Kemper Corporation and subsidiaries as of December 31, 1994 and 1993, 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, 1994. In connection with our audits of the consolidated financial statements, we have also audited the supplementary schedules as listed in the accompanying index. These consolidated financial statements and supplementary schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplementary schedules based on our audits.
KEMPER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Upon default or indication of potential default by an issuer of fixed maturity securities, the Company-owned issue(s) of such issuer would be placed on nonaccrual status and, since declines in market value would no longer be considered by the Company to be temporary, would be analyzed for possible write-down. Any such issue would be written down to its net realizable value, determined in the manner described in the following paragraph, during the fiscal quarter in which the impairment was determined to have become other than temporary, unless such net realizable value exceeded the Company's carrying value for such issue. Thereafter, each issue on nonaccrual status is regularly reviewed, and additional write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and estimates, so such value should be used with care. Such value determination considers such factors as the existence and value of any collateral security; the capital structure of the issuer; the level of actual and expected market interest rates; where the issue ranks in comparison with other debt of the issuer; the economic and competitive environment of the issuer and its business; the Company's view on the likelihood of success of any proposed issuer restructuring plan and the timing, type and amount of any restructured securities that the Company anticipates it will receive.
The valuation allowance of $181.4 million is subject to future adjustments, based on, among other items, the Company's estimates of future operating earnings and capital gains.
--------------- * The effect of these items is antidilutive; accordingly, no adjustment is required.
The other operations and corporate category primarily includes Kemper Corporation's and KFC's holding company net expenses.