Kemper Corporation
Address:
1 Kemper Drive
Long Grove, Illinois 60049
U.S.A.
Telephone: (708) 320-4700
Fax: (708) 320-4535
Statistics:
Wholly Owned Subsidiary of Zurich Insurance Group (80%) and Insurance Partners L.P. (20%)
Incorporated: 1967 as Kemperco Inc.
Employees: 6,059
Total Assets: $13.15 billion (1994)
Stock Exchanges: New York
SICs: 6311 Life Insurance; 6719 Offices of Holding Companies, Not Elsewhere Classified
Company History:
Kemper Corporation is a holding company consisting of life insurance and real estate investment operations. Until a recent string of divestments, spinoffs, and mergers, Kemper consisted of a much broader array of insurance and investment services units, including property-casualty insurance, reinsurance, brokerage services, and asset management services. After a lengthy two-year period in which the sale of the company preoccupied company management, Kemper was sold in early 1996 to a partnership consisting of Zurich Insurance Group and Insurance Partners L.P.
Kemper Corporation's origins are tied directly to the general business climate of the early 20th century. In 1912, a new Illinois state law requiring compensation for industrial accidents, which were common for the industry at the time, was passed.
Sensing opportunity, a 25-year-old insurance salesman named James S. Kemper proposed to a group of Chicago lumber-industry leaders that they take control of the situation by organizing their own mutual insurance firm. Kemper pointed out that the group could also contain rising premium costs by making workshops safer.
Kemper was rewarded for his plan by being named manager of the new Lumbermens Mutual Casualty Company, incorporated in Illinois on November 18, 1912. Lumbermens issued its first policy, to the Rittenhouse and Embree lumberyard, seven days after the firm was incorporated.
In 1913 James Kemper founded National Underwriters insurance exchange to provide supplementary fire insurance for lumbermen. Slow growth continued through World War I. In 1919 Lumbermens opened offices in Philadelphia, Boston, and Syracuse, New York. By this time the company was providing auto insurance as well as workers' compensation and liability insurance. The company's product line continued to grow steadily.
By 1923 Lumbermens had organized or acquired two subsidiaries and had begun operating in Canada. Around this time, Lumbermens and National Underwriters informally adopted the name Kemper Insurance to refer collectively to the interests James Kemper had organized. Although the two companies were independent, they shared office space. According to company lore, a receptionist coined the name in order to shorten her phone salutation to callers.
James Kemper incorporated American Motorists Insurance Company (AMICO) in 1926. Organized as a stock company, AMICO became part of the Kemper Insurance group but had no financial relationship to Lumbermens. During the Great Depression, Glen Cove Mutual Insurance Company, a New York mutual company, joined Kemper Insurance and, after a reorganization, reemerged as American Manufacturers Mutual Insurance Company.
During World War II Lumbermens continued to grow. The company placed patriotic advertisements and employed more women, as men went off to fight. In the years after the war, Lumbermens continued to organize subsidiaries, and--in 1948--the company moved to a larger building on Chicago's Wacker Drive.
In 1954 James Kemper became U.S. ambassador to Brazil, but his group of companies continued to grow. The Fidelity Life Association was organized in 1954. Kemper Insurance's first move into life insurance, Fidelity Life, was a mutual company that, again, had no financial ties to Lumbermens. Also in 1954, the Kemper companies invested in an automatic billing machine that helped cut office expenses. This system got a boost in 1957, when the group installed computers to process the vast amounts of data Kemper Insurance collected.
As the company grew, Kemper management, which as of 1959 included James S. Kemper Jr., decided to establish a nonoperating holding company in order to give the group greater diversification flexibility. In October 1967, Kemperco Inc. was incorporated in Delaware as a holding company for the property and casualty and life insurance operations of Kemper Insurance. Kemperco was owned primarily by Lumbermens, but its stock was also publicly traded. The holding company began operations in June 1968, with 11 operating subsidiaries. Management established objectives for the new company, including annual average earnings growth of no less than 15 percent and continuation of diversification into related businesses.
Kemperco's internal development included the organization of National Loss Control Service Corporation in July 1968. The division, known as NATLSCO, offered consulting services in the areas of fire protection, safety, industrial hygiene, air pollution, and boiler and mechanical inspection services. Diversification through external integration included the acquisition of a 40 percent stake in Extel Corporation, a maker of telecommunications devices, including printers and stock-quotation equipment.
In 1969 Kemperco added a reinsurance division, Kemper Reinsurance Company, and in 1970 Kemperco purchased Supervised Investors Services, later known as Kemper Financial Services, to manage the firm's investment portfolio. The company's assets also included Bank of Chicago, which owned a local commercial banking operation. In 1972, the company acquired Kemper Investors Life Insurance Company, National Automobile and Casualty Insurance Company, and Sequoia Insurance.
The Kemper organization had outgrown the three buildings it then occupied in Chicago, and in 1971 it had moved to a 1,000-acre campus in Long Grove, Illinois, northwest of Chicago. In 1971 assets managed by the financial-services operation reached more than $2 billion, and investment income totaled $14 million--more than double the investment income four years earlier. In 1972 the firm reported a 13 percent volume increase compared to 1971, to $329 million. Much of this growth resulted from acquisitions.
When the 1973 Arab oil embargo sparked runaway inflation in the United States, Kemper suffered. Net income for the fiscal year plunged more than 19 percent, to $18.9 million, as a slump in Kemper's automobile, workers' compensation, and general liability insurance units offset the steady growth posted in the first three quarters of the year by the other divisions.
Kemper launched a corporate-identity program, and established one-year and five-year internal performance objectives in order to maintain the goal of 15 percent annual earnings growth set in 1968. As part of its corporate-identity program, Kemperco changed its name to Kemper Corporation, on January 15, 1974. Companywide, profits continued to plunge nearly 37 percent from the disappointing showing in 1973, with net income dipping to $12.6 million.
This two-year slump prompted Kemper management to reevaluate its operations. In 1974, insurance-premium income contributed about 90 percent of the company's gross revenues, while investment income contributed about 6.5 percent. Despite modest diversification, Kemper was still dependent on the maturing insurance industry for the lion's share of its income. Kemper Corporation suffered its worst performance ever in 1975, when net income slid 26 percent from 1974, to $9.3 million. Repositioning proved to be a wise tactic. In mid-1975 Kemper Corporation launched a new market-sensitive approach, and in 1986 the holding company enjoyed the highest earnings in its nine-year history. Net income soared more than 238 percent, to $31.4 million, while total assets topped $1 billion for the first time. In 1977 Kemper Corporation posted profits of more than $57 million on sales of $808 million. The company's assets by 1977 topped $1.3 billion.
James S. Kemper Jr. announced his intention to resign as chief executive officer on April 1, 1979. Around this time, the company hit another round of financial bumps after three years of steady growth in revenues and profits. Joseph E. Luecke, Kemper Corporation's new chief executive officer, blamed an annual inflation rate of 13.3 percent for hurting the company's auto and commercial property insurance rates. Also during 1979, Kemper Corporation adopted the umbrella designation Kemper Group to refer to what had been called the Kemper Insurance and Financial Companies.
In 1979 Kemper's catastrophe losses passed $1 billion for the first time in the history of the insurance industry. Kemper's share of these losses amounted to about $25 million. A catastrophic loss is defined by the Insurance Services Offices as a total insured loss to the industry of $1 million or more. A record 50 such losses were recorded in 1979.
In 1980 Kemper once again reevaluated its dependence on property and casualty operations. Continued diversification into reinsurance and financial services lowered the contribution of insurance operations to earnings by nearly 18 percent between 1970 and 1980. Kemper management, led by chairman and CEO Luecke, responded by launching an expansion that would carry the firm far beyond property and casualty insurance. One aspect of the diversification program was the purchase of a 24.9 percent stake in Gibraltar Financial Corporation of California, a savings and loan holding company. Kemper sold some of its other assets, such as its LaBow, Haynes Company insurance brokerage in Seattle, Washington, and its 95 percent stake in the Bank of Chicago. Combined with the sale of Kemper's 33 percent stake in Extel Corporation, a manufacturer of communications equipment, Kemper realized a capital gain of about $12 million.
In 1981, Kemper reported a slide in property and casualty insurance business as a result of high interest rates, and while sales climbed 40 percent over the previous year, operating income suffered. The high interest rates that had helped the investment operations post significant gains in the fiscal year also caused inadequate pricing throughout the insurance industry, resulting in a decline in underwriting results. The diversification program launched in the previous year was expected to cover losses as uncertainty about interest rates continued.
James S. Kemper, founder of Lumbermens, died September 17, 1981. Late in 1981, Kemper announced its intention to acquire Loewi Financial Companies, widening the company's involvement in the financial-services industry. The Milwaukee, Wisconsin-based company owned Blunt Ellis & Loewi, a regional brokerage firm with offices in six midwestern states. Loewi had been a distributor of Kemper Financial Services financial products for several years before the purchase, which was completed in 1982 at a cost of $64 million in cash and stock. It was the first of several acquisitions that expanded Kemper's financial-services division over the next three years.
The timing of the brokerage acquisitions coincided with the decline of the performance of Kemper's investment in Gibraltar Financial savings and loan operation in California. Kemper had lost almost $10 million in 1980 and almost $30 million in 1981 as a result of its investment in Gibralter. The long-term diversification program was meant to help soften the blow that Kemper's property and casualty insurance business would see in 1982 and beyond.
During 1981, Kemper's property and casualty insurance units contributed just 49 percent of the firm's operating income, compared to 60 percent in 1980. Rate competition and inflation were blamed for sharp declines in the industry, and Kemper responded by committing $20 million for expansion of its life insurance business, which continued to grow, along with Kemper's annuity products.
In 1982 operating earnings for Kemper's property-casualty operations fell more than 51 percent compared to the previous year, although life insurance, reinsurance, investment services, and other operations rose by nearly 38 percent. The expansion of the financial-services business continued with the purchase of Bateman Eichler Hill Richards of Los Angeles for $50 million. Kemper acquired its third brokerage firm in two years with the purchase of an 80 percent equity stake in Cleveland-based Prescott Ball & Turben in a deal valued at $64 million. The acquisitions made Kemper the 11th-largest brokerage operator in the nation.
The slump in Kemper's property and casualty division continued in 1983, although the firm remained optimistic about long-range prospects. Operating earnings fell 11.7 percent compared to the previous year, although Kemper's life insurance division posted a 6.1 percent gain in earnings. In the boardroom, James W. Harding retired as president of the corporation and chief financial officer of the Kemper Group. Kemper Corporation chairman and chief executive Luecke assumed the additional post of president.
Early in 1984, the investment-services division again broadened its operations with the acquisition of Burton J. Vincent, Chesley & Company, a Chicago-based regional securities firm. Kemper's life insurance unit, which saw earnings improve by 43 percent, continued to offset disappointing showings by the property and casualty business for the fourth straight year. CEO Luecke labeled 1984 the worst year in Kemper Corporation's relatively short history.
In 1985 operating earnings in the property and casualty division rebounded significantly. The company also instituted cost-cutting programs which contributed to improved results. The financial division continued its expansion when Kemper acquired an 80 percent stake in Boettcher & Company, a Denver, Colorado-based regional brokerage firm, for $16 million. Also in 1985, Kemper began selling its stake in Gibralter Financial. The savings and loan had been losing money consistently since 1980. The sale of its Gibralter stock was completed in May 1986.
James S. Kemper Jr. announced his retirement as chairman of Kemper Corporation in the spring of 1986. Having joined the Kemper organization in 1959, the son of the founder was instrumental in the decision to form Kemper Corporation in 1967.
Improving market conditions helped Kemper's property and casualty operations continue to recover in 1986. Organizational changes and further cost-cutting measures also helped improve bottom-line results, although operating results at the firm's life insurance segment declined by 32 percent. In an effort to maximize earnings, the company placed its financial-services business in an independent holding company, Kemper Financial Companies, in December 1986. Kemper Corporation then sold 12 percent of the unit to 1,100 employees in a deal worth about $88 million and retained the remaining 88 percent.
The stock market crash in October 1987 caused a shakeout in the financial-services industry and also at Kemper Financial Companies, especially at the company's securities brokerage units. Overall, the financial-services arm ended 1987 relatively unscathed by the stock market crash, posting earnings 25 percent higher than those in 1986.
Kemper's property and casualty insurance operations continued to improve as the firm launched a reorganization of the business. Kemper sold most of its accident and health business and established separate profit centers for its national personal and commercial insurance lines.
By 1988, the company was finally beginning to see the fruit of the ongoing diversification program launched nearly ten years earlier. Net income reached $220 million on revenues of $2.4 billion as the firm's life insurance, reinsurance, and investment-services operations all posted significant gains. Kemper also sought to further control expenses by establishing Kemper Clearing Corporation, a joint operation that clears securities trades for all of the company's securities brokerage operations. Kemper's property and casualty business suffered a decline in earnings, despite improved underwriting results. The division also exited the troubled Massachusetts auto insurance market, a move that cost the firm $21 million.
As the 1980s came to a close, Kemper Corporation plotted yet another major restructuring, one that would take the company further away from its sister company, Lumbermens, in an effort to spur profits. The first step was the reduction of Lumbermens Mutual Casualty Company's ownership of Kemper stock from 48.8 percent to 38.3 percent, effective April 1, 1989. This was accomplished through the sale of Kemper's American Motorists Insurance Company unit to Lumbermens in exchange for 9.6 million Kemper shares. The move boosted earnings per share by reducing the number of shares outstanding by nearly 15 percent.
In late 1989 Banco Santander, Spain's fourth-largest bank, acquired a three percent stake in Kemper Corporation for $60 million. The companies teamed up to offer investment and management services to clients in the United States, Europe, and South America and also began offering insurance services to customers in Chile.
In March 1990 the three members of the Kemper Group that were not also members of Kemper Corporation--Lumbermens Mutual Casualty Company, American Motorists Insurance Company, and American Manufacturers Mutual Insurance Company--became known as the Kemper National Insurance Companies, and the Kemper organizations ceased to be referred to as the Kemper Group. Luecke remained chairman of the boards of Kemper Corporation and of the three Kemper National Insurance Companies and David B. Mathis, a Kemper Corporation vice-president, became president and chief operating officer of Kemper Corporation. Gerald L. Maatman became president and CEO of the Kemper National Insurance Companies.
Also in 1990 Kemper's five regional brokerage operations were consolidated under Kemper Securities, Inc., which was made a subsidiary of Kemper Financial Services. The move was intended to establish better control over a group of operations beset by mounting lawsuits. Two years later, however, Kemper's Prescott Ball & Turbin brokerage lost a fraud and racketeering suit filed by ContiCommodity and was assessed $137 million in damages.
Revenues declined drastically in 1992 to $1.5 billion (21.3 percent lower than 1991) and, thanks in part to the brokerage suit, Kemper posted a net loss of $203.4 million. An even larger contributor to the dismal results were the continued difficulties with Kemper's real estate investments, which posted net losses of $209.1 million in 1992. Only the ongoing strength of Kemper's asset management unit--the only Kemper unit to post a profit for the year, $88.3 million--kept 1992 from being a complete disaster.
In 1992 Mathis became CEO of Kemper Corporation and early the following year moved to turn the company's fortunes around through a major restructuring. Economy Fire & Casualty Co. was sold to the St. Paul Companies, while Federal Kemper Insurance Co. was sold to Anthem P&C Holdings, part of the Associated Group (in the process Kemper exited from property-casualty insurance, the business upon which it was founded). The risk management and reinsurance businesses were sold to Lumbermans in return for most of the Kemper stock owned by Lumbermans, which thereafter held less than four percent of Kemper. The Lumbermans purchases became part of the separately operated Kemper National Insurance Companies. Kemper also took a $180 million charge to write off real estate investments and set up additional reserves. Following these moves, Kemper Corporation's remaining businesses were the asset management operations of Kemper Financial Services, the life insurance subsidiaries Federal Kemper Life Assurance Company and Kemper Investors Life Insurance Company, the securities brokerage operations of Kemper Securities, and a much-reduced real estate investment unit.
Year-end results for 1993 boded well for the restructuring's long-term chances of success as sales increased slightly to $1.55 billion and Kemper was profitable again with $235.5 million in net income. The time needed to render a judgment was never allowed, however, since early in 1994 corporate-control events became the overriding focus of company management for the next two years.
In January 1994, General Electric Capital Corporation (GECC), the financial services arm of General Electric, made a takeover proposal of $45 per share to Kemper's board. The following month the board turned down the offer, stating that the company was not for sale and wished to give the restructuring more time to bear fruit. In March GECC increased its offer to $55 per share (or $2.2 billion); when the board again refused to sell, GECC initiated a proxy fight. Kemper and GECC continued to talk and tentatively agreed in May on a $60/share bid, all in cash, although Kemper management indicated it would consider other offers as well.
In June Conseco, Inc., a life-insurance holding company much smaller than Kemper ($5.9 billion in assets compared to Kemper's $14 billion), made a $67/share bid (or $2.96 billion), with $56/share in cash and the remainder in Conseco stock. GECC immediately withdrew its offer. A definitive merger agreement between Conseco and Kemper was signed, with the deal to be largely financed with debt given the companies' relative sizes. Following the proposed merger, in fact, Conseco planned to adopt the Kemper name.
Over the next few months, Conseco attempted to secure the financing needed to bring the deal off. Unable to sell enough assets to raise significant cash and having to take into account the impact of rising interest rates, Conseco was forced to lower its bid to $60 per share in November. Shortly thereafter the deal fell apart completely, as both sides agreed to terminate the agreement. In December Mathis told stockholders at an annual meeting that Kemper was still for sale despite its battered stock, which had fallen from a high of $62 in June to $38, a sure sign that any new offers would not be as attractive as those of 1994.
Predictions that Kemper would now be sold piecemeal turned out to be true. In a deal announced in early April 1995 and completed in September, the brokerage unit of Kemper Securities was first to go in a spinoff to be 100 percent-owned by the new firm's employees. Renamed Everan Capital Corp., the spinoff forced Kemper to take an $88 million loss from discontinued operations in 1995.
Shortly after the spinoff was announced, in mid-April, a tentative agreement for the sale of the remaining Kemper operations was reached between Kemper, Zurich Insurance Group, and Insurance Partners L.P. Following the consummation of the deal in early 1996, Zurich--Switzerland's second-largest insurance company&mdashøok sole control of the asset management unit Kemper Financial Services, which was renamed Zurich Kemper Investments Inc. What remained of Kemper Corporation--the life insurance and real estate units--became 80 percent owned by Zurich and 20 percent owned by Insurance Partners, a New York-based investment partnership specializing in the property-casualty and life insurance industries. In the final deal, Zurich and Insurance Partners paid $49.50 per share to Kemper shareholders, or a total of $2.064 billion, all in cash.
The issue of corporate control finally resolved, the much smaller Kemper Corporation could now concentrate on rebuilding its shaky business backed by the wealth of Zurich. The Swiss insurance giant saw Kemper as an attractive target because of the Kemper name and because of the opportunity the acquisition afforded to increase Zurich's life-insurance business and decrease its dependence on property-casualty premiums, two of Zurich's main goals. Many questions still remained about Kemper's future as it headed into the end of the century, but its prospects seemed much brighter than they had in many years.
Principal Subsidiaries: Federal Kemper Life Assurance Company; Kemper Investors Life Insurance Company.
Further Reading:
Burns, Greg, "A Suitor Blinded by Love?," Business Week, October 31, 1994, p. 46.
------, "Is Kemper Trying to Give Away the Store?," Business Week, January 23, 1995, p. 94.
------, "Now It's on a Swiss Watch," Business Week, January 22, 1996.
"Conseco Caves," Economist, July 2, 1994, pp. 71, 74.
Fritz, Michael, "Zurich's U.S. Boss Faces Kemper Challenge," Crain's Chicago Business, April 17, 1995.
Kahn, Virginia Munger, "Swiss Cheese: Can Zurich Insurance Plug the Holes in Kemper?," Financial World, May 9, 1995, p. 64.
Pouschine, Tatiana, "Getting Out from Under," Forbes, March 1, 1993, p. 54.
Smart, Tim, and Greg Burns, "Does GE Have Kemper Cornered?," Business Week, March 28, 1994, p. 30.
Source: International Directory of Company Histories, Vol. 15. St. James Press, 1996.
