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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO U.S.C. SECTION 1350 - KEMPER Corpkmpr201709302017ex322.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO U.S.C. SECTION 1350 - KEMPER Corpkmpr201709302017ex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SEC RULE 13A-14(A) - KEMPER Corpkmpr201709302017ex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SEC RULE 13A-14(A) - KEMPER Corpkmpr201709302017ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________
FORM 10-Q
______________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 2017
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from              to             
Commission file number 001-18298
______________________________________________________
 Kemper Corporation
(Exact name of registrant as specified in its charter)
______________________________________________________
Delaware
95-4255452
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
One East Wacker Drive, Chicago, Illinois
60601
(Address of principal executive offices)
(Zip Code)
(312) 661-4600
(Registrant’s telephone number, including area code)

______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x      No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “accelerated filer, large accelerated filer, smaller reporting company and emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
  
Accelerated filer
¨
 
Non-accelerated filer
¨

(Do not check if a smaller reporting company)
Smaller Reporting Company
¨
 
 
 
 
 
Emerging Growth Company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
51,451,359 shares of common stock, $0.10 par value, were outstanding as of October 27, 2017.




KEMPER CORPORATION
INDEX
 
 
 
 
Page
 
 
 
 
 
PART I.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including, but not limited to, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), Quantitative and Qualitative Disclosures About Market Risk, Risk Factors and the accompanying unaudited Condensed Consolidated Financial Statements (including the notes thereto) of Kemper Corporation (“Kemper”) and its subsidiaries (individually and collectively referred to herein as the “Company”) may contain or incorporate by reference information that includes or is based on forward-looking statements within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “believe(s),” “goal(s),” “target(s),” “estimate(s),” “anticipate(s),” “forecast(s),” “project(s),” “plan(s),” “intend(s),” “expect(s),” “might,” “may,” “could” and other terms of similar meaning. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong, and, accordingly, Kemper cautions readers not to place undue reliance on such statements. Kemper bases these statements on current expectations and the current economic environment as of the date of this Quarterly Report on Form 10-Q. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties that may be important in determining the Company’s actual future results and financial condition.
In addition to those factors discussed under Item 1A., “Risk Factors,” of Part I of Kemper’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”), for the year ended December 31, 2016 (the “2016 Annual Report”) as updated by Item 1A. of Part II of this Quarterly Report on Form 10-Q, the reader should consider the following list of general factors that, among others, could cause the Company’s actual results and financial condition to differ materially from estimated results and financial condition.
Factors related to the legal and regulatory environment in which Kemper and its subsidiaries operate
Outcomes of state initiatives that could result in significant changes to, or interpretations of, unclaimed property laws or significant changes in claims handling practices with respect to life insurance policies, including the requirement to proactively use death verification databases, particularly any that involve retroactive application of new requirements to existing life insurance policy contracts;
Adverse outcomes in litigation or other legal or regulatory proceedings involving Kemper or its subsidiaries or affiliates;
Governmental actions, including, but not limited to, implementation of new federal and state laws and regulations, and court decisions interpreting existing laws and regulations or policy provisions;
Uncertainties related to regulatory approval of insurance rates, policy forms, insurance products, license applications, dividends from insurance subsidiaries, acquisitions of businesses and other matters within the purview of state insurance regulators;
Factors relating to insurance claims and related reserves in the Company’s insurance businesses
The incidence, frequency and severity of catastrophes occurring in any particular reporting period or geographic area, including natural disasters, pandemics and terrorist attacks or other man-made events;
The number and severity of insurance claims (including those associated with catastrophe losses);
Changes in facts and circumstances affecting assumptions used in determining loss and loss adjustment expenses (“LAE”) reserves, including, but not limited to, the number and severity of insurance claims, changes in claims handling procedures and closure patterns and development patterns;
The impact of inflation on insurance claims, including, but not limited to, the effects on personal injury claims of increasing medical costs and the effects on property claims attributed to scarcity of resources available to rebuild damaged structures, including labor and materials and the amount of salvage value recovered for damaged property;
Developments related to insurance policy claims and coverage issues, including, but not limited to, interpretations or decisions by courts or regulators that may govern or influence losses incurred in connection with hurricanes and other catastrophes;
Orders, interpretations or other actions by regulators that impact the reporting, adjustment and payment of claims;

1



Changes in the pricing or availability of reinsurance, or in the financial condition of reinsurers and amounts recoverable therefrom;
Factors related to the Company’s ability to compete
Changes in the ratings by rating agencies of Kemper and/or its insurance company subsidiaries with regard to credit, financial strength, claims paying ability and other areas on which the Company is rated;
The level of success and costs incurred in realizing or maintaining economies of scale, implementing significant business initiatives, including those related to, but not limited to, expense and claims savings, consolidations, reorganizations and technology, and integrating acquired businesses;
Absolute and relative performance of the Company’s products and services, including, but not limited to, the level of success achieved in designing and introducing new insurance products;
The ability of the Company to maintain the availability of critical systems and manage technology initiatives cost-effectively to address insurance industry developments and regulatory requirements;
Heightened competition, including, with respect to pricing, consolidations of existing competitors or entry of new competitors and alternate distribution channels, introduction of new technologies, emergence of telematics, refinements of existing products and development of new products by current or future competitors;
Expected benefits and synergies from mergers, acquisitions and/or divestitures may not be realized to the extent anticipated, within the anticipated time frame or at all, due to a number of factors including, but not limited to, the loss of key agents/brokers, customers or employees, increased costs, fees, expenses and charges related to transactions, and the delay of transactions for reasons outside of the Company’s control;
Factors relating to the business environment in which Kemper and its subsidiaries operate
Changes in general economic conditions, including, but not limited to, performance of financial markets, interest rates, inflation, unemployment rates and fluctuating values of particular investments held by the Company;
Absolute and relative performance of investments held by the Company;
Changes in insurance industry trends and significant industry developments;
Changes in consumer trends and significant consumer or product developments;
Changes in capital requirements, including the calculations thereof, used by regulators and rating agencies;
Regulatory, accounting or tax changes that may affect the cost of, or demand for, the Company’s products or services or after-tax returns from the Company’s investments;
The impact of required participation in windpools and joint underwriting associations, residual market assessments and assessments for insurance industry insolvencies;
Changes in distribution channels, methods or costs resulting from changes in laws or regulations, lawsuits or market forces;
Increased costs and risks related to cybersecurity and information technology, including, but not limited to, identity theft, data breaches and system disruptions affecting services and actions taken to minimize the risks thereof; and
Other risks and uncertainties described from time to time in Kemper’s filings with the SEC.
Kemper cannot provide any assurances that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable or that future events or developments will not cause such statements to be inaccurate. Kemper assumes no obligation to correct or update any forward-looking statements publicly for any changes in events or developments or in the Company’s expectations or results subsequent to the date of this Quarterly Report on Form 10-Q. Kemper advises the reader, however, to consult any further disclosures Kemper makes on related subjects in its filings with the SEC.

2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
 
 
Nine Months Ended
 
Three Months Ended
 
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Revenues:
 
 
 
 
 
 
 
 
Earned Premiums
 
$
1,744.1

 
$
1,658.6

 
$
598.2

 
$
558.9

Net Investment Income
 
244.6

 
218.4

 
85.9

 
77.7

Other Income
 
2.9

 
2.2

 
1.0

 
0.8

Net Realized Gains on Sales of Investments
 
45.0

 
24.0

 
8.1

 
11.6

Other-than-temporary Impairment Losses:
 
 
 
 
 
 
 
 
Total Other-than-temporary Impairment Losses
 
(10.7
)
 
(24.3
)
 
(2.9
)
 
(8.3
)
Portion of Losses Recognized in Other Comprehensive Income
 
0.2

 
0.3

 

 

Net Impairment Losses Recognized in Earnings
 
(10.5
)
 
(24.0
)
 
(2.9
)
 
(8.3
)
Total Revenues
 
2,026.1

 
1,879.2

 
690.3

 
640.7

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses
 
1,364.9

 
1,362.5

 
440.1

 
490.2

Insurance Expenses
 
485.2

 
488.8

 
163.7

 
161.7

Interest and Other Expenses
 
59.1

 
65.0

 
18.2

 
22.0

Total Expenses
 
1,909.2

 
1,916.3

 
622.0

 
673.9

Income (Loss) from Continuing Operations before Income Taxes
 
116.9

 
(37.1
)
 
68.3

 
(33.2
)
Income Tax Benefit (Expense)
 
(32.9
)
 
20.7

 
(20.5
)
 
14.9

Income (Loss) from Continuing Operations
 
84.0

 
(16.4
)
 
47.8

 
(18.3
)
Income (Loss) from Discontinued Operations
 

 
2.0

 
(0.1
)
 
2.0

Net Income (Loss)
 
$
84.0

 
$
(14.4
)
 
$
47.7

 
$
(16.3
)
Income (Loss) from Continuing Operations Per Unrestricted Share:
 
 
 
 
 
 
 
 
Basic
 
$
1.63

 
$
(0.31
)
 
$
0.92

 
$
(0.36
)
Diluted
 
$
1.62

 
$
(0.31
)
 
$
0.92

 
$
(0.36
)
Net Income (Loss) Per Unrestricted Share:
 
 
 
 
 
 
 
 
Basic
 
$
1.63

 
$
(0.27
)
 
$
0.92

 
$
(0.32
)
Diluted
 
$
1.62

 
$
(0.27
)
 
$
0.92

 
$
(0.32
)
Dividends Paid to Shareholders Per Share
 
$
0.72

 
$
0.72

 
$
0.24

 
$
0.24


The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

3



KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)

 
 
Nine Months Ended
 
Three Months Ended
 
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Net Income (Loss)
 
$
84.0

 
$
(14.4
)
 
$
47.7

 
$
(16.3
)
 
 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss) Before Income Taxes:
 
 
 
 
 
 
 
 
Unrealized Holding Gains (Losses)
 
82.8

 
217.2

 
15.6

 
(8.3
)
Foreign Currency Translation Adjustments
 
0.9

 

 
0.1

 

Decrease (Increase) in Net Unrecognized Postretirement Benefit Costs
 
(0.4
)
 
(13.8
)
 
(0.1
)
 
0.4

Loss on Cash Flow Hedges
 
(6.6
)
 

 
(0.1
)
 

Other Comprehensive Income (Loss) Before Income Taxes
 
76.7

 
203.4

 
15.5

 
(7.9
)
Other Comprehensive Income Tax Benefit (Expense)
 
(27.3
)
 
(71.6
)
 
(5.7
)
 
2.9

Other Comprehensive Income (Loss)
 
49.4

 
131.8

 
9.8

 
(5.0
)
Total Comprehensive Income (Loss)
 
$
133.4

 
$
117.4

 
$
57.5

 
$
(21.3
)

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.


4



KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
 
Sep 30,
2017
 
Dec 31,
2016
 
(Unaudited)
 
 
Assets:
 
 
 
Investments:
 
 
 
Fixed Maturities at Fair Value (Amortized Cost: 2017 - $4,876.7; 2016 - $4,846.8)
$
5,242.8

 
$
5,124.9

Equity Securities at Fair Value (Cost: 2017 - $469.1; 2016 - $434.4)
512.1

 
481.7

Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings
160.1

 
175.9

Fair Value Option Investments
77.1

 
111.4

Short-term Investments at Cost which Approximates Fair Value
239.0

 
273.7

Other Investments
420.0

 
439.9

Total Investments
6,651.1

 
6,607.5

Cash
137.6

 
115.7

Receivables from Policyholders
374.8

 
336.5

Other Receivables
182.4

 
198.6

Deferred Policy Acquisition Costs
361.7

 
332.0

Goodwill
323.0

 
323.0

Current Income Tax Assets
0.9

 
15.5

Deferred Income Tax Assets

 
25.8

Other Assets
269.5

 
255.9

Total Assets
$
8,301.0

 
$
8,210.5

Liabilities and Shareholders’ Equity:
 
 
 
Insurance Reserves:
 
 
 
Life and Health
$
3,509.8

 
$
3,475.3

Property and Casualty
968.5

 
931.4

Total Insurance Reserves
4,478.3

 
4,406.7

Unearned Premiums
672.0

 
618.7

Deferred Income Tax Liabilities
11.9

 

Liabilities for Unrecognized Tax Benefits
6.8

 
5.1

Long-term Debt, Current and Non-current, at Amortized Cost (Fair Value: 2017 - $616.1; 2016 - $770.9)
592.2

 
751.6

Accrued Expenses and Other Liabilities
457.4

 
453.2

Total Liabilities
6,218.6

 
6,235.3

Shareholders’ Equity:
 
 
 
Common Stock, $0.10 Par Value, 100 Million Shares Authorized; 51,448,024 Shares Issued and Outstanding at September 30, 2017 and 51,270,940 Shares Issued and Outstanding at December 31, 2016
5.1

 
5.1

Paid-in Capital
672.1

 
660.3

Retained Earnings
1,218.8

 
1,172.8

Accumulated Other Comprehensive Income
186.4

 
137.0

Total Shareholders’ Equity
2,082.4

 
1,975.2

Total Liabilities and Shareholders’ Equity
$
8,301.0

 
$
8,210.5

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

5



KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
 
Nine Months Ended
 
Sep 30,
2017
 
Sep 30,
2016
Operating Activities:
 
 
 
Net Income (Loss)
$
84.0

 
$
(14.4
)
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
 
Amortization of Intangible Assets Acquired
3.9

 
4.5

Equity in Earnings of Equity Method Limited Liability Investments
(21.9
)
 
(3.3
)
Distribution of Accumulated Earnings of Equity Method Limited Liability Investments
15.9

 
10.3

Decrease (Increase) in Value of Fair Value Option Investments Reported in Investment Income
(0.9
)
 
3.9

Amortization of Investment Securities and Depreciation of Investment Real Estate
12.8

 
11.7

Net Realized Gains on Sales of Investments
(45.0
)
 
(24.0
)
Net Impairment Losses Recognized in Earnings
10.5

 
24.0

Depreciation of Property and Equipment
9.8

 
10.5

Increase in Receivables
(27.2
)
 
(23.8
)
Increase in Deferred Policy Acquisition Costs
(29.6
)
 
(11.8
)
Increase in Insurance Reserves
71.4

 
177.6

Increase in Unearned Premiums
53.3

 
23.9

Change in Income Taxes
27.4

 
(30.2
)
Change in Accrued Expenses and Other Liabilities
(1.5
)
 
2.0

Other, Net
1.6

 
9.6

Net Cash Provided by Operating Activities
164.5

 
170.5

Investing Activities:
 
 
 
Sales, Paydowns and Maturities of Fixed Maturities
367.7

 
422.4

Purchases of Fixed Maturities
(401.8
)
 
(539.8
)
Sales of Equity Securities
230.3

 
107.2

Purchases of Equity Securities
(233.5
)
 
(64.8
)
Return of Investment of Equity Method Limited Liability Investments
36.3

 
22.6

Acquisitions of Equity Method Limited Liability Investments
(14.5
)
 
(20.2
)
Sales of Fair Value Option Investments
42.2

 
50.5

Purchases of Fair Value Option Investments
(7.0
)
 
(16.0
)
Decrease (Increase) in Short-term Investments
40.4

 
(68.5
)
Improvements of Investment Real Estate
(1.3
)
 
(1.8
)
Sales of Investment Real Estate
26.2

 
7.5

Increase in Other Investments
(1.3
)
 
(3.4
)
Purchases of Corporate-owned Life Insurance

 
(7.5
)
Acquisition and Development of Software
(28.8
)
 
(8.8
)
Other, Net
(4.4
)
 
(2.0
)
Net Cash Provided (Used) by Investing Activities
50.5

 
(122.6
)
Financing Activities:
 
 
 
Net Proceeds from Issuance of Long-term Debt
200.2

 

Repayment of Long-term Debt
(360.0
)
 

Common Stock Repurchases

 
(3.8
)
Dividends and Dividend Equivalents Paid
(37.1
)
 
(36.9
)
Cash Exercise of Stock Options
3.7

 
1.2

Other, Net
0.1

 
1.0

Net Cash Used by Financing Activities
(193.1
)
 
(38.5
)
Increase in Cash
21.9

 
9.4

Cash, Beginning of Year
115.7

 
161.7

Cash, End of Period
$
137.6

 
$
171.1

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

6


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the SEC and include the accounts of Kemper Corporation (“Kemper”) and its subsidiaries (individually and collectively referred to herein as the “Company”) and are unaudited. All significant intercompany accounts and transactions have been eliminated.
Certain financial information that is normally included in annual financial statements, including certain financial statement footnote disclosures, prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation. The preparation of interim financial statements relies heavily on estimates. This factor and other factors, such as the seasonal nature of some portions of the insurance business, as well as market conditions, call for caution in drawing specific conclusions from interim results. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included in the 2016 Annual Report.
Adoption of New Accounting Guidance
Guidance Adopted in 2017
The Company adopted Accounting Standard Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in the first quarter of 2017. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 impacts the timing of when excess tax benefits are recognized by eliminating the delay in the recognition of a tax benefit until the tax benefit is realized through a reduction to income taxes payable. The Company applied the modified retrospective transition method and recognized an increase to retained earnings of $0.5 million as of January 1, 2017 to recognize excess tax benefits that had been previously delayed. On a prospective basis, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the Company’s Condensed Consolidated Statements of Operations. Further, the Company will continue to estimate the number of awards that are expected to vest.
The Company early adopted ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, in the first quarter of 2017. ASU 2017-08 shortens the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. No change is required for securities held at a discount, which will continue to be amortized to maturity. The Company holds a large number of debt securities for which prepayments are probable and the timing and amount of prepayments can be reasonably estimated. As allowed under GAAP in effect prior to the issuance of ASU 2017-08, the Company already considered such estimates of future principal prepayments in the calculation of the constant effective yield necessary in applying the interest method. Accordingly, adoption of ASU 2017-08 did not have a material impact on the Company’s financial statements.
Guidance Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which revises the criteria for recognizing revenue. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. The guidance specifically excludes insurance contracts, lease contracts and investments from its scope. Accordingly, the Company does not expect adoption to have a material impact on net income or its financial position.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most significantly, ASU 2016-01 requires companies to measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily-determinable fair values at cost minus impairment, if any, plus or minus

7


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 1 - Basis of Presentation (continued)
changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently records its Investments in Equity Securities at fair value with net unrealized appreciation or depreciation reported in Accumulated Other Comprehensive Income (“AOCI”) in Shareholders’ Equity. The Company’s Investments in Equity Securities include securities with readily-determinable fair values and securities without readily-determinable fair values. Until the Company adopts ASU 2016-01 and makes its elections for Investments in Equity Securities that do not have readily-determinable fair values, it cannot determine the impact of the adoption on its consolidated balance sheet. Subsequent to adoption, ASU 2016-01 is expected to cause increased volatility in the Company’s Consolidated Statements of Operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), by amending the Accounting Standards
Codification and creating a new topic on accounting for leases. ASU 2016-02 introduces a lessee model that requires most leases to be reported on the balance sheet of a lessee. ASU 2016-02 also aligns many of the underlying principles of the new lessor model with those in ASC Topic 606, Revenue from Contracts with Customers, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns related to the current leases model. For example, ASU 2016-02 eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. ASU 2016-02 also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that utilizes expected credit losses to provide for an allowance for credit losses for financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement includes the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities are measured in a manner similar to current GAAP, although the ASU requires that they be presented as an allowance rather than as a write-down. In situations where the estimate of credit loss on an available-for-sale debt security declines, entities will be able to record the reversal to income in the current period, which GAAP currently prohibits. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods with early adoption permitted for fiscal years beginning after December 31, 2018 and interim periods within such year. The Company is currently evaluating the impact of this guidance on its financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Derivatives and Hedging Activities. ASU 2017-12 aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Furthermore, the amendments make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administration of hedge documentation requirements and assessing hedge effectiveness. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods with early adoption permitted. The Company does not expect adoption to have a material impact on its financial statements.

8


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 1 - Basis of Presentation (continued)
The Company has adopted all other recently issued accounting pronouncements with effective dates prior to October 1, 2017. There were no adoptions of such accounting pronouncements in 2016 or during the nine months ended September 30, 2017 that had a material impact on the Company’s Condensed Consolidated Financial Statements. With the possible exceptions of Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-02, Leases (Topic 842) and ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company does not expect the adoption of all other recently issued accounting pronouncements with effective dates after September 30, 2017 to have a material impact on the Company’s financial statements and/or disclosures.
Note 2 - Investments
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at September 30, 2017 were:
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair Value
(Dollars in Millions)
 
Gains
 
Losses
 
U.S. Government and Government Agencies and Authorities
 
$
342.8

 
$
21.2

 
$
(4.9
)
 
$
359.1

States and Political Subdivisions
 
1,615.0

 
110.8

 
(2.8
)
 
1,723.0

Foreign Governments
 
3.1

 
0.2

 

 
3.3

Corporate Securities:
 
 
 
 
 
 
 
 
Bonds and Notes
 
2,796.9

 
247.2

 
(11.0
)
 
3,033.1

Redeemable Preferred Stocks
 
0.1

 

 

 
0.1

Collateralized Loan Obligations
 
118.4

 
4.7

 

 
123.1

Other Mortgage- and Asset-backed
 
0.4

 
0.7

 

 
1.1

Investments in Fixed Maturities
 
$
4,876.7

 
$
384.8

 
$
(18.7
)
 
$
5,242.8

The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2016 were:
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair Value
(Dollars in Millions)
 
Gains
 
Losses
 
U.S. Government and Government Agencies and Authorities
 
$
321.2

 
$
22.3

 
$
(7.2
)
 
$
336.3

States and Political Subdivisions
 
1,640.6

 
88.4

 
(14.1
)
 
1,714.9

Foreign Governments
 
3.5

 

 
(0.1
)
 
3.4

Corporate Securities:
 
 
 
 
 
 
 
 
Bonds and Notes
 
2,758.9

 
209.9

 
(24.0
)
 
2,944.8

Redeemable Preferred Stocks
 
0.5

 
0.1

 

 
0.6

Collateralized Loan Obligations
 
121.2

 
2.7

 
(1.1
)
 
122.8

Other Mortgage- and Asset-backed
 
0.9

 
1.2

 

 
2.1

Investments in Fixed Maturities
 
$
4,846.8

 
$
324.6

 
$
(46.5
)
 
$
5,124.9

There were no unsettled sales of Investments in Fixed Maturities at September 30, 2017. Other Receivables included unsettled sales of Investments in Fixed Maturities of $2.7 million at December 31, 2016. Accrued Expenses and Other Liabilities included unsettled purchases of Investments in Fixed Maturities of $4.7 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively.

9


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at September 30, 2017 by contractual maturity were:
(Dollars in Millions)
 
Amortized Cost
 
Fair Value
Due in One Year or Less
 
$
188.3

 
$
190.8

Due after One Year to Five Years
 
785.9

 
814.3

Due after Five Years to Ten Years
 
1,632.7

 
1,710.9

Due after Ten Years
 
1,988.1

 
2,234.3

Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date
 
281.7

 
292.5

Investments in Fixed Maturities
 
$
4,876.7

 
$
5,242.8

The expected maturities of the Company’s Investments in Fixed Maturities may differ from the contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Investments in Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date at September 30, 2017 consisted of securities issued by the Government National Mortgage Association with a fair value of $152.1 million, securities issued by the Federal National Mortgage Association with a fair value of $11.2 million, securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $4.1 million and securities of other non-governmental issuers with a fair value of $125.1 million.
Gross unrealized gains and gross unrealized losses on the Company’s Investments in Equity Securities at September 30, 2017 were:
 
 
 
 
Gross Unrealized
 
 
(Dollars in Millions)
 
Cost
 
Gains
 
Losses
 
Fair Value
Preferred Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
$
53.6

 
$
5.0

 
$

 
$
58.6

Other Industries
 
18.4

 
6.2

 

 
24.6

Common Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
6.7

 
1.3

 
(0.8
)
 
7.2

Other Industries
 
8.9

 
5.1

 
(0.2
)
 
13.8

Other Equity Interests:
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
196.7

 
8.3

 

 
205.0

Limited Liability Companies and Limited Partnerships
 
184.8

 
23.6

 
(5.5
)
 
202.9

Investments in Equity Securities
 
$
469.1

 
$
49.5

 
$
(6.5
)
 
$
512.1

Gross unrealized gains and gross unrealized losses on the Company’s Investments in Equity Securities at December 31, 2016 were:
 
 
 
 
Gross Unrealized
 
 
(Dollars in Millions)
 
Cost
 
Gains
 
Losses
 
Fair Value
Preferred Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
$
58.1

 
$
2.3

 
$
(0.8
)
 
$
59.6

Other Industries
 
18.5

 
4.9

 
(0.5
)
 
22.9

Common Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
31.2

 
2.3

 

 
33.5

Other Industries
 
7.2

 
4.6

 
(0.1
)
 
11.7

Other Equity Interests:
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
136.1

 
9.6

 
(1.3
)
 
144.4

Limited Liability Companies and Limited Partnerships
 
183.3

 
29.2

 
(2.9
)
 
209.6

Investments in Equity Securities
 
$
434.4

 
$
52.9

 
$
(5.6
)
 
$
481.7


10


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
There were no unsettled sales of Investments in Equity Securities at September 30, 2017. Other Receivables included unsettled sales of Investments in Equity Securities of $0.2 million at December 31, 2016. There were no unsettled purchases of Investments in Equity Securities at either September 30, 2017 or December 31, 2016.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities and Equity Securities at September 30, 2017 is presented below.
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(Dollars in Millions)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies and Authorities
 
$
67.4

 
$
(2.1
)
 
$
41.2

 
$
(2.8
)
 
$
108.6

 
$
(4.9
)
States and Political Subdivisions
 
169.3

 
(2.1
)
 
28.9

 
(0.7
)
 
198.2

 
(2.8
)
Corporate Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds and Notes
 
292.7

 
(6.7
)
 
96.2

 
(4.3
)
 
388.9

 
(11.0
)
Collateralized Loan Obligations
 
2.0

 

 
2.4

 

 
4.4

 

Total Fixed Maturities
 
531.4

 
(10.9
)
 
168.7

 
(7.8
)
 
700.1

 
(18.7
)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 

 

 
0.2

 

 
0.2

 

Other Industries
 
0.1

 

 
0.2

 

 
0.3

 

Common Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
2.2

 
(0.8
)
 

 

 
2.2

 
(0.8
)
Other Industries
 
0.2

 
(0.2
)
 
0.5

 

 
0.7

 
(0.2
)
Other Equity Interests:
 
 
 
 
 
 
 
 
 
 
 
 
Limited Liability Companies and Limited Partnerships
 
46.3

 
(1.9
)
 
32.1

 
(3.6
)
 
78.4

 
(5.5
)
Total Equity Securities
 
48.8

 
(2.9
)
 
33.0

 
(3.6
)
 
81.8

 
(6.5
)
Total
 
$
580.2

 
$
(13.8
)
 
$
201.7

 
$
(11.4
)
 
$
781.9

 
$
(25.2
)
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. The portions of the declines in the fair values of investments that are determined to be other than temporary are reported as losses in the Condensed Consolidated Statements of Operations in the periods when such determinations are made.

11


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
Unrealized losses on fixed maturities, which the Company has determined to be temporary at September 30, 2017, were $18.7 million, of which $7.8 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were no unrealized losses at September 30, 2017 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “Less Than 12 Months.” There were no unrealized losses at September 30, 2017 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “12 Months or Longer.” Investment-grade fixed maturity investments comprised $12.0 million and below-investment-grade fixed maturity investments comprised $6.7 million of the unrealized losses on investments in fixed maturities at September 30, 2017. For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was approximately 4% of the amortized cost basis of the investment. At September 30, 2017, the Company did not have the intent to sell these investments, and it was not more likely than not that the Company would be required to sell these investments before it recovered the amortized cost of such investments, which may be at maturity. Based on the Company’s evaluation at September 30, 2017 of the prospects of the issuers, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company’s intention to not sell and its determination that it would not be required to sell before it recovered the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company’s investments in fixed maturities presented in the preceding table were temporary at the evaluation date.
With respect to Investments in Equity Securities, the Company concluded that the unrealized losses on its investments in preferred and common stocks at September 30, 2017 were temporary based on various factors, including the relative short length and magnitude of the losses and overall market volatility. The Company’s investments in other equity interests include investments in limited liability companies and limited partnerships that primarily invest in mezzanine debt, distressed debt and secondary transactions. By the nature of their underlying investments, the Company believes that some of its investments in the limited liability companies and limited partnerships exhibit debt-like characteristics which, among other factors, the Company also considers when evaluating these investments for impairment. Based on evaluations of the factors in the preceding paragraph, the Company concluded that the declines in the fair values of the Company’s investments in equity securities presented in the preceding table were temporary at September 30, 2017.

12


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
An aging of unrealized losses on the Company’s Investments in Fixed Maturities and Equity Securities at December 31, 2016 is presented below.
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(Dollars in Millions)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies and Authorities
 
$
117.7

 
$
(7.2
)
 
$
1.1

 
$

 
$
118.8

 
$
(7.2
)
States and Political Subdivisions
 
432.7

 
(14.1
)
 
0.3

 

 
433.0

 
(14.1
)
Foreign Governments
 
2.1

 
(0.1
)
 

 

 
2.1

 
(0.1
)
Corporate Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds and Notes
 
663.3

 
(16.6
)
 
107.3

 
(7.4
)
 
770.6

 
(24.0
)
Collateralized Loan Obligations
 
19.9

 
(0.7
)
 
21.4

 
(0.4
)
 
41.3

 
(1.1
)
Total Fixed Maturities
 
1,235.7

 
(38.7
)
 
130.1

 
(7.8
)
 
1,365.8

 
(46.5
)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
15.6

 
(0.5
)
 
7.3

 
(0.3
)
 
22.9

 
(0.8
)
Other Industries
 
5.3

 
(0.5
)
 

 

 
5.3

 
(0.5
)
Common Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
2.8

 

 

 

 
2.8

 

Other Industries
 
0.6

 
(0.1
)
 
0.5

 

 
1.1

 
(0.1
)
Other Equity Interests:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange Traded Funds
 

 

 
18.6

 
(1.3
)
 
18.6

 
(1.3
)
Limited Liability Companies and Limited Partnerships
 
13.9

 
(0.7
)
 
33.8

 
(2.2
)
 
47.7

 
(2.9
)
Total Equity Securities
 
38.2

 
(1.8
)
 
60.2

 
(3.8
)
 
98.4

 
(5.6
)
Total
 
$
1,273.9

 
$
(40.5
)
 
$
190.3

 
$
(11.6
)
 
$
1,464.2

 
$
(52.1
)
Unrealized losses on fixed maturities, which the Company has determined to be temporary at December 31, 2016, were $46.5 million, of which $7.8 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were $0.1 million unrealized losses at December 31, 2016 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “Less Than 12 Months.” There were no unrealized losses at December 31, 2016 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “12 Months or Longer.” Investment-grade fixed maturity investments comprised $33.8 million and below-investment-grade fixed maturity investments comprised $12.7 million of the unrealized losses on investments in fixed maturities at December 31, 2016. For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was approximately 5% of the amortized cost basis of the investment. At December 31, 2016, the Company did not have the intent to sell these investments, and it was not more likely than not that the Company would be required to sell these investments before recovery of its amortized cost basis, which may be at maturity. Based on the Company’s evaluation at December 31, 2016 of the prospects of the issuers, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company’s intention to not sell and its determination that it would not be required to sell before recovery of the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company’s investments in fixed maturities presented in the preceding table were temporary at the evaluation date.
With respect to Investments in Equity Securities, the Company concluded that the unrealized losses on its investments at December 31, 2016 were temporary based on various factors, including the relative short length and magnitude of the losses and overall market volatility, as well as, the debt-like characteristics of investments in certain other equity interests.

13


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
The following table sets forth the pre-tax amount of other than temporary impairment (“OTTI”) credit losses recognized in Retained Earnings for Investments in Fixed Maturities held by the Company as of the beginning and end of the periods presented for which a portion of the OTTI loss related to factors other than credit has been recognized in AOCI, and the corresponding changes in such amounts.
 
 
Nine Months Ended
 
Three Months Ended
(Dollars in Millions)
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at Beginning of Period
 
$
1.4

 
$
5.1

 
$
2.4

 
$
4.2

Pre-tax Credit Losses on Fixed Maturities without Pre-tax Credit Losses Included in Cumulative Balance at Beginning of Period
 
1.2

 
2.7

 

 

Reductions for Change in Impairment Status:
 
 
 
 
 
 
 
 
From Status of Credit Loss to Status of Intent-to-sell or Required-to-sell
 

 
(6.3
)
 

 
(2.7
)
Reductions for Investments Sold During Period
 
(0.3
)
 

 
(0.1
)
 

Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at End of Period
 
$
2.3

 
$
1.5

 
$
2.3

 
$
1.5

Net Investment Income for the nine and three months ended September 30, 2017 and 2016 was:
 
 
Nine Months Ended
 
Three Months Ended
(Dollars in Millions)
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Investment Income (Loss):
 
 
 
 
 
 
 
 
Interest on Fixed Income Securities
 
$
184.0

 
$
181.2

 
$
61.8

 
$
61.4

Dividends on Equity Securities Excluding Alternative Investments
 
7.0

 
9.0

 
2.6

 
2.7

Alternative Investments:
 
 
 
 
 
 
 
 
Equity Method Limited Liability Investments
 
21.9

 
3.7

 
11.1

 
5.2

Fair Value Option Investments
 
1.0

 
(3.9
)
 
0.5

 
(1.4
)
Limited Liability Investments Included in Equity Securities
 
18.7

 
16.6

 
5.9

 
5.7

Total Alternative Investments
 
41.6

 
16.4

 
17.5

 
9.5

Short-term Investments
 
1.0

 
0.4

 
0.5

 
0.2

Loans to Policyholders
 
15.7

 
16.1

 
4.9

 
5.4

Real Estate
 
8.3

 
8.9

 
2.6

 
3.0

Other
 
0.2

 

 
0.1

 

Total Investment Income
 
257.8

 
232.0

 
90.0

 
82.2

Investment Expenses:
 
 
 
 
 
 
 
 
Real Estate
 
7.7

 
8.4

 
2.6

 
2.9

Other Investment Expenses
 
5.5

 
5.2

 
1.5

 
1.6

Total Investment Expenses
 
13.2

 
13.6

 
4.1

 
4.5

Net Investment Income
 
$
244.6

 
$
218.4

 
$
85.9

 
$
77.7


14


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
Gross gains and losses on sales of investments in fixed maturities and equity securities for the nine and three months ended September 30, 2017 and 2016 were:
 
 
Nine Months Ended
 
Three Months Ended
(Dollars in Millions)
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Fixed Maturities:
 
 
 
 
 
 
 
 
Gains on Sales
 
$
7.3

 
$
14.1

 
$
2.4

 
$
2.7

Losses on Sales
 
(0.4
)
 
(1.1
)
 

 
(0.8
)
Equity Securities:
 
 
 
 
 
 
 
 
Gains on Sales
 
31.1

 
9.8

 
3.9

 
9.3

Losses on Sales
 

 
(0.1
)
 

 

Equity Method Limited Liability Investments include investments in limited liability investment companies and limited partnerships in which the Company’s interests are not deemed minor and are accounted for under the equity method of accounting. The Company’s investments in Equity Method Limited Liability Investments are generally of a passive nature in that the Company does not take an active role in the management of the investment entity. The Company’s maximum exposure to loss at September 30, 2017 is limited to the total carrying value of $160.1 million. In addition, the Company had outstanding commitments totaling approximately $82.5 million to fund Equity Method Limited Liability Investments at September 30, 2017.
The carrying values of the Company’s Other Investments at September 30, 2017 and December 31, 2016 were:
(Dollars in Millions)
 
Sep 30,
2017
 
Dec 31,
2016
Loans to Policyholders at Unpaid Principal
 
$
295.5

 
$
294.2

Real Estate at Depreciated Cost
 
118.1

 
140.2

Trading Securities at Fair Value
 
6.3

 
5.3

Other
 
0.1

 
0.2

Total
 
$
420.0

 
$
439.9



15


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 3 - Property and Casualty Insurance Reserves
Property and casualty insurance reserve activity for the nine months ended September 30, 2017 and 2016 was:
 
 
Nine Months Ended
(Dollars in Millions)
 
Sep 30,
2017
 
Sep 30,
2016
Property and Casualty Insurance Reserves:
 
 
 
 
Gross of Reinsurance and Indemnification at Beginning of Year
 
$
931.4

 
$
862.8

Less Reinsurance and Indemnification Recoverables at Beginning of Year
 
50.2

 
52.0

Property and Casualty Insurance Reserves - Net of Reinsurance and Indemnification at Beginning of Year
 
881.2

 
810.8

Incurred Losses and LAE Related to:
 
 
 
 
Current Year:
 
 
 
 
Continuing Operations
 
1,072.0

 
1,031.1

Prior Years:
 
 
 
 
Continuing Operations
 
19.7

 
(17.7
)
Discontinued Operations
 

 
(3.3
)
Total Incurred Losses and LAE Related to Prior Years
 
19.7

 
(21.0
)
Total Incurred Losses and LAE
 
1,091.7

 
1,010.1

Paid Losses and LAE Related to:
 
 
 
 
Current Year:
 
 
 
 
Continuing Operations
 
600.7

 
583.2

Prior Years:
 
 
 
 
Continuing Operations
 
443.6

 
360.8

Discontinued Operations
 
3.0

 
5.3

Total Paid Losses and LAE Related to Prior Years
 
446.6

 
366.1

Total Paid Losses and LAE
 
1,047.3

 
949.3

Property and Casualty Insurance Reserves - Net of Reinsurance and Indemnification at End of Period
 
925.6

 
871.6

Plus Reinsurance and Indemnification Recoverables at End of Period
 
42.9

 
49.1

Property and Casualty Insurance Reserves - Gross of Reinsurance and Indemnification at End of Period
 
$
968.5

 
$
920.7


16


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 3 - Property and Casualty Insurance Reserves (continued)
Property and casualty insurance reserves are estimated based on historical experience patterns and current economic trends. Actual loss experience and loss trends are likely to differ from these historical experience patterns and economic conditions. Loss experience and loss trends emerge over several years from the dates of loss inception. The Company monitors such emerging loss trends on a quarterly basis. Changes in such estimates are included in the Condensed Consolidated Statements of Income in the period of change.
For the nine months ended September 30, 2017, the Company increased its property and casualty insurance reserves by $19.7 million to recognize adverse development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed adversely by $17.7 million, and commercial lines insurance loss and LAE reserves developed adversely by $2.0 million. Personal automobile insurance loss and LAE reserves developed adversely by $18.1 million due primarily to the emergence of loss patterns that were worse than expected for both physical damage and liability insurance for the 2016 accident year. Homeowners insurance loss and LAE reserves developed favorably by $0.1 million due primarily to favorable development on catastrophes of $3.2 million related to the 2016 and 2015 accident years, partially offset by the emergence of non-catastrophe loss patterns that were worse than expected for the 2016 accident year. Other personal lines loss and LAE reserves developed favorably by $0.3 million due primarily to the emergence of more favorable loss patterns than expected for the 2015, 2014 and 2013 accident years, partially offset by the emergence of worse than expected loss patterns for the 2016 accident year. Commercial lines insurance loss and LAE reserves developed adversely due primarily to the emergence of loss patterns that were worse than expected for the 2015 accident year.
For the nine months ended September 30, 2016, the Company reduced its property and casualty insurance reserves by $21.0 million to recognize favorable development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed favorably by $17.7 million, and commercial lines insurance loss and LAE reserves developed favorably by $3.3 million. The commercial lines insurance loss and LAE reserve development included no development from continuing operations and favorable development of $3.3 million from discontinued operations. Personal automobile insurance loss and LAE reserves developed adversely by $7.3 million due primarily to the emergence of loss patterns that were worse than expected for liability insurance for the 2015 accident year. Homeowners insurance loss and LAE reserves developed favorably by $18.1 million due primarily to $14.3 million of favorable development on catastrophes primarily for the 2015 and 2014 accident years. Other personal lines loss and LAE reserves developed favorably by $6.9 million due primarily to the emergence of more favorable loss patterns than expected for the 2015, 2014, 2013 and 2012 accident years.
The Company cannot predict whether loss and LAE reserves will develop favorably or adversely from the amounts reported in the Company’s Condensed Consolidated Financial Statements. The Company believes that any such development will not have a material effect on the Company’s consolidated shareholders’ equity, but could have a material effect on the Company’s consolidated financial results for a given period.
Subsequent Events
In early October 2017, a series of wildfires began burning in California. The Company expects that the catastrophe losses and loss adjustment expenses that it has incurred from these wildfires in the fourth quarter will be significant and have the potential to trigger recoveries under the Company’s catastrophe reinsurance program. The Company has not completed a full evaluation of its exposure to these wildfires, including potential reinsurance recoveries. Accordingly, the Company does not currently have an estimate of the ultimate loss related to these wildfires.


17


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 4 - Debt
The Company designates debt obligations as either short-term or long-term based on maturity date at issuance. Total amortized cost of Long-term Debt, Current and Non-current, outstanding at September 30, 2017 and December 31, 2016 was:
(Dollars in Millions)
 
Sep 30,
2017
 
Dec 31,
2016
Senior Notes:
 
 
 
 
6.00% Senior Notes due May 15, 2017
 
$

 
$
359.8

4.35% Senior Notes due February 15, 2025
 
448.1

 
247.7

7.375% Subordinated Debentures due February 27, 2054
 
144.1

 
144.1

Total Long-term Debt, Current and Non-current, Outstanding
 
$
592.2

 
$
751.6

There were no outstanding borrowings at either September 30, 2017 or December 31, 2016 under Kemper’s $225.0 million, unsecured, revolving credit agreement which expires June 2, 2020.
Kemper’s subsidiaries, Trinity Universal Insurance Company (“Trinity”) and United Insurance Company of America (“United Insurance”), are members of the Federal Home Loan Bank (“FHLB”) of Dallas and Chicago, respectively. There were no advances from the FHLB of Dallas or Chicago outstanding at either September 30, 2017 or December 31, 2016.
On February 24, 2015, Kemper issued $250 million of its 4.350% Senior Notes due February 15, 2025 (the “2025 Senior Notes”). On June 12, 2017, Kemper issued an additional $200 million of its 2025 Senior Notes. The net proceeds of the additional issuance were $200.2 million, net of discount and transaction costs for an effective yield of 4.16%. The additional notes are fungible with the initial notes issued, and together are treated as part of a single series for all purposes under the indenture governing the 2025 Senior Notes. The 2025 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Kemper’s option at specified redemption prices. Kemper is using the net proceeds from the additional issuance for general corporate purposes.
During the fourth quarter of 2016, in anticipation of a debt issuance in the second quarter of 2017 and for risk management purposes, the Company entered into a derivative transaction to hedge the risk of changes in the debt cash flows attributable to changes in the benchmark U.S. Treasury interest rate during the period leading up to the probable debt issuance (“Treasury Lock”). The Treasury Lock was formally designated as a cash flow hedge at inception and qualified for hedge accounting treatment. In the second quarter of 2017, the Company de-designated a portion of the cash flow hedge because the anticipated principal issuance was less than the notional amount of the Treasury Lock and recorded a pre-tax charge of $1.1 million in Other Expenses. The effective portion of the loss on the derivative instrument upon discontinuance was $4.5 million and is reported as a component of Other Comprehensive Income before Income Taxes. Beginning with the additional issuance of the 2025 Senior Notes described in the preceding paragraph, such loss is being amortized into earnings and reported in Interest Expense in the same periods that the hedged items affect earnings. Amortization, reported in Interest Expense, was $0.1 million for the nine and three months ended September 30, 2017. The Company expects to reclassify $0.4 million of net losses on derivative instruments from AOCI to earnings for the twelve months ended September 30, 2018 as interest expense on the debt is recognized. The Treasury Lock was in a gain position of $1.6 million at December 31, 2016 and, accordingly, such gain has been included in Other Assets in the Condensed Consolidated Balance Sheet at such date.
Interest Expense, including facility fees, accretion of discount and amortization of issuance costs, was $26.9 million and $7.8 million for the nine and three months ended September 30, 2017, respectively. Interest paid, including facility fees, was $31.8 million and $12.7 million for the nine and three months ended September 30, 2017, respectively. Interest Expense, including facility fees, accretion of discount and amortization of issuance costs, was $33.4 million and $11.1 million for the nine and three months ended September 30, 2016, respectively. Interest paid, including facility fees, was $30.5 million and $8.5 million for the nine and three months ended September 30, 2016, respectively.

18


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 5 - Income (Loss) from Continuing Operations Per Unrestricted Share
The Company’s awards of restricted stock contain rights to receive non-forfeitable dividends and participate in the undistributed earnings with common shareholders. The Company’s awards of restricted stock units and deferred stock units also contain rights to receive non-forfeitable dividend equivalents and participate in the undistributed earnings with common shareholders. Accordingly, the Company is required to apply the two-class method of computing basic and diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of Basic Income (Loss) from Continuing Operations Per Unrestricted Share and Diluted Income (Loss) from Continuing Operations Per Unrestricted Share for the nine and three months ended September 30, 2017 and 2016 is presented below.
 
 
Nine Months Ended
 
Three Months Ended
 
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
(Dollars in Millions)
 
 
 
 
 
 
 
 
Income (Loss) from Continuing Operations
 
$
84.0

 
$
(16.4
)
 
$
47.8

 
$
(18.3
)
Less Income (Loss) from Continuing Operations Attributed to Participating Awards
 
0.6

 
(0.3
)
 
0.4

 
(0.1
)
Income (Loss) from Continuing Operations Attributed to Unrestricted Shares
 
83.4

 
(16.1
)
 
47.4

 
(18.2
)
Dilutive Effect on Income of Equity-based Compensation Equivalent Shares
 

 

 

 

Diluted Income (Loss) from Continuing Operations Attributed to Unrestricted Shares
 
$
83.4

 
$
(16.1
)
 
$
47.4

 
$
(18.2
)
(Number of Shares in Thousands)
 
 
 
 
 
 
 
 
Weighted-average Unrestricted Shares Outstanding
 
51,308.7

 
51,140.6

 
51,366.8

 
51,122.5

Equity-based Compensation Equivalent Shares
 
171.6

 

 
199.6

 

Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution
 
51,480.3

 
51,140.6

 
51,566.4

 
51,122.5

(Per Unrestricted Share in Whole Dollars)
 
 
 
 
 
 
 
 
Basic Income (Loss) from Continuing Operations Per Unrestricted Share
 
$
1.63

 
$
(0.31
)
 
$
0.92

 
$
(0.36
)
Diluted Income (Loss) from Continuing Operations Per Unrestricted Share
 
$
1.62

 
$
(0.31
)
 
$
0.92

 
$
(0.36
)
The number of shares of Kemper common stock that were excluded from the calculations of Equity-based Compensation Equivalent Shares and Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution for the nine and three months ended September 30, 2017 and 2016 because the effect of inclusion would be anti-dilutive is presented below.
 
 
Nine Months Ended
 
Three Months Ended
(Number of Shares in Thousands)
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Equity-based Compensation Equivalent Shares
 
459.7

 
1,195.2

 
382.1

 
1,009.5

Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution
 
459.7

 
1,195.2

 
382.1

 
1,009.5


19


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 6 - Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
The components of Other Comprehensive Income (Loss) Before Income Taxes for the nine and three months ended September 30, 2017 and 2016 were:
 
 
Nine Months Ended
 
Three Months Ended
(Dollars in Millions)
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Other Comprehensive Income (Loss) Before Income Taxes:
 
 
 
 
 
 
 
 
Unrealized Holding Gains Arising During the Period Before Reclassification Adjustment
 
$
110.5

 
$
215.9

 
$
19.2

 
$
(5.4
)
Reclassification Adjustment for Amounts Included in Net Income
 
(27.7
)
 
1.3

 
(3.6
)
 
(2.9
)
Unrealized Holding Gains
 
82.8

 
217.2

 
15.6

 
(8.3
)
Foreign Currency Translation Adjustments Arising During the Period Before Reclassification Adjustment
 
0.9

 

 
0.1

 

Reclassification Adjustment for Amounts Included in Net Income
 

 

 

 

Foreign Currency Translation Adjustments
 
0.9

 

 
0.1

 

Net Unrecognized Postretirement Benefit Costs Arising During the Period
 

 
(19.5
)
 

 

Reclassification Adjustments for Amounts Included in Net Income:
 
 
 
 
 
 
 
 
Curtailment Cost Recognized
 

 
1.0

 

 

Amortization of Net Unrecognized Postretirement Benefit Costs
 
(0.4
)
 
4.7

 
(0.1
)
 
0.4

Total Reclassification Adjustments for Amounts Included in Net Income
 
(0.4
)
 
5.7

 
(0.1
)
 
0.4

Net Unrecognized Postretirement Benefit Costs
 
(0.4
)
 
(13.8
)
 
(0.1
)
 
0.4

Loss on Cash Flow Hedges During the Period Before Reclassification Adjustment
 
(7.9
)
 

 
(0.3
)
 

Reclassification Adjustment for Amounts Included in Net Income
 
1.3

 

 
0.2

 

Loss on Cash Flow Hedges
 
(6.6
)
 

 
(0.1
)
 

Other Comprehensive Income (Loss) Before Income Taxes
 
$
76.7

 
$
203.4

 
$
15.5

 
$
(7.9
)

20


KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 6 - Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (continued)
The components of Other Comprehensive Income Tax Benefit (Expense) for the nine and three months ended September 30, 2017 and 2016 were:
 
 
Nine Months Ended
 
Three Months Ended
(Dollars in Millions)
 
Sep 30,
2017
 
Sep 30,
2016
 
Sep 30,
2017
 
Sep 30,
2016
Other Comprehensive Income Tax Benefit (Expense):
 
 
 
 
 
 
 
 
Unrealized Holding Gains and Losses Arising During the Period Before Reclassification Adjustment
 
$
(39.1
)
 
$
(76.0
)
 
$
(7.0
)
 
$
2.0

Reclassification Adjustment for Amounts Included in Net Income
 
9.7

 
(0.4
)
 
1.3

 
1.1

Unrealized Holding Gains