Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - KEMPER Corp | kmpr201809302018ex322.htm |
| EX-32.1 - EXHIBIT 32.1 - KEMPER Corp | kmpr201809302018ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - KEMPER Corp | kmpr201809302018ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - KEMPER Corp | kmpr201809302018ex311.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, 2018
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.) |
200 E. Randolph Street, Chicago, Illinois | 60601 |
(Address of principal executive offices) | (Zip Code) |
(312) 661-4600
(Registrant’s telephone number, including area code)
One East Wacker Drive, Chicago, Illinois
(Former name, former address and former fiscal year, if changed since last report)
______________________________________________________
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 | ¨ |
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
64,747,142 shares of common stock, $0.10 par value, were outstanding as of October 29, 2018.
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, 2017 (the “2017 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
• | Evolving practices and interpretations by regulators and courts that increase operating costs and potential liabilities, particularly any that involve retroactive application of new requirements, including, but not limited to, state initiatives related to unclaimed property laws or claims handling practices with respect to life insurance policies and the proactive use of death verification databases; |
• | 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, integrating acquired businesses and implementing significant business initiatives, including, but not limited to, those related to expense and claims savings, consolidations, reorganizations and technology; |
• | 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 that may not be realized to the extent anticipated, within expected time frames 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 related charges and delays caused by factors 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 INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Earned Premiums | $ | 2,320.8 | $ | 1,744.1 | $ | 1,052.9 | $ | 598.2 | ||||||||
Net Investment Income | 249.6 | 244.6 | 92.0 | 85.9 | ||||||||||||
Other Income | 40.2 | 2.9 | 37.8 | 1.0 | ||||||||||||
Income from Change in Fair Value of Equity Securities | 12.1 | — | 11.0 | — | ||||||||||||
Net Realized Gains on Sales of Investments | 10.0 | 45.0 | 3.6 | 8.1 | ||||||||||||
Other-than-temporary Impairment Losses: | ||||||||||||||||
Total Other-than-temporary Impairment Losses | (2.3 | ) | (10.7 | ) | (1.8 | ) | (2.9 | ) | ||||||||
Portion of Losses Recognized in Other Comprehensive Income | — | 0.2 | — | — | ||||||||||||
Net Impairment Losses Recognized in Earnings | (2.3 | ) | (10.5 | ) | (1.8 | ) | (2.9 | ) | ||||||||
Total Revenues | 2,630.4 | 2,026.1 | 1,195.5 | 690.3 | ||||||||||||
Expenses: | ||||||||||||||||
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses | 1,693.7 | 1,364.9 | 757.3 | 440.1 | ||||||||||||
Insurance Expenses | 627.3 | 485.2 | 296.0 | 163.7 | ||||||||||||
Interest and Other Expenses | 116.4 | 59.1 | 61.7 | 18.2 | ||||||||||||
Total Expenses | 2,437.4 | 1,909.2 | 1,115.0 | 622.0 | ||||||||||||
Income from Continuing Operations before Income Taxes | 193.0 | 116.9 | 80.5 | 68.3 | ||||||||||||
Income Tax Benefit (Expense) | (9.6 | ) | (32.9 | ) | 11.8 | (20.5 | ) | |||||||||
Income from Continuing Operations | 183.4 | 84.0 | 92.3 | 47.8 | ||||||||||||
Income (Loss) from Discontinued Operations | 0.2 | — | (0.1 | ) | (0.1 | ) | ||||||||||
Net Income | $ | 183.6 | $ | 84.0 | $ | 92.2 | $ | 47.7 | ||||||||
Income from Continuing Operations Per Unrestricted Share: | ||||||||||||||||
Basic | $ | 3.26 | $ | 1.63 | $ | 1.42 | $ | 0.92 | ||||||||
Diluted | $ | 3.23 | $ | 1.62 | $ | 1.40 | $ | 0.92 | ||||||||
Net Income Per Unrestricted Share: | ||||||||||||||||
Basic | $ | 3.26 | $ | 1.63 | $ | 1.42 | $ | 0.92 | ||||||||
Diluted | $ | 3.23 | $ | 1.62 | $ | 1.40 | $ | 0.92 | ||||||||
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
(Dollars in millions)
(Unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||||||
Net Income | $ | 183.6 | $ | 84.0 | $ | 92.2 | $ | 47.7 | ||||||||
Other Comprehensive Income (Loss) Before Income Taxes: | ||||||||||||||||
Unrealized Holding Gains (Losses) | (232.1 | ) | 82.8 | (49.9 | ) | 15.6 | ||||||||||
Foreign Currency Translation Adjustments | 0.3 | 0.9 | — | 0.1 | ||||||||||||
Decrease (Increase) in Net Unrecognized Postretirement Benefit Costs | 0.8 | (0.4 | ) | 0.2 | (0.1 | ) | ||||||||||
Gain (Loss) on Cash Flow Hedges | 1.1 | (6.6 | ) | 0.9 | (0.1 | ) | ||||||||||
Other Comprehensive Income (Loss) Before Income Taxes | (229.9 | ) | 76.7 | (48.8 | ) | 15.5 | ||||||||||
Other Comprehensive Income Tax Benefit (Expense) | 48.3 | (27.3 | ) | 10.2 | (5.7 | ) | ||||||||||
Other Comprehensive Income (Loss) | (181.6 | ) | 49.4 | (38.6 | ) | 9.8 | ||||||||||
Total Comprehensive Income | $ | 2.0 | $ | 133.4 | $ | 53.6 | $ | 57.5 | ||||||||
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)
(Unaudited)
Sep 30, 2018 | Dec 31, 2017 | ||||||
Assets: | |||||||
Investments: | |||||||
Fixed Maturities at Fair Value (Amortized Cost: 2018 - $5,972.4; 2017 - $5,021.6) | $ | 6,108.6 | $ | 5,382.7 | |||
Equity Securities at Fair Value | 815.8 | 526.0 | |||||
Equity Securities at Modified Cost | 50.9 | — | |||||
Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings | 170.0 | 161.0 | |||||
Fair Value Option Investments | — | 77.5 | |||||
Short-term Investments at Cost which Approximates Fair Value | 688.5 | 235.5 | |||||
Other Investments | 412.8 | 422.2 | |||||
Total Investments | 8,246.6 | 6,804.9 | |||||
Cash | 92.8 | 45.7 | |||||
Receivables from Policyholders | 1,029.9 | 366.0 | |||||
Other Receivables | 243.1 | 194.3 | |||||
Deferred Policy Acquisition Costs | 447.4 | 365.3 | |||||
Goodwill | 1,091.2 | 323.0 | |||||
Current Income Tax Assets | 58.1 | 6.1 | |||||
Other Assets | 563.5 | 270.9 | |||||
Total Assets | $ | 11,772.6 | $ | 8,376.2 | |||
Liabilities and Shareholders’ Equity: | |||||||
Insurance Reserves: | |||||||
Life and Health | $ | 3,551.4 | $ | 3,521.0 | |||
Property and Casualty | 1,819.1 | 1,016.8 | |||||
Total Insurance Reserves | 5,370.5 | 4,537.8 | |||||
Unearned Premiums | 1,470.9 | 653.9 | |||||
Deferred Income Tax Liabilities | 40.4 | 14.8 | |||||
Liabilities for Unrecognized Tax Benefits | 4.5 | 8.1 | |||||
Debt, Current and Non-current, at Amortized Cost (Fair Value: 2018 - $1,127.7; 2017 - $614.6) | 1,123.7 | 592.3 | |||||
Accrued Expenses and Other Liabilities | 698.8 | 453.7 | |||||
Total Liabilities | 8,708.8 | 6,260.6 | |||||
Shareholders’ Equity: | |||||||
Common Stock, $0.10 Par Value, 100 Million Shares Authorized; 64,737,807 Shares Issued and Outstanding at September 30, 2018 and 51,462,405 Shares Issued and Outstanding at December 31, 2017 | 6.5 | 5.1 | |||||
Paid-in Capital | 1,661.3 | 673.1 | |||||
Retained Earnings | 1,365.1 | 1,243.0 | |||||
Accumulated Other Comprehensive Income | 30.9 | 194.4 | |||||
Total Shareholders’ Equity | 3,063.8 | 2,115.6 | |||||
Total Liabilities and Shareholders’ Equity | $ | 11,772.6 | $ | 8,376.2 | |||
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, 2018 | Sep 30, 2017 | ||||||
Operating Activities: | |||||||
Net Income | $ | 183.6 | $ | 84.0 | |||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |||||||
Amortization of Intangible Assets Acquired | 106.1 | 3.9 | |||||
Equity in Earnings of Equity Method Limited Liability Investments | (8.1 | ) | (21.9 | ) | |||
Distribution of Accumulated Earnings of Equity Method Limited Liability Investments | 9.2 | 15.9 | |||||
Decrease (Increase) in Value of Fair Value Option Investments Reported in Investment Income | — | (0.9 | ) | ||||
Decrease (Increase) in Value of Equity Securities at Fair Value | (12.1 | ) | — | ||||
Amortization of Investment Securities and Depreciation of Investment Real Estate | 6.9 | 12.8 | |||||
Net Realized Gains on Sales of Investments | (10.0 | ) | (45.0 | ) | |||
Net Impairment Losses Recognized in Earnings | 2.3 | 10.5 | |||||
Depreciation of Property and Equipment | 12.2 | 9.8 | |||||
Increase in Receivables | (102.3 | ) | (27.2 | ) | |||
Increase in Deferred Policy Acquisition Costs | (82.1 | ) | (29.6 | ) | |||
Increase in Insurance Reserves | 131.8 | 71.4 | |||||
Increase in Unearned Premiums | 102.3 | 53.3 | |||||
Change in Income Taxes | 4.6 | 27.4 | |||||
Change in Accrued Expenses and Other Liabilities | (10.5 | ) | (1.5 | ) | |||
Other, Net | 11.4 | 1.6 | |||||
Net Cash Provided by Operating Activities | 345.3 | 164.5 | |||||
Investing Activities: | |||||||
Sales, Paydowns and Maturities of Fixed Maturities | 2,133.7 | 367.7 | |||||
Purchases of Fixed Maturities | (1,520.7 | ) | (401.8 | ) | |||
Sales of Equity Securities | 186.6 | 230.3 | |||||
Purchases of Equity Securities | (344.3 | ) | (233.5 | ) | |||
Return of Investment of Equity Method Limited Liability Investments | 7.3 | 36.3 | |||||
Acquisitions of Equity Method Limited Liability Investments | (17.4 | ) | (14.5 | ) | |||
Sales of Fair Value Option Investments | — | 42.2 | |||||
Purchases of Fair Value Option Investments | — | (7.0 | ) | ||||
Decrease (Increase) in Short-term Investments | (351.6 | ) | 40.4 | ||||
Improvements of Investment Real Estate | (1.0 | ) | (1.3 | ) | |||
Sales of Investment Real Estate | — | 26.2 | |||||
Increase (Decrease) in Other Investments | 0.6 | (1.3 | ) | ||||
Acquisition and Development of Software | (53.9 | ) | (28.8 | ) | |||
Acquisition of Business, Net of Cash Acquired | (560.6 | ) | — | ||||
Other, Net | 4.6 | (4.4 | ) | ||||
Net Cash Provided (Used) by Investing Activities | (516.7 | ) | 50.5 | ||||
Financing Activities: | |||||||
Net Proceeds from Issuance of Long-term Debt | 249.0 | 200.2 | |||||
Repayment of Long-term Debt | — | (360.0 | ) | ||||
Dividends and Dividend Equivalents Paid | (40.7 | ) | (37.1 | ) | |||
Proceeds from Advances from FHLB | 10.0 | — | |||||
Cash Exercise of Stock Options | 0.7 | 3.7 | |||||
Other, Net | (0.5 | ) | 0.1 | ||||
Net Cash Provided (Used) by Financing Activities | 218.5 | (193.1 | ) | ||||
Increase in Cash | 47.1 | 21.9 | |||||
Cash, Beginning of Year | 45.7 | 115.7 | |||||
Cash, End of Period | $ | 92.8 | $ | 137.6 | |||
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 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 2017 Annual Report.
Adoption of New Accounting Guidance
Guidance Adopted in 2018
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“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 changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (“Modified Cost”). 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 an impairment of an equity investment without readily-determinable fair value exists, an entity is required to re-measure such investment at fair value.
The Company applied the modified retrospective transition method, except for the provisions regarding equity investments without readily determinable fair values, which were applied on a prospective basis, with no impact on the Company’s Total Shareholders’ Equity. The Company recognized a $17.7 million increase to Retained Earnings, and a corresponding reduction to Accumulated Other Comprehensive Income (“AOCI”), as of January 1, 2018, which represents the accumulated net unrealized gains on Equity Securities at Fair Value immediately prior to the adoption of ASU 2016-01. The Company has recorded equity investments without readily-determinable fair values under the caption Equity Securities at Modified Cost in the Condensed Consolidated Balance Sheets. As a result of adopting ASU 2016-01, the Company revised its accounting policy as of January 1, 2018 and no longer classifies equity investments as available-for-sale or trading securities. Equity securities with readily-determinable fair values, including equity securities which the Company previously classified as Fair Value Option Investments, are classified as Equity Securities at Fair Value in the Condensed Consolidated Balance Sheet at September 30, 2018 with changes in fair value recorded as Income from Change in Fair Value of Equity Securities in the Condensed Consolidated Statement of Income for the nine and three months ended September 30, 2018. The Company anticipates ASU 2016-01 will result in increased volatility within the Condensed Consolidated Statements of Income in future periods.
Effective January 1, 2018, the Company early adopted ASU 2018-02, Reclassification of Certain Income Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides companies the option to reclassify tax effects stranded in AOCI, as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”), to retained earnings. The Company elected to reclassify tax effects stranded in AOCI and recognized a decrease to Retained Earnings and a corresponding increase to AOCI of $35.9 million as of January 1, 2018. The adoption of ASU 2018-02 had no impact on Total Shareholders’ Equity.
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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. ASU 2014-09 specifically excludes insurance contracts, lease contracts and investments from its scope. Accordingly, the adoption of ASU 2014-09 had no material impact on the Company’s net income or its financial position.
7
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1 - Basis of Presentation (continued)
Guidance Not Yet Adopted
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 does not expect adoption to have a material impact 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.
In August 2018, the FASB issued ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. ASU 2018-12 amends the accounting model for certain long-duration insurance contracts and requires the insurer to provide additional disclosures in annual and interim reporting periods. ASU 2018-12 is effective for fiscal years beginning after December 15, 2020, including interim periods therein. The amendments in ASU 2018-12 are intended to improve measurement of the liability for future policy benefits related to nonparticipating traditional and limited-payment contracts, measurement and presentation of market risk benefits, amortization of deferred acquisition costs, and enhance presentation and disclosures. The Company is currently evaluating the impact of this guidance on its financial statements.
The Company has adopted all other recently issued accounting pronouncements with effective dates prior to October 1, 2018. There were no adoptions of such accounting pronouncements during the nine months ended September 30, 2018 that had a material impact on the Company’s Condensed Consolidated Financial Statements. With the possible exceptions of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2018-12, Financial Services—Insurance (Topic 944):Targeted Improvements to Accounting for Long-Duration Contracts, the Company does not expect the adoption of recently issued accounting pronouncements with effective dates after September 30, 2018 to have a material impact on the Company’s financial statements and/or disclosures.
8
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 2 - Acquisition of Business
Acquisition of Infinity Property and Casualty Corporation
On July 2, 2018, Kemper acquired 100% of the outstanding common stock of Infinity Property and Casualty Corporation (“Infinity”), pursuant to the terms of the merger agreement dated February 13, 2018, with total cash, stock and equity-based compensation consideration paid to Infinity shareholders of approximately $1.5 billion. In conjunction with closing the acquisition, Kemper issued 13,184,107 shares, with an aggregate fair value of $982.5 million based on Kemper’s July 2, 2018 stock price of $74.53 per share, and paid $564.6 million in cash consideration to Infinity’s shareholders. In addition, Kemper issued 44,010 restricted units under Kemper’s equity-based compensation plan to replace Infinity restricted shares that were outstanding immediately prior to the closing. The aggregate fair value of such Kemper restricted units granted was $3.3 million at July 2, 2018, of which $1.6 million is attributed to service provided prior to the closing and included in consideration paid. The remaining amount of $1.7 million is attributed to future service and will be recognized in compensation expense primarily over a period of two years. The cash consideration was funded by cash on hand as of July 2, 2018, inclusive of $250.0 million in borrowings under the Company’s delayed draw term loan facility and $110.0 million of Kemper subsidiary borrowings from the FHLB of Dallas and FHLB of Chicago. On July 13, 2018, Kemper subsidiaries repaid in full the $110.0 million of FHLB borrowings, plus accrued interest. See Note 5, Debt for additional information. Infinity is a national provider of auto insurance focused on serving the specialty, nonstandard segment. With approximately 10,600 independent agents and $1.4 billion in 2017 direct written premiums, Infinity is one of the largest nonstandard auto insurers in the United States.
The Company has not yet completed the process of estimating the fair value of assets acquired and liabilities assumed, including, but not limited to, receivables, intangible assets, unearned premium reserves, certain tax-related balances and certain other asset and liabilities. Accordingly, the Company’s preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as the Company completes the process, which would also likely impact the Company’s allocation of the purchase price to Goodwill. In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, changes if any, to the preliminary estimates and allocation will be reported in the Company’s financial statements as an adjustment to the opening balance sheet. Based on the Company’s preliminary allocation of the purchase price, the fair values of the assets acquired and liabilities assumed were:
(Dollars in Millions) | ||||
Investments | $ | 1,569.3 | ||
Short Term Investments | 98.8 | |||
Cash | 4.0 | |||
Receivables from Policyholders | 582.3 | |||
Other Receivables | 31.9 | |||
Value of Intangible Assets Acquired (Reported in Other Assets) | 262.7 | |||
Goodwill | 768.2 | |||
Other Assets | 102.1 | |||
Property and Casualty Insurance Reserves | (701.4 | ) | ||
Unearned Premiums | (714.6 | ) | ||
Debt | (282.1 | ) | ||
Current Income Tax Liabilities | (1.8 | ) | ||
Deferred Income Tax Liabilities | (12.2 | ) | ||
Accrued Expenses and Other Liabilities | (158.5 | ) | ||
Total Purchase Price | 1,548.7 | |||
Unaudited Pro Forma Results
The following unaudited pro forma information presents the Company’s results of operations as if the acquisition of Infinity occurred on January 1, 2017. The adjustments to arrive at the pro forma information below included adjustments for the lost investment income on the cash used to fund the acquisition, amortization of the fair value adjustment on Infinity investments, amortization of the acquired intangible assets, interest expense on debt incurred to finance the acquisition and the exclusion of
9
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 2 - Acquisition of Business (continued)
certain acquisition related costs considered to be non-recurring in nature. Shares used to calculate the basic and diluted earnings per share were adjusted to reflect the additional shares of common stock issued to fund the acquisition.
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in millions, except per share amounts) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Total Revenues | $ | 3,375.2 | $ | 3,080.3 | $ | 1,194.9 | $ | 1,044.4 | ||||||||
Total Expenses | 3,065.7 | 2,995.8 | 1,044.4 | 966.6 | ||||||||||||
Income from Continuing Operations before Income Taxes | 309.5 | 84.5 | 150.5 | 77.8 | ||||||||||||
Net Income | $ | 275.5 | $ | 54.8 | $ | 147.5 | $ | 53.0 | ||||||||
Net Income Per Unrestricted Share: | ||||||||||||||||
Basic | $ | 4.26 | $ | 0.85 | $ | 2.28 | $ | 0.82 | ||||||||
Diluted | $ | 4.23 | $ | 0.85 | $ | 2.26 | $ | 0.82 | ||||||||
The pro forma information is not necessarily indicative of the consolidated results of operations that might have been achieved had the transaction in fact occurred at the beginning of the periods presented, nor does the information project results for any future period. The pro forma information does not include the impact of any future cost savings or synergies that may be achieved as a result of the acquisition.
Note 3 - Investments
Fixed Maturities
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at September 30, 2018 were:
Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||
(Dollars in Millions) | Gains | Losses | ||||||||||||||
U.S. Government and Government Agencies and Authorities | $ | 876.5 | $ | 10.8 | $ | (28.4 | ) | $ | 858.9 | |||||||
States and Political Subdivisions | 1,485.6 | 62.5 | (14.6 | ) | 1,533.5 | |||||||||||
Foreign Governments | 6.2 | — | (0.5 | ) | 5.7 | |||||||||||
Corporate Securities: | ||||||||||||||||
Bonds and Notes | 3,118.9 | 145.5 | (41.9 | ) | 3,222.5 | |||||||||||
Collateralized Loan Obligations | 470.2 | 2.9 | (1.0 | ) | 472.1 | |||||||||||
Other Mortgage- and Asset-backed | 15.0 | 1.0 | (0.1 | ) | 15.9 | |||||||||||
Investments in Fixed Maturities | $ | 5,972.4 | $ | 222.7 | $ | (86.5 | ) | $ | 6,108.6 | |||||||
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2017 were:
Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||
(Dollars in Millions) | Gains | Losses | ||||||||||||||
U.S. Government and Government Agencies and Authorities | $ | 542.7 | $ | 19.6 | $ | (6.2 | ) | $ | 556.1 | |||||||
States and Political Subdivisions | 1,595.5 | 108.6 | (2.3 | ) | 1,701.8 | |||||||||||
Foreign Governments | 3.0 | 0.2 | — | 3.2 | ||||||||||||
Corporate Securities: | ||||||||||||||||
Bonds and Notes | 2,745.8 | 245.8 | (11.0 | ) | 2,980.6 | |||||||||||
Redeemable Preferred Stocks | 0.1 | — | — | 0.1 | ||||||||||||
Collateralized Loan Obligations | 134.1 | 5.7 | — | 139.8 | ||||||||||||
Other Mortgage- and Asset-backed | 0.4 | 0.7 | — | 1.1 | ||||||||||||
Investments in Fixed Maturities | $ | 5,021.6 | $ | 380.6 | $ | (19.5 | ) | $ | 5,382.7 | |||||||
10
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments (continued)
Other Receivables included $16.9 million unsettled sales of Investments in Fixed Maturities at September 30, 2018, compared to no unsettled sales of Investments in Fixed Maturities at December 31, 2017. Accrued Expenses and Other Liabilities included unsettled purchases of Investments in Fixed Maturities of $105.8 million and $5.4 million at September 30, 2018 and December 31, 2017, respectively.
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at September 30, 2018 by contractual maturity were:
(Dollars in Millions) | Amortized Cost | Fair Value | ||||||
Due in One Year or Less | $ | 154.0 | $ | 156.0 | ||||
Due after One Year to Five Years | 1,087.6 | 1,094.9 | ||||||
Due after Five Years to Ten Years | 1,717.7 | 1,735.8 | ||||||
Due after Ten Years | 1,884.4 | 2,006.2 | ||||||
Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date | 1,128.7 | 1,115.7 | ||||||
Investments in Fixed Maturities | $ | 5,972.4 | $ | 6,108.6 | ||||
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, 2018 consisted of securities issued by the Government National Mortgage Association with a fair value of $615.6 million, securities issued by the Federal National Mortgage Association with a fair value of $8.9 million, securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $3.2 million and securities of other non-governmental issuers with a fair value of $488.0 million.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at September 30, 2018 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 | $ | 594.0 | $ | (20.0 | ) | $ | 56.5 | $ | (8.4 | ) | $ | 650.5 | $ | (28.4 | ) | |||||||||
States and Political Subdivisions | 486.4 | (14.6 | ) | — | — | 486.4 | (14.6 | ) | ||||||||||||||||
Foreign Governments | 4.8 | (0.5 | ) | — | — | 4.8 | (0.5 | ) | ||||||||||||||||
Corporate Securities: | ||||||||||||||||||||||||
Bonds and Notes | 1,237.5 | (32.2 | ) | 302.3 | (9.7 | ) | 1,539.8 | (41.9 | ) | |||||||||||||||
Collateralized Loan Obligations | 204.6 | (1.0 | ) | — | — | 204.6 | (1.0 | ) | ||||||||||||||||
Other Mortgage- and Asset-backed | 7.5 | (0.1 | ) | — | — | 7.5 | (0.1 | ) | ||||||||||||||||
Total Fixed Maturities | 2,534.8 | (68.4 | ) | 358.8 | (18.1 | ) | 2,893.6 | (86.5 | ) | |||||||||||||||
The Company regularly reviews its fixed maturity 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 fixed maturity investments that are determined to be other than temporary are reported as losses in the Condensed Consolidated Statements of Income in the periods when such determinations are made.
Unrealized losses on fixed maturities, which the Company has determined to be temporary at September 30, 2018, were $86.5 million, of which $18.1 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, 2018 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, 2018 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 $77.3 million and below-investment-grade fixed maturity investments comprised $9.2 million of the unrealized losses on investments in fixed maturities
11
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments (continued)
at September 30, 2018. 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, 2018, 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, 2018 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.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at December 31, 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 | $ | 140.0 | $ | (1.1 | ) | $ | 103.4 | $ | (5.1 | ) | $ | 243.4 | $ | (6.2 | ) | |||||||||
States and Political Subdivisions | 57.0 | (0.3 | ) | 124.2 | (2.0 | ) | 181.2 | (2.3 | ) | |||||||||||||||
Corporate Securities: | ||||||||||||||||||||||||
Bonds and Notes | 283.1 | (4.2 | ) | 208.9 | (6.8 | ) | 492.0 | (11.0 | ) | |||||||||||||||
Collateralized Loan Obligations | 2.8 | — | 2.4 | — | 5.2 | — | ||||||||||||||||||
Total Fixed Maturities | 482.9 | (5.6 | ) | 438.9 | (13.9 | ) | 921.8 | (19.5 | ) | |||||||||||||||
Unrealized losses on fixed maturities, which the Company determined to be temporary at December 31, 2017, were $19.5 million, of which $13.9 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were no unrealized losses at December 31, 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 December 31, 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 $12.6 million and below-investment-grade fixed maturity investments comprised $6.9 million of the unrealized losses on investments in fixed maturities at December 31, 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 December 31, 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 recovery of its amortized cost basis, which may be at maturity. Based on the Company’s evaluation at December 31, 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 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.
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.
12
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments (continued)
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at Beginning of Period | $ | 1.6 | $ | 1.4 | $ | 1.6 | $ | 2.4 | ||||||||
Pre-tax Credit Losses on Fixed Maturities without Pre-tax Credit Losses Included in Cumulative Balance at Beginning of Period | — | 1.2 | — | — | ||||||||||||
Reductions for Change in Impairment Status: | ||||||||||||||||
From Status of Credit Loss to Status of Intent-to-sell or Required-to-sell | (0.5 | ) | — | (0.5 | ) | — | ||||||||||
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 | $ | 1.1 | $ | 2.3 | $ | 1.1 | $ | 2.3 | ||||||||
Equity Securities
Investments in Equity Securities at Fair Value were $815.8 million and $526.0 million at September 30, 2018 and December 31, 2017, respectively. Net unrealized gains arising during the nine months ended September 30, 2018 and recognized in earnings, related to such investments still held as of September 30, 2018, were $12.4 million.
For Equity Securities at Modified Cost, the Company performs a qualitative impairment analysis on a quarterly basis consisting of various factors such as earnings performance, current market conditions, changes in credit ratings, changes in the regulatory environment and other factors. If the qualitative analysis identifies the presence of impairment indicators, the Company estimates the fair value of the investment. If the estimated fair value is below the carrying value, the Company records an other-than-temporary impairment in the Condensed Consolidated Statement of Income to reduce the carrying value to the estimated fair value. When the Company identifies observable transactions of the same or similar securities to those held by the Company, the Company increases or decreases the carrying value to the observable transaction price. The Company did not recognize any increases or decreases in the carrying value due to observable transactions. The Company recognized an impairment of $1.8 million on Equity Securities at Modified Cost for the nine months ended September 30, 2018 as a result of the Company’s qualitative impairment analysis. Impairments of $1.6 million were recognized during the three months ended September 30, 2018. The Company has recognized no cumulative increases in the carrying value due to observable transactions, no cumulative decreases in the carrying value due to observable transactions and $1.8 million of cumulative impairments on Equity Securities at Modified Cost held as of September 30, 2018.
There were no unsettled sales of Investments in Equity Securities at September 30, 2018 and December 31, 2017. There were no unsettled purchases of Investments in Equity Securities at September 30, 2018 and December 31, 2017.
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, 2018 is limited to the total carrying value of $170.0 million. In addition, the Company had outstanding commitments totaling approximately $96.4 million to fund Equity Method Limited Liability Investments at September 30, 2018.
Other Investments
The carrying values of the Company’s Other Investments at September 30, 2018 and December 31, 2017 were:
(Dollars in Millions) | Sep 30, 2018 | Dec 31, 2017 | ||||||
Loans to Policyholders at Unpaid Principal | $ | 298.0 | $ | 298.6 | ||||
Real Estate at Depreciated Cost | 114.8 | 116.8 | ||||||
Trading Securities at Fair Value | — | 6.7 | ||||||
Other | — | 0.1 | ||||||
Total | $ | 412.8 | $ | 422.2 | ||||
13
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments (continued)
Net Investment Income
Net Investment Income for the nine and three months ended September 30, 2018 and 2017 was:
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Investment Income: | ||||||||||||||||
Interest on Fixed Income Securities | $ | 197.4 | $ | 184.0 | $ | 70.6 | $ | 61.8 | ||||||||
Dividends on Equity Securities Excluding Alternative Investments | 7.0 | 7.0 | 2.5 | 2.6 | ||||||||||||
Alternative Investments: | ||||||||||||||||
Equity Method Limited Liability Investments | 8.1 | 21.9 | (0.4 | ) | 11.1 | |||||||||||
Fair Value Option Investments | — | 1.0 | — | 0.5 | ||||||||||||
Limited Liability Investments Included in Equity Securities | 22.8 | 18.7 | 13.7 | 5.9 | ||||||||||||
Total Alternative Investments | 30.9 | 41.6 | 13.3 | 17.5 | ||||||||||||
Short-term Investments | 4.3 | 1.0 | 2.3 | 0.5 | ||||||||||||
Loans to Policyholders | 16.5 | 15.7 | 5.5 | 4.9 | ||||||||||||
Real Estate | 7.2 | 8.3 | 2.4 | 2.6 | ||||||||||||
Other | 0.6 | 0.2 | 0.2 | 0.1 | ||||||||||||
Total Investment Income | 263.9 | 257.8 | 96.8 | 90.0 | ||||||||||||
Investment Expenses: | ||||||||||||||||
Real Estate | 7.5 | 7.7 | 2.6 | 2.6 | ||||||||||||
Other Investment Expenses | 6.8 | 5.5 | 2.2 | 1.5 | ||||||||||||
Total Investment Expenses | 14.3 | 13.2 | 4.8 | 4.1 | ||||||||||||
Net Investment Income | $ | 249.6 | $ | 244.6 | $ | 92.0 | $ | 85.9 | ||||||||
Gross gains and losses on sales of investments in fixed maturities for the nine and three months ended September 30, 2018 and 2017 were:
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Fixed Maturities: | ||||||||||||||||
Gains on Sales | $ | 11.2 | $ | 7.3 | $ | 5.9 | $ | 2.4 | ||||||||
Losses on Sales | (6.5 | ) | (0.4 | ) | (2.5 | ) | — | |||||||||
14
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4 - Property and Casualty Insurance Reserves
Property and casualty insurance reserve activity for the nine months ended September 30, 2018 and 2017 was:
Nine Months Ended | ||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | ||||||
Property and Casualty Insurance Reserves: | ||||||||
Gross of Reinsurance and Indemnification at Beginning of Year | $ | 1,016.8 | $ | 931.4 | ||||
Less Reinsurance and Indemnification Recoverables at Beginning of Year | 53.1 | 50.2 | ||||||
Property and Casualty Insurance Reserves - Net of Reinsurance and Indemnification at Beginning of Year | 963.7 | 881.2 | ||||||
Property and Casualty Insurance Reserves Acquired, Net of Reinsurance | 682.9 | — | ||||||
Incurred Losses and LAE Related to: | ||||||||
Current Year: | ||||||||
Continuing Operations | 1,412.7 | 1,072.0 | ||||||
Prior Years: | ||||||||
Continuing Operations | (1.2 | ) | 19.7 | |||||
Discontinued Operations | (0.5 | ) | — | |||||
Total Incurred Losses and LAE Related to Prior Years | (1.7 | ) | 19.7 | |||||
Total Incurred Losses and LAE | 1,411.0 | 1,091.7 | ||||||
Paid Losses and LAE Related to: | ||||||||
Current Year: | ||||||||
Continuing Operations | 770.9 | 600.7 | ||||||
Prior Years: | ||||||||
Continuing Operations | 533.1 | 443.6 | ||||||
Discontinued Operations | 2.2 | 3.0 | ||||||
Total Paid Losses and LAE Related to Prior Years | 535.3 | 446.6 | ||||||
Total Paid Losses and LAE | 1,306.2 | 1,047.3 | ||||||
Property and Casualty Insurance Reserves - Net of Reinsurance and Indemnification at End of Period | 1,751.4 | 925.6 | ||||||
Plus Reinsurance Recoverables at End of Period | 67.7 | 42.9 | ||||||
Property and Casualty Insurance Reserves - Gross of Reinsurance and Indemnification at End of Period | $ | 1,819.1 | $ | 968.5 | ||||
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, 2018, the Company decreased its property and casualty insurance reserves by $1.7 million to recognize favorable development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed adversely by $0.1 million, and commercial lines insurance loss and LAE reserves developed favorably by $1.8 million. Personal automobile insurance loss and LAE reserves developed favorably by $0.5 million due primarily to the emergence of loss patterns that were more favorable than expected for both physical damage and liability insurance for the 2017 accident year, partially offset by the emergence of less favorable loss patterns than expected for both physical damage and liability insurance lines for the 2016 and prior accident years. Homeowners insurance loss and LAE reserves developed adversely by $3.6 million due primarily to the emergence of non-catastrophe loss patterns that were worse than expected for the 2016 and 2015 accident years, partially offset by favorable development on catastrophes primarily related to the 2017 accident year. Other personal lines loss and LAE reserves developed favorably by $2.9 million due primarily to the emergence of more favorable loss patterns than expected for the 2016 and 2015 accident years. Commercial lines insurance
15
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4 - Property and Casualty Insurance Reserves (continued)
loss and LAE reserves developed favorably due primarily to the emergence of more favorable loss patterns than expected for the 2015 and 2014 accident years.
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 the 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.
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.
Note 5 - Debt
Amended and Extended Credit Agreement and Term Loan Facility
On June 8, 2018, the Company entered into an amended and extended credit agreement and term loan facility. The amended and extended credit agreement increased the borrowing capacity of the existing unsecured credit agreement to $300.0 million and extended the maturity date to June 8, 2023. The term loan facility includes a delayed draw feature with borrowing capacity of $250.0 million and a maturity date two years from the borrowing date. Furthermore, the amended and extended credit agreement provides for an accordion feature whereby the Company can increase either the revolving credit or term loan borrowing capacity by $100.0 million. On June 29, 2018, the Company borrowed $250.0 million on the delayed draw term loan facility to facilitate the funding of the acquisition of Infinity. The proceeds from the term loan facility, net of debt issuance costs, were $249.4 million. There were no outstanding borrowings at September 30, 2018 and December 31, 2017 under the revolving credit agreement.
Infinity Debt
Infinity’s liabilities at the acquisition date included $275.0 million principal amount, 5.0% Senior Notes due September 19, 2022 (the “2022 Senior Notes”). The 2022 Senior Notes were recorded at fair value as of the acquisition date, $282.1 million, with the $7.1 million premium being amortized as a reduction to interest expense over the remaining term, resulting in an effective interest rate of 4.36%.
Long-term Debt
The Company designates debt obligations as either short-term or long-term based on maturity date at issuance, or in the case of the 2022 Senior Notes, based on the date of assumption. Total amortized cost of Long-term Debt outstanding at September 30, 2018 and December 31, 2017 was:
(Dollars in Millions) | Sep 30, 2018 | Dec 31, 2017 | ||||||
4.35% Senior Notes due February 15, 2025 | $ | 448.4 | $ | 448.1 | ||||
5.0% Senior Notes due September 19, 2022 | 281.7 | — | ||||||
7.375% Subordinated Debentures due February 27, 2054 | 144.2 | 144.2 | ||||||
Term Loan due June 29, 2020 | 249.4 | — | ||||||
Total Long-term Debt Outstanding | $ | 1,123.7 | $ | 592.3 | ||||
16
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 5 - Debt (continued)
Short-term Debt
Kemper’s subsidiaries, United Insurance Company of America (“United Insurance”) and Trinity Universal Insurance Company (“Trinity”), are members of the Federal Home Loan Bank (“FHLB”) of Chicago and Dallas, respectively. As a requirement of membership in the FHLB, United Insurance and Trinity maintain a certain level of investment in FHLB stock. Total holdings of FHLB of Chicago stock were $0.8 million and $0.4 million at September 30, 2018 and December 31, 2017, respectively. Total holdings of FHLB of Dallas stock were $3.3 million at September 30, 2018 and December 31, 2017.
In June of 2018, United Insurance received advances of $55.0 million from the FHLB of Chicago and Trinity received advances of $55.0 million from the FHLB of Dallas. The advances, which were repaid in full on July 13, 2018, were made to facilitate the funding of the acquisition of Infinity. There were no advances from the FHLB of Chicago or the FHLB of Dallas outstanding at September 30, 2018.
In March of 2018, United Insurance received advances of $10.0 million from the FHLB of Chicago. The advances, which mature in one year or less, were made in connection with the start-up of the Company’s collateralized investment borrowing program. In connection with the advances, United Insurance pledged U.S. Government Agency securities with a fair value of $15.9 million at September 30, 2018. The fair value of the collateral pledged must be maintained at certain specified levels above the borrowed amount, which can vary depending on the assets pledged. If the fair value of the collateral declines below these specified levels of the amount borrowed, United Insurance would be required to pledge additional collateral or repay outstanding borrowings. Accrued Expenses and Other Liabilities in the Condensed Consolidated Balance Sheet at September 30, 2018 includes $10.0 million related to these advances.
There were no advances from the FHLB of Chicago or the FHLB of Dallas outstanding at December 31, 2017.
Interest Expense and Interest Paid
Interest Expense, including facility fees, accretion of discount, amortization of premium and amortization of issuance costs, was $29.3 million and $13.4 million for the nine and three months ended September 30, 2018, respectively. Interest paid, including facility fees, was $35.0 million and $19.7 million for the nine and three months ended September 30, 2018, respectively. 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.
17
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6 - Income from Continuing Operations Per Unrestricted Share
Prior to January 1, 2018, the Company’s awards of restricted stock contained rights to receive non-forfeitable dividends and participate in the undistributed earnings with common shareholders. Prior to January 1, 2018, the Company’s awards of restricted stock units and deferred stock units also contained 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 from Continuing Operations Per Unrestricted Share and Diluted Income from Continuing Operations Per Unrestricted Share for the nine and three months ended September 30, 2018 and 2017 is presented below.
Nine Months Ended | Three Months Ended | |||||||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Income from Continuing Operations | $ | 183.4 | $ | 84.0 | $ | 92.3 | $ | 47.8 | ||||||||
Less Income from Continuing Operations Attributed to Participating Awards | 1.0 | 0.6 | 0.4 | 0.4 | ||||||||||||
Income from Continuing Operations Attributed to Unrestricted Shares | 182.4 | 83.4 | 91.9 | 47.4 | ||||||||||||
Dilutive Effect on Income of Equity-based Compensation Equivalent Shares | — | — | — | — | ||||||||||||
Diluted Income from Continuing Operations Attributed to Unrestricted Shares | $ | 182.4 | $ | 83.4 | $ | 91.9 | $ | 47.4 | ||||||||
(Number of Shares in Thousands) | ||||||||||||||||
Weighted-average Unrestricted Shares Outstanding | 55,925.7 | 51,308.7 | 64,580.4 | 51,366.8 | ||||||||||||
Equity-based Compensation Equivalent Shares | 569.8 | 171.6 | 769.1 | 199.6 | ||||||||||||
Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution | 56,495.5 | 51,480.3 | 65,349.5 | 51,566.4 | ||||||||||||
(Per Unrestricted Share in Whole Dollars) | ||||||||||||||||
Basic Income from Continuing Operations Per Unrestricted Share | $ | 3.26 | $ | 1.63 | $ | 1.42 | $ | 0.92 | ||||||||
Diluted Income from Continuing Operations Per Unrestricted Share | $ | 3.23 | $ | 1.62 | $ | 1.40 | $ | 0.92 | ||||||||
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, 2018 and 2017, 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, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Equity-based Compensation Equivalent Shares | 293.7 | 459.7 | 47.2 | 382.1 | ||||||||
Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution | 293.7 | 459.7 | 47.2 | 382.1 | ||||||||
18
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7 - 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, 2018 and 2017 were:
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Other Comprehensive Income (Loss) Before Income Taxes: | ||||||||||||||||
Unrealized Holding Gains (Losses) Arising During the Period Before Reclassification Adjustment | $ | (224.4 | ) | $ | 110.5 | $ | (43.4 | ) | $ | 19.2 | ||||||
Reclassification Adjustment for Amounts Included in Net Income | (7.7 | ) | (27.7 | ) | (6.5 | ) | (3.6 | ) | ||||||||
Unrealized Holding Gains (Losses) | (232.1 | ) | 82.8 | (49.9 | ) | 15.6 | ||||||||||
Foreign Currency Translation Adjustments | 0.3 | 0.9 | — | 0.1 | ||||||||||||
Net Unrecognized Postretirement Benefit Costs | 0.8 | (0.4 | ) | 0.2 | (0.1 | ) | ||||||||||
Gain (Loss) on Cash Flow Hedges During the Period Before Reclassification Adjustment | 0.8 | (7.9 | ) | 0.9 | (0.3 | ) | ||||||||||
Reclassification Adjustment for Amounts Included in Net Income | 0.3 | 1.3 | — | 0.2 | ||||||||||||
Gain (Loss) on Cash Flow Hedges | 1.1 | (6.6 | ) | 0.9 | (0.1 | ) | ||||||||||
Other Comprehensive Income (Loss) Before Income Taxes | $ | (229.9 | ) | $ | 76.7 | $ | (48.8 | ) | $ | 15.5 | ||||||
The components of Other Comprehensive Income Tax Benefit (Expense) for the nine and three months ended September 30, 2018 and 2017 were:
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Other Comprehensive Income Tax Benefit (Expense): | ||||||||||||||||
Unrealized Holding Gains and Losses Arising During the Period Before Reclassification Adjustment | $ | 47.2 | $ | (39.1 | ) | $ | 9.2 | $ | (7.0 | ) | ||||||
Reclassification Adjustment for Amounts Included in Net Income | 1.6 | 9.7 | 1.3 | 1.3 | ||||||||||||
Unrealized Holding Gains | 48.8 | (29.4 | ) | 10.5 | (5.7 | ) | ||||||||||
Foreign Currency Translation Adjustments | (0.1 | ) | (0.4 | ) | — | (0.1 | ) | |||||||||
Net Unrecognized Postretirement Benefit Costs | (0.1 | ) | 0.2 | — | 0.1 | |||||||||||
Gain and Loss on Cash Flow Hedges During the Period Before Reclassification Adjustment | (0.2 | ) | 2.7 | (0.2 | ) | — | ||||||||||
Reclassification Adjustment for Amounts Included in Net Income | (0.1 | ) | (0.4 | ) | (0.1 | ) | — | |||||||||
Gain and Loss on Cash Flow Hedges | (0.3 | ) | 2.3 | (0.3 | ) | — | ||||||||||
Other Comprehensive Income Tax Benefit (Expense) | $ | 48.3 | $ | (27.3 | ) | $ | 10.2 | $ | (5.7 | ) | ||||||
The components of AOCI at September 30, 2018 and December 31, 2017 were:
(Dollars in Millions) | Sep 30, 2018 | Dec 31, 2017 | ||||||
Net Unrealized Gains on Investments, Net of Income Taxes: | ||||||||
Available for Sale Fixed Maturities with Portion of OTTI Recognized in Earnings | $ | — | $ | 0.2 | ||||
Other Net Unrealized Gains on Investments | 122.6 | 269.5 | ||||||
Foreign Currency Translation Adjustments, Net of Income Taxes | — | 0.2 | ||||||
Net Unrecognized Postretirement Benefit Costs, Net of Income Taxes | (88.5 | ) | (72.2 | ) | ||||
Loss on Cash Flow Hedges, Net of Income Taxes | (3.2 | ) | (3.3 | ) | ||||
Accumulated Other Comprehensive Income | $ | 30.9 | $ | 194.4 | ||||
19
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7 - Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (continued)
Components of AOCI were reclassified to the following lines of the Condensed Consolidated Statements of Income for the nine and three months ended September 30, 2018 and 2017:
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Reclassification of AOCI from Net Unrealized Gains on Investments to: | ||||||||||||||||
Net Realized Gains on Sales of Investments | $ | 10.0 | $ | 38.2 | $ | 8.3 | $ | 6.5 | ||||||||
Net Impairment Losses Recognized in Earnings | (2.3 | ) | (10.5 | ) | (1.8 | ) | (2.9 | ) | ||||||||
Total Before Income Taxes | 7.7 | 27.7 | 6.5 | 3.6 | ||||||||||||
Income Tax Expense | (1.6 | ) | (9.7 | ) | (1.3 | ) | (1.3 | ) | ||||||||
Reclassification from AOCI, Net of Income Taxes | 6.1 | 18.0 | 5.2 | 2.3 | ||||||||||||
Reclassification of AOCI from Unrecognized Postretirement Benefit Costs to: | ||||||||||||||||
Interest and Other Expenses | (0.8 | ) | 0.4 | (0.2 | ) | 0.1 | ||||||||||
Income Tax Benefit | 0.1 | (0.2 | ) | — | (0.1 | ) | ||||||||||
Reclassification from AOCI, Net of Income Taxes | (0.7 | ) | 0.2 | (0.2 | ) | — | ||||||||||
Reclassification of AOCI from Loss on Cash Flow Hedges to: | ||||||||||||||||
Interest and Other Expenses | (0.3 | ) | (1.3 | ) | (0.2 | ) | (0.2 | ) | ||||||||
Income Tax Benefit | 0.1 | 0.4 | 0.1 | — | ||||||||||||
Reclassification from AOCI, Net of Income Taxes | (0.2 | ) | (0.9 | ) | (0.1 | ) | (0.2 | ) | ||||||||
Total Reclassification from AOCI to Net Income | $ | 5.2 | $ | 17.3 | $ | 4.9 | $ | 2.1 | ||||||||
Note 8 - Changes in Shareholders’ Equity
Changes in Shareholders’ Equity for the nine months ended September 30, 2018 were:
(Dollars in Millions, Except Per Share Amounts) | Total Shareholders’ Equity | |||
Shareholders’ Equity at Beginning of Year | $ | 2,115.6 | ||
Net Income | 183.6 | |||
Other Comprehensive Income (Loss) | (181.6 | ) | ||
Total Comprehensive Income | 2.0 | |||
Cash Dividends and Dividend Equivalents to Shareholders ($0.24 per share) | (40.7 | ) | ||
Common Stock Issued | 978.5 | |||
Equity-based Compensation Cost | 13.5 | |||
Equity-based Awards, Net of Shares Exchanged | (5.1 | ) | ||
Shareholders’ Equity at End of Period | $ | 3,063.8 | ||
Effective January 1, 2018, the Company adopted ASU 2016-01. The Company applied the modified retrospective transition method, except for the provisions regarding equity investments without readily determinable fair values, which were applied on a prospective basis, with no impact on the Company’s Total Shareholders’ Equity. Accordingly, the Company recognized an increase to Retained Earnings and a corresponding reduction to Accumulated Other Comprehensive Income (“AOCI”) as of January 1, 2018 of $17.7 million. See Note 1, Basis of Presentation, to the Condensed Consolidated Financial Statements for additional information.
Effective January 1, 2018, the Company early adopted ASU 2018-02, Reclassification of Certain Income Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides companies the option to reclassify tax effects stranded in AOCI, as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”), to retained earnings. The Company elected to reclassify tax effects stranded in AOCI and recognized a decrease to Retained Earnings and a corresponding increase to AOCI of
20
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8 - Changes in Shareholders’ Equity (continued)
$35.9 million as of January 1, 2018. The adoption of ASU 2018-02 had no impact on Total Shareholders’ Equity. See Note 1, Basis of Presentation, to the Condensed Consolidated Financial Statements for additional information.
Note 9 - Income Taxes
On December 22, 2017, Public Law 115-97, more commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted and included numerous changes to existing federal income tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recorded certain provisional amounts for estimated income tax effects of the Tax Act on deferred income taxes.
In the third quarter of 2018, the Company finalized certain effects of the Tax Act on deferred income taxes, which were previously recorded as provisional amounts under SAB 118, based on additional information received from third parties and the completion of additional actuarial computations which impacted tax elections made for the 2017 and earlier tax years. As a result, the Company recorded a tax benefit of $26.0 million for the nine and three months ended September 30, 2018. The tax benefit recognized includes the estimated benefit of elections to reset the interest rates used to discount and compute the tax-basis of reserves on certain post-1987 life insurance contracts reported in the Company's 2014 through 2017 income tax returns. Final determination of the effects of the Tax Act on deferred income taxes, aside from the items noted above, continues to require additional information and detailed computations, the Company expects to complete its determination of the effect of the Tax Act on its deferred income tax assets and liabilities during the fourth quarter of 2018.
The statute of limitations related to Kemper and its eligible subsidiaries’ consolidated Federal income tax returns is closed for all tax years up to and including 2013. The expiration of the statute of limitations related to the various state income tax returns that Kemper and its subsidiaries file varies by state.
Liabilities for Unrecognized Tax Benefits at September 30, 2018 and December 31, 2017 include $3.8 million and $7.6 million, respectively, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred income tax accounting, other than for interest and penalties, the disallowance of the shorter deductibility period would not affect the effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Liabilities for Unrecognized Tax Benefits included accrued interest of $0.7 million and $0.5 million at September 30, 2018 and December 31, 2017, respectively.
Income taxes paid, net of refunds received, were $10.2 million for the nine months ended September 30, 2018. Income taxes paid, net of refunds received, were $5.5 million for the nine months ended September 30, 2017.
Note 10 - Pension Benefits and Postretirement Benefits Other Than Pensions
The Company sponsors a qualified defined benefit pension plan (the “Pension Plan”) that covers approximately 9,000 participants and beneficiaries, of which 1,600 are active employees. The Pension Plan is closed to employees newly-hired after January 1, 2006. On May 12, 2016, the Company amended the Pension Plan to freeze benefit accruals, effective June 30, 2016, for substantially all of the participants under the plan. The components of Pension Benefit for the Pension Plan for the nine and three months ended September 30, 2018 and 2017 were:
Nine Months Ended | Three Months Ended | |||||||||||||||
(Dollars in Millions) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||||
Service Cost | $ | — | $ | — | $ | — | $ | — | ||||||||
Interest Cost on Projected Benefit Obligation | 15.2 | 15.4 | 5.0 | |||||||||||||