Timing Is Everything : For Corporate Cousin, Kemper Stock Trade Could Prove Costly
If GE Capital’s offer to buy Kemper Corp. succeeds, another firm--that until August owned nearly 39% of Kemper Corp.--will have missed out big on a chance at windfall profits from the sale.
That company is Lumbermens Mutual Casualty Co., which as a mutual insurance company is owned by its customers--businesses and individual property owners, including thousands in California.
Lumbermens last year agreed to trade back to Kemper most of the stake it owned in the big financial-services company, in exchange for ownership of two Kemper subsidiaries--one that sells reinsurance, the other a risk management unit. Lumbermens was left with about 4% of Kemper’s stock.
Although separate companies, publicly-traded Kemper and Lumbermens, both based in Long Grove., Ill., share common corporate roots and long have had close relations--including four board members in common when the transaction was approved.
Now, some analysts question whether Lumbermens board deliberately gave Kemper a sweetheart deal at the expense of Lumbermens’ owners.
“Over the years, Lumbermens . . . has basically done a number of transactions to help or benefit Kemper Corp. as a publicly traded vehicle at the expense of Lumbermens,” according to Michael A. Lewis, an analyst with Dean Witter Reynolds. The August swap, he said, was the biggest example so far of that.
“Kemper got the better end of that deal,” added Robert E. Robotti of New York’s Robotti & Eng, a securities research and trading firm.
Lumbermens is part of a group of mutual insurance companies that go under the rubric of Kemper National Insurance Cos. (a separate entity independent of Kemper Corp.). Kemper National spokesman Charles F. Johanns insists that Lumbermens got a fair deal in the swap.
He noted that an independent investment bank, Lazard Freres, was hired to review the trade and gave its approval in a so-called fairness opinion. Johanns said the Illinois Insurance Department also approved the transaction.
The price was arrived at “through an arms-length process of negotiation,” Johanns said.
Details of the deal are coming to light as critics of the insurance industry increasingly question whether the management and boards of mutual insurance companies adequately look out for the interests of the companies’ owner--that is, their policyholders.
Questions about the value of the Kemper Corp. stake that Lumbermens gave up were stirred by GE Capital’s announcement March 14 that it was willing to pay $55 a share for all of Kemper’s stock. Since then, Kemper’s stock price has risen to $60.875 on the expectation that GE will raise its offer.
When Lumbermens gave up its 17.4 million shares, that stake was worth $593.8 million, based on the $34.125 closing price for Kemper the day before the transaction closed last year. At Wednesday’s closing price, the same 17.4-million-share stake would be worth nearly twice as much, although a true comparison is difficult because Kemper now has fewer shares outstanding.
Kemper’s board so far has spurned GE’s offer, although Wall Street is betting GE will prevail.
It’s quite possible GE wouldn’t have made its offer if Lumbermens still owned a 38.8% stake; part of Kemper’s appeal to GE is that no big holder loomed to confound the deal. But as things stand, Dean Witter’s Lewis contends, “Lumbermens is a double loser, because they gave away their (Kemper) shares cheap for what they got in kind, and Lumbermens now will hardly benefit if Kemper is acquired.”
The transaction last August also could end up personally benefiting directors who sat on both companies’ boards, if they remain Kemper stockholders. (Kemper’s most recent proxy statement lists three men who served on both boards as holding 2,250 to 20,250 shares.)
None of those directors responded to telephone messages left with their offices Wednesday seeking comment. Johanns declined to say whether they participated in the vote on Lumbermens board that approved the deal.
Even before GE’s offer, the Lumbermens-Kemper swap had the potential for boosting the value of Kemper stockholders’ shares. Kemper retired Lumbermens’ 17.4 million shares, thereby sharply reducing the number of Kemper shares outstanding.
As for Lumbermens’ policyholders, one way the swap might end up costing them is in the loss of regular or special dividends they might have collected had Lumbermens experienced a big profit in selling its Kemper stake. The firm is California’s seventh-largest workers compensation insurer, and bigger dividends might have gone to businesses in the state, among other policyholders.
Alternatively, the profits could have gone into a reserve account assuring the company’s financial strength and ability to meet future claims.
In the August trade, Lumbermens got ownership of Kemper Corp.’s reinsurance unit, known as Kemper Re, and National Loss Control Service Corp., a risk management concern. A spokesman for Kemper Corp. said the combined book value of the two at the time was $409.2 million.
Based on that alone, the price Lumbermens paid seemed fair--stock with a market value then of $593.8 million, or a relatively small premium over the subsidiaries’ book value. But shortly before the swap first was announced in March, 1993, at least one insurance rating agency, A.M. Best, lowered its rating of Kemper Re.
