Kemper Forced to Revise Plan to Spin Off Brokerage Unit

Kemper Corp. said regulators forced it to scrap a plan to spin off its brokerage unit by distributing common stock to shareholders, the latest setback in the firm’s efforts to become a separate company.

Under terms of the revised plan Kemper is submitting to the Securities and Exchange Commission, shareholders will receive preferred stock in Everen Capital Corp.--the newest name for Kemper Securities--instead of common shares. As a result, Kemper will take an $18-million charge against its third-quarter earnings.

The plan values Everen at about $101 million, or 60% of the price at which Kemper carried the brokerage on its books at the end of 1994. Kemper is taking a charge because it initially valued Everen at about $130 million.

“Unfortunately, the divestiture of our securities brokerage corporation proved to be impossible to complete as originally planned,” David B. Mathis, Kemper chairman and chief executive, said in a statement.

Mathis did not return phone calls seeking comment and Kemper spokesman Ira Nathanson declined to explain why regulators nixed the original plan.

The spinoff, which was expected to be completed earlier this summer, now will occur in the first two weeks of September. Earlier this month, Everen’s chairman and chief executive, James R. Boris, told the firm’s brokers that the SEC was delaying the transaction because of accounting glitches.

Accountants speculated that Everen had to come up with a new plan because its first one would have left the company with too little capital to satisfy SEC regulations. SEC spokesman John Heine declined to comment on the proposed transaction.

Kemper agreed to shed the brokerage division as part of its acquisition by Zurich Insurance Co. Zurich agreed to buy Kemper for about $2 billion in May.

The insurer originally planned to give 45% of Everen’s common stock to shareholders. The company said it expected that stock would trade for $1.50 a share. The rest of the company would be held by employees through an employee stock ownership plan. The ESOP paid $74.1 million for a 55% ownership stake.

Under the new plan, the ESOP will own all of Everen.

Accountants said the problem with the first plan may have been that the ESOP would have had too much debt relative to the size of its stake in the company. The ESOP borrowed money to pay for the employees’ ownership. Brokerages are required by the SEC to maintain a maximum ratio of debt to liquid capital of 15 to 1.

Under the revised proposal, Kemper’s ESOP will pay the same amount of money for a much larger stake in the company.

“It’s possible that because of the way the ESOP was structured, it would not have given [Everen] enough regulatory capital,” said Peter Testaverde, partner in the financial services group at accountants Goldstein Golub Kessler & Co. in New York. “It’s a liquidity question.”

As part of the new proposal, the company will issue 1.2 million shares of preferred stock.