Kemper Corporation
2019 Annual Report
Kemper at a Glance
Kemper Corporation (NYSE: KMPR) is one of the nation’s leading specialized insurers. With nearly $13 billion
in assets, Kemper is improving the world of insurance by providing affordable and easy-to-use personalized
solutions to individuals, families and businesses through its Auto, Personal Insurance, Life and Health brands.
Kemper serves over 6.4 million policies, is represented by more than 30,000 agents and brokers, and has
over 8,900 associates dedicated to meeting the ever-changing needs of its customers.
Financial Highlights
Earned Premiums
Dollars in Millions
$4,472
$3,384
$2,350
Book Value Per Share
Dollars Per Share
BVPS
Adj. BVPS1
$47.10
$41.11
$29.29
$28.22
$59.59
$36.36
2017
2018
2019
2017
2018
2019
Earnings Per Diluted Share
Dollars Per Share
Net Income
Adj. Consolidated Net
Operating Income1
$7.96
$3.22
$6.27
$4.37
$3.22
$2.33
$1.78
1 Book value per share excluding net unrealized gains on fixed
maturities and goodwill
Return on Average Shareholders’
Equity
Percentage
24.7%
ROAE1
ROATCE2
14.8%
11.4%
8.1%
7.7%
5.9%
2017
2018
2019
2017
2018
2019
1 This is a non-GAAP financial measure that is defined and
reconciled after Exhibit 32.2 of this document.
g months return on average shareholders’ equity (ROAE)
1 Rolling 12
using 5-point average
2 Rolling 12g months return on average shareholders’ equity excluding
net unrealized gains on fixed maturities and goodwill (tangible
common equity) using 5-point average
Joseph P. Lacher, Jr.
President and Chief Executive Officer
Kemper Corporation
To Our Shareholders,
At Kemper, our strategic intent is focused on
proudly serving growing niche and underserved
markets by providing appropriate and affordable
insurance and financial solutions. We do this
through a portfolio of specialty businesses,
disciplined financial management, and technology
and process solutions that enable efficient
customization and speed to execution.
I am pleased with the progress we have made
on moving our business forward. In 2019, we
capitalized on the infrastructure we developed
and enhancements we made over the past few
years that enabled industry-leading top-line
growth at attractive margins.
2019 Results
We had another year of strong operating
performance. In 2019, Kemper delivered adjusted
operating earnings of $418 million, or $6.27 per
diluted share, compared to $4.37 per diluted
share in 2018. Net income was $531 million, or
$7.96 per diluted share, compared to $3.22 per
diluted share in 2018. These results drove a 27%
increase in book value per share, or 29% increase
in book value per share excluding net unrealized
gains on fixed maturities and goodwill, and a
return on average equity excluding net unrealized
gains on fixed maturities and goodwill of 25%.
These results are exceptional and industry leading.
While they are likely not sustainable over the
long-term, they demonstrate the power of our
business model and are something we aspire
to achieve.
During the year, we also took a number of actions
that further strengthened the balance sheet. A few
noteworthy items include a successful equity
raise, the retirement of our 2054 hybrid
instrument, and a $55 million contribution to
our pension fund that brought the liability within
a fully funded range. During 2019, we generated
$534 million in cash flow from operating activities.
At year-end, our debt-to-capital ratio was 16.4%
and we had $867 million of available committed
contingent liquidity. In short, Kemper has a robust
balance sheet and substantial financial flexibility
to support continued growth and shareholder
value creation.
Kemper has a robust balance
sheet and substantial financial
flexibility to support continued
growth and shareholder value
creation.
Business Performance
Overall, our specialty businesses had a strong year.
This was highlighted by significant Specialty Auto
market share gains and modest Life and Health
premium growth.
The 2019 performance of our Specialty Auto
business was outstanding, resulting in industry-
leading organic growth and profitability.
For the year, earned premiums increased 12% to
$3.1 billion adjusted for the acquisition of Infinity.
Our competitive advantages within the specialty
auto market have become a foundation for success.
Our tailored focus on specialty customers, an
expanding cost advantage, and our increasing
product sophistication is solidifying Kemper as
a premier specialty auto insurance franchise.
Our specialty businesses had
a strong year highlighted by
significant Specialty Auto
market share gains.
Last year we reported on the close of our acquisition
of Infinity Property and Casualty Corporation,
a leading provider of specialty auto insurance
focused on serving the Hispanic market segment.
We are happy to report that we have exceeded all
initial and revised financial targets we set for the
transaction.
Written premium, investment income and
operating synergies—as well as key financial
targets including operating earnings accretion,
tangible book value earnback, and our debt-to-total-
capitalization ratio—were achieved beyond our
goals, with continued upside expected. Additionally,
the success of the Infinity acquisition was cited as
a key driver in a number of recent ratings agency
upgrades and revised outlooks.
The stability of our Life and Health segment is
core to our success. The business generates a
consistent and diverse income and cash stream
for the organization. The reliable stream of
production from our dedicated agency force will
generate earned premiums and income for years
to come. With this in mind, we are making
investments to modernize the capabilities of
Kemper Life, giving agents improved tools to drive
sales. The result of these investments is modest
earned premium growth for the year, after a long
history of declining premiums. Our supplemental
Health business increased earned premiums by
roughly 8% in 2019.
We continue to work toward improving results in
our Preferred Insurance segment. We had some
modest, short-term setbacks in 2019, largely driven
by the rollout of the new Prime product. We’re
confident that the increased rating sophistication
capabilities our platform enables will yield
improvements to our future operating performance.
Our Team
Corporate Citizenship
The performance and results we have achieved
were made possible by the commitment and talents
of our entire team. We’re building a culture at
Kemper where every employee thinks and acts
like an owner and understands the important
role they play in fulfilling the promises we make
to our customers. We strive to be world-class
operators, where decisions and actions are guided
by intellectual curiosity, and we leverage analytic
superiority as a key to build sustainable competitive
advantages and advance growth. Not only do we
demonstrate these behaviors with a strong spirit
of individual responsibility and successful teamwork,
but also a powerful sense of commitment to ensure
we’re meeting the needs of our stakeholders.
We’re building a culture at
Kemper where every employee
thinks and acts like an owner and
understands the important role
they play in fulfilling the promises
we make to our customers.
Good corporate citizenship is inherent to what
insurance is about. We’re focused on specialty
and underserved markets that need affordable
financial solutions. We pick people up on their
bad days and make things better for them. We
have deep ties in the community—both through
our customers and investment strategy—including
our investment fund allocations in municipal
bonds that support state and local projects and
services including schools and housing. Our
business model works only if we stay true to the
promises we make to our customers, while in tandem
ensuring we’re providing a rewarding experience
for our employees, and creating meaningful value
for our shareholders.
Optimizing our core competencies to address
opportunities and goals in aspects related to
environmental, social and governance (ESG)
principles have long been—and will continue to
be—imperative to our business strategy. Key areas
of focus include ethics and governance, serving
our customers, employee well-being, diversity
and inclusion, responsible investing, philanthropy
and community relations, and environmental
responsibility. You can find more information on
ESG in this report and we will continue to share
progress on these initiatives.
Looking Forward
We remain proudly committed to serving growing
niche and underserved markets by providing
appropriate and affordable insurance and financial
solutions that create long-term value for all of our
stakeholders. Our strong results, competitive
differentiators, and disciplined capital management
give Kemper distinct opportunities to meet the
continued needs and lifestyle choices of our
customers while producing strong financial
results for our shareholders, and being valuable
members of the community.
In Specialty Auto, we have significant competitive
advantages and our growth prospects remain strong.
We’re concentrated in geographies and customer
segments that are growing faster than the overall
market, and are leveraging these differentiators to
expand into new geographies. The combination
of these dynamics creates multiple tailwinds and
uniquely positions us for profitable growth in
Specialty Auto for the foreseeable future.
We expect our Life and Health businesses to
remain a stable earnings source that generates
a consistent cash stream to the platform.
We’re optimistic about our ability to further
grow this business profitably.
And finally, as I write this in March 2020, the world
is facing a unique and unprecedented threat from
COVID-19. While we are confident this crisis is
one that can be overcome through collaboration
and the focused dedication of needed resources,
the short- and long-term impact to our employees,
customers and businesses is very difficult to forecast.
As we look to what lies ahead in 2020, we know
there will be challenging situations and questions.
The Kemper we are today would not be possible
without the dedication, leadership, expertise
and commitment of our employees, customers,
agents and the support of our Board of Directors.
Everyone has put in a tremendous amount of
work to realize the potential of the organization,
and I look forward to leading the company into
the next chapter of success.
Joseph P. Lacher, Jr.
President and CEO
Environmental
Sustainability
Kemper’s Sustainability Team reports to the CEO
and is composed of senior leaders representing
key functional areas within the company.
This team sets the overall sustainability strategy
by reviewing short- and long-term objectives and
opportunities related to operational efficiency,
enterprise risk, and sustainability initiatives.
Energy Use, Environmental Action and Targets
Kemper’s operations include initiatives across our
offices to reduce waste, energy, water use, and
greenhouse gas emissions whenever possible.
We encourage recycling and reduced use of paper
in all locations and offer our customers an
increasing number of paperless solutions.
The company fleet of approximately 500 vehicles
consists of newer models with improved fuel
economy and reduced CO2 emissions. Kemper
leases or owns more than 127,000 square feet
of LEED-certified (Leadership in Energy and
Environmental Design) office space with a goal of
aligning our new locations with LEED certifications,
and efficient and alternative energy sources.
Kemper and ESG
The Kemper family of companies is one of the
nation’s leading insurers, with nearly $13 billion
in assets and 6.4 million customers nationwide.
We proudly serve growing niche and underserved
markets by providing affordable insurance and
financial solutions. Our business—insurance—is
at its core about sustainability. For customers,
we have a responsibility to keep the promises we
make to help them rebuild and continue their lives
after a loss, today and in the future. We take great
pride in our commitment to the central principles
underlying our ESG initiatives because they’re
grounded in the business that we’re in.
The other piece of sustainability relates directly
to our business. Building our core businesses
around growing customer segments that are often
overlooked by the competition, and our ability to
best serve their changing needs, makes our
business prospects highly sustainable.
Sustainability will continue to be increasingly
important for our customers, shareholders,
employees and communities. As we grow,
engaging with our key stakeholders, partners,
and the environments we impact improves and
strengthens who we are as a company and how
we do business.
Building our core businesses
around growing customer
segments that are often
overlooked by the competition,
and our ability to best serve their
changing needs, makes our
business prospects highly
sustainable.
Social
Products and Services
Kemper is focused on meeting the needs of a
diverse customer base by providing products
and services that are affordable and easy-to-use.
Our specialty auto and life businesses offer
coverage to modest-income customers who may
not otherwise be able to afford more costly
insurance. The company supports our Hispanic
customers’ needs with dedicated bilingual sales
and service support representatives, sales and
marketing materials, and applications. Kemper
continually monitors our products and services
to be responsive to changing conditions,
state-specific risks, and climate-change impacts.
Our specialty auto and life
businesses offer coverage to
modest-income customers who
may not otherwise be able to
afford more costly insurance.
Responsible Investing
As an insurer, the primary purpose of Kemper’s
investment portfolio is to fund future claim
payments. As such, we take a risk-adjusted
approach to investing that ensures our capital is
adequate to support varying economic climates.
We understand the value and potential impact to
investment return of environmental, social and
governance factors, and they are considered when
relevant in researching, analyzing and making
investment decisions.
In addition, Kemper’s investments enable civic,
societal and environmental improvements.
Many of our investments are in instruments like
municipal bonds that help fund communities.
We have historically supported limited exposure
to coal and the fossil fuel sector while pursuing
opportunities with low carbon, U.S. small- and
medium-sized businesses, opportunity zone
investing, and solar equity investing, among others.
Society and Corporate Responsibility
Kemper’s philanthropic initiatives are focused on
supporting causes, organizations and initiatives
that make a meaningful difference in the lives of
our customers, our employees, and the communities
where we live and work. Kemper’s support is
provided through donations of resources and time
primarily in the areas of education, health and
community development.
Talent Management, Inclusion and Diversity
To recruit and retain talented people, we have
appropriate policies and procedures in place to
ensure we can achieve—and our employees can
thrive in—a positive work environment, free from
explicit or implicit biases and harassment, where
employment decisions are based on merit.
Kemper’s operations include
initiatives across our offices to
reduce waste, energy, water use,
and greenhouse gas emissions
whenever possible.
Kemper’s total rewards programs are designed to
attract, motivate and retain high-performing talent.
Among the benefits offered to our associates
are medical, dental, vision and prescription drug
coverage; flexible spending and health savings
accounts; an employee stock purchase plan and
401(k); life insurance; paid time off; short- and
long-term disability; and a robust Employee
Assistance Program.
Governance
Kemper’s Board of Directors has been comprised
of a majority of independent directors since 2003.
Our board has a wide and valuable range of business,
industry, and functional experience and capabilities.
In addition, of our nine non-management directors,
three are women and two are ethnically diverse.
Additionally, consistent with our “act like an owner”
culture, our officers and directors are subject to
significant stock ownership requirements.
The Audit Committee of our Board of Directors
oversees the Company’s independent auditors,
financial statement integrity, compliance with
legal and regulatory requirements, internal control
adequacy, internal audit function, and corporate
responsibility hotline. Kemper’s Enterprise Risk
Committee (“ERC”) is comprised of senior
management and provides oversight of enterprise
and business unit risk management activities,
and establishes risk appetites and tolerances.
The ERC also reviews enterprise principles,
guidelines and limits for Kemper’s significant
risks, monitors emerging risks, and oversees the
strategies and actions management takes to control
these risks.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-18298
Kemper Corporation
(Exact name of registrant as specified in its charter)
DE
(State or other jurisdiction of
incorporation or organization)
95-4255452
(I.R.S. Employer
Identification No.)
200 E. Randolph Street
Suite 3300
Chicago
IL
(Address of principal executive offices)
60601
(Zip Code)
(312) 661-4600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.10 par value per share
Trading Symbol(s)
KMPR
Name of each exchange on which registered
NYSE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
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
As of June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $5.7 billion based on the
closing sale price as reported on the New York Stock Exchange. Solely for purposes of this calculation, all executive officers and directors of the
registrant are considered affiliates.
Registrant had 66,668,172 shares of common stock outstanding as of January 31, 2020.
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Caution Regarding Forward-Looking Statements .................................................................................................
Part I
Business ..............................................................................................................................................
Item 1.
Item 1A. Risk Factors ........................................................................................................................................
Item 1B. Unresolved Staff Comments...............................................................................................................
Properties ............................................................................................................................................
Item 2.
Legal Proceedings...............................................................................................................................
Item 3.
Mine Safety Disclosures .....................................................................................................................
Item 4.
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .............................................................................................................................
Selected Financial Data ......................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.............
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................................
Financial Statements and Supplementary Data ..................................................................................
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............
Item 9.
Item 9A. Controls and Procedures .....................................................................................................................
Item 9B. Other Information ...............................................................................................................................
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance .................................................................
Executive Compensation ....................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ............................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence ...................................
Principal Accounting Fees and Services.............................................................................................
Part IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules............................................................................................
Form 10-K Summary
Exhibit Index..........................................................................................................................................................
Power of Attorney..................................................................................................................................................
Signatures...............................................................................................................................................................
Financial Statement Schedules:
1
4
15
22
22
23
23
23
25
26
67
69
138
138
139
140
140
140
140
141
142
142
143
147
147
Schedule 1 - Investments Other than Investments in Related Parties...............................................................
Schedule 2 - Parent Company Financial Statements ........................................................................................
Schedule 3 - Supplementary Insurance Information.........................................................................................
Schedule 4 - Reinsurance Schedule ..................................................................................................................
SCH I-1
SCH II-1
SCH III-1
SCH IV-1
Caution Regarding Forward-Looking Statements
This 2019 Annual Report on Form 10-K (the “2019 Annual Report”), including, but not limited to, the accompanying
consolidated financial statements of Kemper Corporation (“Kemper” or the “Registrant”) and its subsidiaries (individually and
collectively referred to herein as the “Company”) and the notes thereto appearing in Item 8 herein (the “Consolidated Financial
Statements”), the Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7
herein (the “MD&A”) and the other Exhibits and Financial Statement Schedules filed as a part hereof or incorporated by
reference herein, 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 2019 Annual Report. They involve a number of risks and uncertainties that are difficult to predict. These
statements are not guarantees of future performance, and 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 the factors discussed below under Item 1A., “Risk Factors,” in this 2019 Annual Report, 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 policies, 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 laws and regulations, and court decisions
interpreting existing and future 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;
Increased costs and initiatives required to address new legal and regulatory requirements and developments related to
cybersecurity, privacy and data governance;
1
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 frequency 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 frequency 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 home and automobile property
damage, 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,
pronouncements 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;
• 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 of Kemper and/or its insurance company subsidiaries by rating agencies 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,
divesting of businesses, and implementing significant business initiatives and the timing of the occurrence or
completion of such events, 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 and services;
• The ability of the Company to maintain the availability and required performance 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, use and enhancements 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
unanticipated developments or factors outside of the Company’s control;
• The successful formulation and execution of the Company’s plans with regard to corporate strategy and significant
operational changes;
2
Factors relating to the business environment in which Kemper and its subsidiaries operate
• Changes in general economic conditions, including those related to, without limitation, performance of financial
markets, interest rates, inflation, unemployment rates, significant global events, 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 state 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, legal proceedings or
•
market forces;
Increased costs and risks related to cybersecurity that could materially affect the Company’s operations, including, but
not limited to, data breaches, cyber-incidents, virus or malware attacks or other system hazards or infiltrations
affecting system integrity, availability and performance, and actions taken to minimize and remediate the risks thereof;
and
Other risks and uncertainties described from time to time in Kemper’s filings with the U.S. Securities and Exchange
Commission (“SEC”).
Kemper cannot provide any assurances that the results and outcomes 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 2019 Annual Report. Kemper
advises the reader, however, to consult any further disclosures Kemper makes on related subjects in its filings with the SEC.
3
Item 1.
Business.
PART I
Kemper is a diversified insurance holding company, with subsidiaries that provide automobile, homeowners, life, health, and
other insurance products to individuals and businesses. Kemper’s annual reports on Form 10-K, quarterly reports on
Form 10 Q, current reports on Form 8-K and amendments thereto are accessible free of charge through Kemper’s website,
kemper.com, and as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC, which also
maintains an Internet site at sec.gov that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
(a) GENERAL DEVELOPMENT OF BUSINESS
Registrant is a holding company incorporated under the laws of the State of Delaware in 1990, with equity securities traded on
the New York Stock Exchange (the “NYSE”). On August 25, 2011, Registrant adopted its current name, Kemper Corporation,
and changed its NYSE ticker symbol to KMPR. Prior to the name change, the Registrant was known as Unitrin, Inc. and traded
under the NYSE ticker symbol UTR.
The Kemper family of companies is one of the nation’s leading specialized insurers. With nearly $13.0 billion in assets, Kemper
is improving the world of insurance by providing affordable and easy-to-use personalized solutions to individuals, families and
businesses through its Auto, Personal Insurance, Life and Health brands. Kemper serves over 6.4 million policies, is represented
by more than 30,000 agents and brokers, and has approximately 8,900 associates dedicated to meeting the ever-changing needs
of its customers.
(c) DESCRIPTION OF BUSINESS
The Company is engaged, through its subsidiaries, in the property and casualty insurance and life and health insurance
businesses. The Company conducts its operations through three operating segments: Specialty Property & Casualty Insurance,
Preferred Property & Casualty Insurance and Life & Health Insurance. The Company conducts its operations solely in the
United States.
Kemper’s subsidiaries employ approximately 8,900 associates supporting their operations, of which approximately 3,300 are
employed in the Specialty Property & Casualty Insurance Segment, approximately 1,300 are employed in the Preferred
Property & Casualty Insurance segment, approximately 3,400 are employed in the Life & Health Insurance segment and the
remainder are employed in various corporate and other staff and shared functions.
General
Property and Casualty Insurance Business
The Company’s property & casualty insurance business operations are conducted primarily through the Specialty Property &
Casualty Insurance and Preferred Property & Casualty Insurance segments. The Specialty Property & Casualty Insurance and
Preferred Property & Casualty Insurance segments distribute their products primarily through independent agents and brokers
who are paid commissions for their services. In addition, the Life and Health Insurance segment’s career agents also sell
contents coverage for personal property to its customers. Collectively, these segments provide preferred automobile, specialty
automobile, homeowners, renters, fire, umbrella, general liability as an endorsement to commercial automobile and other types
of property and casualty insurance to individuals and commercial automobile insurance to businesses.
Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property.
Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In
most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation arising out
of events covered by the policy.
4
Specialty Property & Casualty Insurance
The Specialty Property & Casualty Insurance segment, based in Chicago, Illinois, conducts business in 35 states under the
Kemper Auto brand. As shown in the following table, three states provided 92% of the segment’s premium revenues in 2019.
State
California ...................................................................................................................................................................
Florida ........................................................................................................................................................................
Texas ..........................................................................................................................................................................
Percentage
of Total
Premiums
67%
14%
11%
The Specialty Property & Casualty Insurance segment provides personal and commercial automobile insurance to consumers
who have had difficulty obtaining standard or preferred risk insurance, usually because of their driving records, claims
experience or premium payment history. The segment also meets the insurance needs of other specialty markets such as urban
and Hispanic consumers. The segment’s insurance products accounted for 69%, 60% and 43% of the Company’s consolidated
insurance premiums in 2019, 2018 and 2017, respectively. The segment’s insurance products are marketed through
approximately 21,000 independent agents and brokers.
Preferred Property & Casualty Insurance
The Preferred Property & Casualty Insurance segment, based in Chicago, Illinois, conducts business in 45 states and the District
of Columbia. As shown in the following table, five states provided 66% of the segment’s premium revenues in 2019.
State
California ...................................................................................................................................................................
New York ...................................................................................................................................................................
Texas ..........................................................................................................................................................................
North Carolina ...........................................................................................................................................................
Pennsylvania ..............................................................................................................................................................
Percentage
of Total
Premiums
21%
17%
15%
9%
4%
The Preferred Property & Casualty Insurance segment primarily sells preferred automobile insurance, homeowners insurance
and other personal insurance. The segment’s insurance products accounted for 17%, 22% and 31% of the Company’s
consolidated insurance premiums in 2019, 2018 and 2017, respectively. The segment’s insurance products are marketed by
approximately 4,800 independent insurance agents and brokers to individuals who have demonstrated favorable risk
characteristics and loss history.
Property and Casualty Loss and Loss Adjustment Expense Reserves
The Company’s reserves for losses and LAE for property and casualty insurance (“Property and Casualty Insurance Reserves”)
are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end
of any given accounting period but have not yet been paid.
Property and Casualty Insurance Reserves by business segment at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Business Segments:
2019
2018
Specialty Property & Casualty Insurance............................................................................................. $ 1,551.0
388.5
Preferred Property & Casualty Insurance.............................................................................................
3.3
Life & Health Insurance .......................................................................................................................
1,942.8
Total Business Segments...........................................................................................................................
27.0
Unallocated Reserves ................................................................................................................................
Total Property & Casualty Insurance Reserves......................................................................................... $ 1,969.8
$ 1,387.0
452.9
4.4
1,844.3
30.6
$ 1,874.9
5
In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s actuaries exercise professional
judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of
estimating and establishing the Company’s Property and Casualty Insurance Reserves is inherently uncertain and the actual
ultimate net cost of claims may vary materially from the estimated amounts reserved. See MD&A, “Critical Accounting
Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses” beginning
on page 62 for a discussion of the Company’s reserving process and the factors considered by the Company’s actuaries in
estimating the Company’s Property and Casualty Insurance Reserves.
The Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover
all costs, while minimizing variation from the time reserves for losses and LAE are initially estimated until losses and LAE are
fully paid. Changes in the Company’s estimates of these losses and LAE, also referred to as “development,” will occur over
time and may be material. Favorable development is recognized and reported in the Consolidated Financial Statements when
the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the period
recognized, whereas adverse development is recognized and reported in the Consolidated Financial Statements when the
Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income.
See Note 6, “Property and Casualty Insurance Reserves,” to the Consolidated Financial Statements for information about
incurred and paid claims development for the 2015-2018 accident years as of December 31, 2019, net of reinsurance and
indemnification, as well as cumulative claim frequency and the total of incurred but not reported (“IBNR”) liabilities, including
expected development on reported claims included within the net incurred losses and allocated LAE amounts as of
December 31, 2019. See Note 6, “Property and Casualty Insurance Reserves,” to the Consolidated Financial Statements for a
tabular reconciliation of the three most recent annual periods setting forth the Company’s Property and Casualty Insurance
Reserves as of the beginning of each year, incurred losses and LAE for insured events of the current year, changes in incurred
losses and LAE for insured events of prior years, payments of losses and LAE for insured events of the current year, payments
of losses and LAE for insured events of prior years and the Company’s Property and Casualty Insurance Reserves at the end of
the year and additional information regarding the nature of adjustments to incurred losses and LAE for insured events of prior
years.
Catastrophe Losses
Catastrophes and natural disasters are inherent risks of the property and casualty insurance business. These catastrophic events
and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and
winter storms. Such events result in insured losses that are, and are expected to be, a material factor in the results of operations
and financial position of Kemper’s property and casualty insurance companies. Further, because the level of insured losses that
could occur in any one year cannot be accurately predicted, these losses contribute to material year-to-year fluctuations in the
results of operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at
certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims.
The occurrence and severity of catastrophic events cannot be accurately predicted in any year. However, some geographic
locations are more susceptible to these events than others. The Company has endeavored to manage its direct insurance
exposures in certain regions that are prone to naturally occurring catastrophic events through a combination of geographic
diversification, restrictions on the amount and location of new business production in such regions, modifications of, and/or
limitations to coverages and deductibles for certain perils in such regions and reinsurance. The Company has adopted the
industry-wide catastrophe classifications of storms and other events promulgated by Insurance Services Office, Inc. (“ISO”) to
track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25 million or
more in direct insured losses to property and affects a significant number of policyholders and insurers. ISO-classified
catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions throughout this
2019 Annual Report utilize ISO’s definition of catastrophes.
The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of
a claim, net of reinsurance recoveries, may vary materially from the estimated amount reserved. See Item 1A., “Risk Factors,”
under the caption “Catastrophe losses could materially and adversely affect the Company’s results of operations, liquidity and/
or financial condition” for a discussion of catastrophe risk. See Note 20, “Catastrophe Reinsurance,” to the Consolidated
Financial Statements for a discussion of the factors that influence the process of estimating and establishing reserves for
catastrophes.
Reinsurance
The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical
diversification, restrictions on the amount and location of new business production in such regions, modifications of, and/or
6
limitations to coverages and deductibles for certain perils in such regions and reinsurance. To limit its exposures to catastrophic
events, the Company maintains a catastrophe reinsurance program for the property and casualty insurance companies. Coverage
for the catastrophe reinsurance program is provided in various layers through multiple excess of loss reinsurance contracts and
an aggregate excess property catastrophe reinsurance contract. The Company’s insurance subsidiaries also purchase reinsurance
from the Florida Hurricane Catastrophe Fund (the “FHCF”) for hurricane losses in Florida at retentions lower than those
described below for the Company’s catastrophe reinsurance program.
The 2020 catastrophe reinsurance program covering the property and casualty insurance companies is provided by (i) three
multi-year excess of loss reinsurance contracts, (ii) an annual excess of loss reinsurance contract (the “2020 Annual Excess of
Loss Contract”) and (iii) an annual aggregate excess property catastrophe reinsurance contract (the “2020 Aggregate Property
Catastrophe Reinsurance Contract”).
Multi-year Excess of Loss Reinsurance Contracts
The first multi-year excess of loss reinsurance contract provides coverage over the three-year period of January 1, 2018 through
December 31, 2020 (the “2018 Reinsurance Contract”). The 2018 Reinsurance Contract provides coverage in two layers, which
together provide coverage for losses on individual catastrophes of $200 million in excess of $50 million. Under the 2018
Reinsurance Contract, the percentage of coverage is 31.66% for each year in the three-year period, and participation of each
reinsurer remains the same over the entire three-year period. Accordingly, the 2018 Reinsurance Contract provides coverage for
31.66% of losses on individual catastrophes of $200 million in excess of $50 million in 2020.
The second multi-year excess of loss reinsurance contract provides coverage over the three-year period of January 1, 2019
through December 31, 2021 (the “2019 Reinsurance Contract”). The 2019 Reinsurance Contract provides coverage in two
layers, which together provide coverage for losses on individual catastrophes of $200 million in excess of $50 million, which is
consistent with the coverage provided under the 2018 Reinsurance Contract. Under the 2019 Reinsurance Contract, the
percentage of coverage is 31.66% for each year in the three-year period, and participation of each reinsurer remains the same
over the entire three-year period. Accordingly, the 2019 Reinsurance Contract provides coverage for 31.66% of losses on
individual catastrophes of $200 million in excess of $50 million in 2020.
The third multi-year excess of loss reinsurance contract provides coverage over the three-year period of January 1, 2020
through December 31, 2022 (the “2020 Reinsurance Contract”). The 2020 Reinsurance Contract provides coverage in two
layers, which together provide coverage for losses on individual catastrophes of $200 million in excess of $50 million, which is
consistent with the coverage provided under the 2018 Reinsurance Contract and 2019 Reinsurance Contract. Under the 2020
Reinsurance Contract, the percentage of coverage is 31.66% for each year in the three-year period, and participation of each
reinsurer remains the same over the entire three-year period. Accordingly, the 2020 Reinsurance Contract provides coverage for
31.66% of losses on individual catastrophes of $200 million in excess of $50 million in 2020.
Annual Excess of Loss Reinsurance Contract
The 2020 Annual Excess of Loss Contract provides coverage for the annual period of January 1, 2020 through December 31,
2020. The 2020 Annual Excess of Loss Contract provides coverage for losses on individual catastrophes of $25 million in
excess of $250 million.
Summary of Excess of Loss Reinsurance Contracts
Coverage on individual catastrophes provided under the three multi-year excess of loss reinsurance contracts for 2020 (January
1, 2020 to December 31, 2020) and the 2020 Annual Excess of Loss Contract is provided in various layers as summarized
below.
DOLLARS IN MILLIONS
Retained........................................................................................................................
1st Layer of Coverage ..................................................................................................
2nd Layer of Coverage .................................................................................................
3rd Layer of Coverage..................................................................................................
In Excess of
$
— $
50.0
150.0
250.0
Up to
50.0
150.0
250.0
275.0
Catastrophe Losses
and LAE
Combined
Percentage
of Coverage
—%
95.0
95.0
95.0
The estimated annual premium in 2020 for the three multi-year excess of loss reinsurance contracts and the 2020 Annual Excess
of Loss Contract presented in the preceding table is $11.9 million. In the event that the Company’s incurred catastrophe losses
7
and LAE covered by its catastrophe reinsurance program exceed the retention for a particular layer, the program allows for one
reinstatement of such coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers
to reinstate the full amount of the limit available under such layer. The reinstatement premium for the first layer of coverage is a
percentage of the full original premium based on the ratio of the losses in excess of the Company’s retention to the reinsurers’
coverage limit. The reinstatement premium for the second layer of coverage is a percentage of half the original premium based
on the ratio of the losses in excess of the Company’s retention to the reinsurers’ coverage limit. The reinstatement premium for
the third layer of coverage is a percentage of half the original premium based on the ratio of the losses in excess of the
Company’s retention to the reinsurers’ coverage limit.
Aggregate Property Catastrophe Reinsurance Contract
The 2020 Aggregate Property Catastrophe Reinsurance Contract is effective for the period of January 1, 2020 through
December 31, 2020 and provides coverage for accumulated catastrophe losses of $50 million in excess of $60 million on
property losses arising out of one or more of the following perils from storms or storm systems that are not named storms: (1)
windstorm; (2) hail; (3) tornado and (4) fire; including ensuing collapse and water damage.
Coverage provided under the 2020 Aggregate Property Catastrophe Reinsurance Contract (January 1, 2020 to December 31,
2020) is summarized below.
DOLLARS IN MILLIONS
Retained..................................................................................................................................................
Coverage.................................................................................................................................................
Aggregate Catastrophe
Losses and LAE
In Excess of
$
— $
60.0
Up to
60.0
110.0
The estimated annual premium for the 2020 Aggregate Property Catastrophe Reinsurance Contract is $13.3 million. To
maintain the same level and percentage of coverage in subsequent years as provided by the catastrophe reinsurance program in
2020, the Company’s property and casualty insurance companies will need to purchase additional reinsurance in the future for
the portion of coverage expiring at the end of 2020, 2021 and 2022.
Other
In addition to the catastrophe loss exposures caused by natural events described above, Kemper’s property and casualty
insurance companies are exposed to losses from catastrophic events that are not the result of acts of nature, such as acts of
terrorism, the nature, occurrence and severity of which in any period cannot be accurately predicted. The companies have
reinsurance coverage to address certain exposures to potential future terrorist attacks. The reinsurance coverage for certified
events, as designated by the federal government, is from the Terrorist Risk Insurance Act and the coverage for non-certified
events is available in the catastrophe reinsurance program for the property and casualty insurance companies. However, certain
perils, such as biological, chemical, nuclear pollution or contamination, are excluded from the reinsurance coverage for non-
certified events.
Under the various reinsurance arrangements, Kemper’s property and casualty insurance companies are indemnified by
reinsurers for certain losses incurred under insurance policies issued by the reinsurers. As indemnity reinsurance does not
discharge an insurer from its direct obligations to policyholders on risks insured, Kemper’s property and casualty insurance
companies remain directly liable. However, provided that the reinsurers meet their obligations, the net liability for Kemper’s
property and casualty insurance companies is limited to the amount of risk that they retain. Kemper’s property and casualty
insurance companies purchase their reinsurance only from reinsurers rated “A-” or better by A. M. Best Co., Inc. (“A.M. Best”),
at the time of purchase. A.M. Best is an organization that specializes in rating insurance and reinsurance companies.
For further discussion of the reinsurance programs, see Note 20, “Catastrophe Reinsurance,” and Note 21, “Other Reinsurance,”
to the Consolidated Financial Statements.
Pricing
Pricing levels for property and casualty insurance products are influenced by many factors, including the frequency and severity
of claims, state regulation and legislation, competition, general business and economic conditions, including market rates of
interest, inflation, expense levels, and judicial decisions. In addition, many state regulators require consideration of investment
income when approving or setting rates, which could reduce underwriting margins. Further, some states have regulations that
limit the after-tax return on underwriting profit allowed for an insurer and may impact the price charged for premiums or result
in premium refunds. The Company derives a significant portion of its earned premiums in two such states, California and
8
Florida. See MD&A under the caption “Specialty Property & Casualty Insurance” and “Preferred Property & Casualty
Insurance.”
Competition
Based on the most recent annual data published by A.M. Best, as of the end of 2018, there were 1,131 property and casualty
insurance groups in the United States. Kemper’s property and casualty group, adjusted for the inclusion of Infinity Property and
Casualty Corporation (“Infinity”) for the entire year was among the top 6% of property and casualty insurance groups in the
United States as measured by net written premiums, policyholders’ surplus and net admitted assets in 2018. Among all personal
lines automobile insurance writers, Kemper’s property and casualty group was the 13th largest writer as measured by net
written premiums in 2018.
Rankings by net admitted assets, net premiums written and capital and surplus were:
Measurement
Net Admitted Assets ..............................................................................................................................
Net Written Premiums ...........................................................................................................................
Capital and Surplus................................................................................................................................
Ordinal
Percentile
Rank
Rank
50
30
74
95%
97
94
In 2018, the U.S. property and casualty insurance industry’s estimated net premiums written were $622 billion, of which nearly
80% were accounted for by the top 50 groups of property and casualty insurance companies. Kemper’s property and casualty
insurance companies, adjusted to include Infinity for the entire year, wrote less than 1% of the industry’s 2018 premium
volume.
The property and casualty insurance industry is highly competitive, particularly with respect to personal automobile insurance.
Kemper’s property and casualty insurance companies compete on the basis of, among other measures, (i) using suitable pricing
segmentation, (ii) maintaining underwriting discipline, (iii) settling claims timely and efficiently, (iv) offering products in
selected markets or geographies, (v) utilizing technological innovations for the marketing and sale of insurance, (vi) controlling
expenses, (vii) maintaining adequate ratings from A.M. Best and other ratings agencies and (viii) providing quality services to
independent agents and policyholders. See Item 1A., “Risk Factors,” under the caption “The insurance industry is highly
competitive, making it difficult to grow profitability and within expectations of investors.”
Life and Health Insurance Business
The Company’s Life & Health Insurance segment consists of Kemper’s wholly-owned subsidiaries, United Insurance Company
of America (“United Insurance”), The Reliable Life Insurance Company (“Reliable”), Union National Life Insurance Company
(“Union National Life”), Mutual Savings Life Insurance Company (“Mutual Savings Life”), United Casualty Insurance
Company of America (“United Casualty”), Union National Fire Insurance Company (“Union National Fire”), Mutual Savings
Fire Insurance Company (“Mutual Savings Fire”) and Reserve National Insurance Company (“Reserve National”). As
discussed below, United Insurance, Reliable, Union National Life, Mutual Savings Life, United Casualty, Union National Fire
and Mutual Savings Fire (the “Kemper Home Service Companies”) distribute their products through a network of employee, or
“career” agents. Reserve National distributes its products through a network of independent agents and brokers. These career
agents, independent agents and brokers are paid commissions for their services. Earned premiums from life insurance
accounted for 9%, 11% and 16% of the Company’s consolidated insurance premiums earned in 2019, 2018 and 2017,
respectively.
As shown in the following table, five states provided 48% of the premium revenues in this segment in 2019.
State
Texas ...........................................................................................................................................................................
Louisiana .....................................................................................................................................................................
Alabama ......................................................................................................................................................................
Mississippi ..................................................................................................................................................................
Georgia........................................................................................................................................................................
Percentage
of Total
Premiums
19%
11
7
6
5
9
Kemper Home Service Companies
The Kemper Home Service Companies, based in St. Louis, Missouri, focus on providing individual life and supplemental
accident and health insurance products to customers of modest incomes who desire basic protection for themselves and their
families. Their leading product is ordinary life insurance, including permanent and term insurance. Face amounts of these
policies are lower than those of policies typically sold to higher income customers by other companies in the life insurance
industry. Approximately 72% of the Life & Health Insurance segment’s premium revenues are generated by the Kemper Home
Service Companies.
The Kemper Home Service Companies employ nearly 2,000 career agents to distribute insurance products in 25 states and the
District of Columbia. These career agents are full-time employees who call on customers in their homes to sell insurance
products, provide services related to policies in force and collect premiums, typically monthly. Premiums average
approximately $24 per policy per month with an average face value of $5,600. Permanent and term policies are offered
primarily on a non-participating, guaranteed-cost basis. These career agents also distribute and/or service certain property
insurance products for the Kemper Home Service Companies.
Reserve National
Reserve National, based in Oklahoma City, Oklahoma, is licensed in 49 states and the District of Columbia. The Company
specializes in the sale of supplemental accident & health and life insurance products such as: Medicare Supplement, fixed
hospital indemnity, home health care, specified disease, and accident-only plans.
Reserve National distributes products through two channels - Kemper Traditional and Kemper Benefits. The Traditional
channel has historically served individuals in rural areas who often do not have access to a broad array of accident and health
insurance products, though has more recently broadened to include surburban and urban areas. Insurance products can be
tailored to meet individual and family needs and are distributed through approximately 600 independent agents. Kemper
Benefits sells voluntary worksite products in the employer market place through Employee Benefit brokers and enrollers. In
total, Reserve National currently has approximately 3,500 independent agents appointed.
Reinsurance
Consistent with insurance industry practice, the Company’s life and health insurance subsidiaries utilize reinsurance
arrangements to limit their maximum loss, provide greater diversification of risk and minimize exposures on larger risks. As the
face amounts of the Company’s issued policies are relatively small, the ceded risks and corresponding premiums are also
relatively small, particularly when compared to other companies in the industry. The segment is also exposed to losses from
catastrophes arising from insurance policies distributed by career agents of the Kemper Home Service Companies. Over the last
several years, the Kemper Home Service Companies have been intentionally reducing their exposure to catastrophic events
through the run-off of their dwelling insurance business. The Kemper Home Services Companies are parties to the FHCF, the
Property & Casualty catastrophe excess of loss reinsurance contracts, and the aggregate property catastrophe reinsurance
contract.
Lapse Ratio
The lapse ratio is a measure of a life insurer’s loss of in-force policies. For a given year, this ratio is commonly computed as the
total face amount of individual life insurance policies lapsed, surrendered, expired and decreased during such year, less policies
increased and revived during such year, divided by the total face amount of policies at the beginning of the year plus the face
amount of policies issued and reinsurance assumed in the prior year. The Life & Health Insurance segment’s lapse ratio for
individual life insurance was 6% in 2019, 2018 and 2017.
The customer base served by the Kemper Home Service Companies and competing life insurance companies tends to have a
higher incidence of lapse than other demographic segments of the population. Thus, to maintain or increase the level of its
business, the Kemper Home Service Companies must write a higher volume of new policies than competitors serving other
demographic segments of the population.
Pricing
Premiums for life and health insurance products are based on assumptions with respect to mortality, morbidity, investment
yields, expenses, and lapses and are also affected by state laws and regulations, as well as competition. Pricing assumptions are
based on the experience of Kemper’s life and health insurance subsidiaries, as well as the industry in general, depending on the
10
factor being considered. The actual profit or loss produced by a product will vary from the anticipated profit if the actual
experience differs from the assumptions used in pricing the product.
Premiums for policies sold by the Kemper Home Service Companies are set at levels designed to cover the relatively high cost
of “in-home” servicing of such policies. As a result, Kemper Home Service Companies’ premiums have a higher expense load
than the life insurance industry average.
Premiums for Medicare supplement and other accident and health policies must take into account the rising costs of medical
care. The annual rate of medical cost inflation has historically been higher than the general rate of inflation, necessitating
frequent rate increases, most of which are subject to approval by state regulators.
Competition
Based on the most recent data published by A.M. Best, as of the end of 2018, there were 369 life and health insurance company
groups in the United States. The Company’s Life & Health Insurance segment ranked in the top 25% of life and health
insurance company groups, as measured by net admitted assets, net premiums written and capital and surplus. Rankings by net
admitted assets, net premiums written and capital and surplus were:
Measurement
Net Admitted Assets ..............................................................................................................................
Net Written Premiums ...........................................................................................................................
Capital and Surplus................................................................................................................................
Ordinal
Percentile
Rank
Rank
92
92
93
75%
75
75
Kemper’s life and health insurance subsidiaries generally compete by using appropriate pricing, offering products to selected
markets or geographies, controlling expenses, maintaining adequate ratings from A.M. Best and providing competitive services
to agents and policyholders.
Investments
The quality, nature and amount of the various types of investments that can be made by insurance companies are regulated by
state laws. Depending on the state, these laws permit investments in qualified assets, including, but not limited to, municipal,
state and federal government obligations, corporate bonds, real estate, preferred and common stocks, investment partnerships,
limited liability investment companies and limited partnerships. In addition, the quality, nature, amount and concentration of the
various types of investments held by Kemper’s insurance subsidiaries affect the amount of asset risk calculated by regulators
and rating agencies in determining required capital. See “Regulation” immediately following this subsection and Item 1A.,
“Risk Factors,” under the caption “The Company’s investment portfolio is exposed to a variety of risks that may negatively
impact net investment income, the change in fair value of equity and convertible securities and cause realized and unrealized
losses.”
The Company employs a total return investment strategy, with an emphasis on yield, while maintaining liquidity to meet both
its short- and medium-term insurance obligations. See the discussions of the Company’s investments under the headings
“Investment Results,” “Investment Quality and Concentrations,” “Investments in Limited Liability Companies and Limited
Partnerships,” “Liquidity and Capital Resources” and “Critical Accounting Estimates,” in the MD&A, “Quantitative and
Qualitative Disclosures about Market Risk,” in Item 7A and Note 4, “Investments,” Note 14, “Income from Investments,” and
Note 22, “Fair Value Measurements,” to the Consolidated Financial Statements.
Overview of State Regulation
Regulation
Kemper’s insurance subsidiaries are subject to extensive regulation, primarily, but not exclusively, at the state level. Such
regulation pertains to a variety of matters, including, but not limited to, policy forms, rate setting, licensing to transact business,
market conduct, trade practices, underwriting standards, claims handling practices, transactions with affiliates, payment of
dividends, nature and amount of investments, solvency, reserve adequacy, statutory accounting methods, risk management and
corporate governance. In addition, insurance regulatory authorities perform periodic examinations of an insurer’s financial
condition, market conduct activities and other affairs. Some of these matters are discussed in more detail below.
11
Approval of Policy Rates and Forms
The majority of Kemper’s insurance operations are in states requiring prior approval by regulators before proposed policy or
coverage forms and rates for property, casualty, or health insurance policies may be implemented and used. The Company’s
ability to take actions to address market developments or increased costs can be adversely impacted by lengthy delays in the
approval process or the failure to receive the required approval of state regulators.
Restrictions on Withdrawal, Cancellation and Nonrenewal
Many states have laws restricting an insurer’s ability to withdraw from particular markets. Laws that limit an insurer’s ability to
cancel or non-renew a block of policies by line of business, or that subject its withdrawal to prior approval requirements, may
restrict the ability of our insurance subsidiaries to exit unprofitable markets.
Financial Reports and Standards
Insurance companies are required to report their financial condition and results of operations in accordance with statutory
accounting principles prescribed or permitted by state insurance regulators in conjunction with the National Association of
Insurance Commissioners (“NAIC”). State insurance regulators also prescribe the form and content of statutory financial
statements, set minimum reserve and loss ratio requirements and establish standards for the types and amounts of investments.
In addition, state laws and regulations require minimum capital and surplus levels and incorporate risk-based capital (“RBC”)
standards developed by the NAIC. These RBC standards are intended to enable regulators to assess the level of risk inherent in
an insurance company’s business based on asset risk, credit risk, underwriting risk and other business risks relevant to its
operations. A company’s requirements are calculated based on an RBC formula and compared to its total adjusted capital to
determine whether regulatory intervention is warranted. At December 31, 2019, the total amount of capital held by each of
Kemper’s insurance subsidiaries exceeded the minimum levels required under applicable RBC requirements.
Guaranty Funds and Risk Pools
Kemper’s insurance subsidiaries are required to pay assessments up to prescribed levels to fund policyholder losses or liabilities
of insolvent insurance companies under the guaranty fund laws of most states in which they transact business. Kemper’s
insurance subsidiaries are also required to participate in various involuntary pools or assigned risk pools, principally involving
windstorms and high risk drivers. In most states, the involuntary pool participation of Kemper’s insurance subsidiaries is
determined in proportion to their voluntary writings of related lines of business in such states.
Privacy and Cybersecurity Regulation
The Company is subject to numerous federal and state laws and state insurance regulations that impose significant requirements
and standards for protecting personally identifiable information of insurance company policyholders and other individuals.
Gramm-Leach-Bliley Act and HIPAA
The federal Gramm-Leach-Bliley Act requires financial institutions, including insurers, to protect the privacy of non-public
information, to restrict use of such information and disclosure to non-affiliated third parties, and to provide notices to customers
regarding use of their non-public personal information and an opportunity to “opt out” of certain disclosures. State departments
of insurance and certain federal agencies adopted implementing regulations as required by federal law.
The federal Health Insurance Portability and Accountability Act of 1996, as amended in 2009 by the HITECH Act, (“HIPAA”),
and implementing regulations, impose extensive obligations regarding the privacy and security of protected health information.
Covered entities subject to HIPAA, which include issuers of health insurance coverage and health benefit plan sponsors, must
implement policies and procedures governing the use, storage and disclosure of such information and related employee training,
breach notification procedures and other requirements.
State Laws and Regulations
In recent years, state insurance regulators have focused increasing attention on cybersecurity. In 2017, the New York
Department of Financial Services adopted a sweeping cybersecurity regulation that requires insurance companies to maintain a
cybersecurity program, incident response plan and information technology system safeguards that protect customer information
and some states have subsequently enacted statutes imposing similar requirements on insurance companies based on a model
data security law adopted by the NAIC. In addition, state insurance regulators focus significant attention on data security during
financial exams, and the NAIC has strengthened and enhanced the cybersecurity guidance included in its handbook for state
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insurance examiners. Additional state laws outside of the insurance industry impose notification requirements in the event of
cybersecurity breaches affecting their residents. On the privacy front, the California Consumer Privacy Act, which took effect in
2020, requires companies to provide privacy notices and respond to any request made to the company by a California resident
regarding his or her personal information used or maintained by the company outside the scope of the GLBA and HIPAA
privacy laws. The Company anticipates a continuing focus on new regulatory and legislative proposals at the state and federal
levels that further regulate practices regarding privacy and security of personal information.
Holding Company Regulation, Including Enterprise Risk Management and Governance
The Company is regulated as an insurance holding company system and is subject to the insurance holding company acts of the
states in which its insurance subsidiaries are domiciled and, in some case, additional states in which the insurance subsidiary is
deemed commercially domiciled. These laws and related regulations contain certain reporting requirements as well as
restrictions on transactions between an insurer and its affiliates. They also generally require insurance companies within an
insurance holding company system to register with the insurance department of each state where they are domiciled and to file
certain reports with those insurance departments describing capital structure, ownership, financial condition, certain
intercompany transactions, an enterprise risk report and general business operations. In addition, various notice and reporting
requirements generally apply to transactions between insurance companies and their affiliates within the insurance holding
company system, depending on the size and nature of the transactions. Some insurance holding company laws and regulations
require prior regulatory approval or, in certain circumstances, prior notice of certain material intercompany transfers of assets as
well as certain transactions between insurance companies, their parent holding companies and affiliates.
Dividends
As a holding company with no significant business operations of its own, Kemper relies on dividends from its insurance
subsidiaries to meet its obligations. Certain dividends and distributions by an insurance subsidiary are subject to prior approval
by the insurance regulators of the state in which it is domiciled or commercially domiciled. See Item 1A., “Risk Factors,” under
the caption, “The ability of Kemper to service its debt, to pay dividends to its shareholders and/or make repurchases of its stock
may be materially impacted by lack of timely and/or sufficient dividends received from its subsidiaries.”
Change in Control Requirements
State insurance laws also impose requirements that must be met prior to a change of control of an insurance company or
insurance holding company based on the insurer’s state of domicile and, in some cases, additional states in which the insurance
subsidiary is deemed commercially domiciled. These requirements may include the advance filing of specific information with
the state insurance regulators, a public hearing on the matter, and the review and approval of the change of control by such
regulators. The Company has insurance subsidiaries domiciled or deemed commercially domiciled in Alabama, California,
Florida, Georgia, Illinois, Indiana, Louisiana, Missouri, New York, Ohio, Oregon, Texas and Wisconsin. In these states, except
Alabama, “control” generally is presumed to exist through the direct or indirect ownership of 10% or more of the voting
securities of an insurance company. Control is presumed to exist in Alabama with a 5% or more ownership interest in such
securities. Any purchase of Kemper’s shares that would result in the purchaser owning Kemper’s voting securities in the
foregoing percentages for the states indicated would be presumed to result in the acquisition of control of the Company’s
insurance subsidiaries in those states. Therefore, acquisitions subject to the 10% threshold generally would require the prior
approval of insurance regulators in each state in which the Company’s insurance subsidiaries are domiciled or deemed
commercially domiciled, including those in Alabama, while acquisitions subject to the 5% threshold generally would require
the prior approval of only Alabama regulators. Similarly, consistent with the Model Holding Company Act, several of the states
in which the Company’s insurance subsidiaries are domiciled have enacted legislation that requires either the divesting and/or
acquiring company to notify regulators of, and in some cases to receive regulatory approval for, a change in control.
Many state statutes also require pre-acquisition notification to state insurance regulators of a change of control of an insurance
company licensed in the state if specific market concentration thresholds would be triggered by the acquisition. Such statutes
authorize the issuance of a cease and desist order with respect to the insurance company if certain conditions, such as undue
market concentration, would result from the acquisition. These regulatory requirements may deter, delay or prevent transactions
effecting control of Kemper or its insurance subsidiaries, or the ownership of Kemper’s voting securities, including transactions
that could be advantageous to Kemper’s shareholders.
Many states have made, or are in the process of making, modifications to their holding company laws. These modifications
impose new reporting requirements and substantially expand the oversight and examination powers of state insurance regulators
to assess enterprise risks within the entire holding company system that may arise from both insurance and non-insurance
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subsidiaries. They also impose new reporting requirements on affiliated transactions and divestiture of a controlling interest in
an insurance subsidiary.
Other Federal Government Regulation
Dodd-Frank Wall Street Reform and Consumer Protection Act and Other Financial Reform Efforts
As part of an effort to strengthen the regulation of the financial services market, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”) was enacted in 2010. The Dodd-Frank Act also created the Federal Insurance
Office (“FIO”) within the U.S. Department of the Treasury (“Treasury”). The FIO monitors the insurance industry, provides
advice to the Financial Stability Oversight Council (“FSOC”), represents the U.S. on international insurance matters, and
studies the current regulatory system. The Dodd-Frank Act includes a number of financial reforms and regulations that may
affect our business and financial reporting. However, there remains uncertainty regarding the future of the Dodd-Frank Act and
how it may impact our business.
Additional regulations or new requirements may emerge from activities of various regulatory entities, including the Federal
Reserve Board, FIO, FSOC, NAIC and the International Association of Insurance Supervisors (“IAIS”), that are evaluating
solvency and capital standards for insurance company groups. The outcome of these actions is uncertain; however, these actions
may result in an increase in the level of capital and liquidity required by insurance holding companies.
Affordable Care Act
In 2010, the Patient Protection and Affordable Care Act, or ACA, as well as the Health Care and Education Reconciliation Act
of 2010 (collectively, the “Health Care Acts”) became law, causing significant changes to the U.S. health care system. Since
then, significant regulations have been enacted by the U.S. Department of Health and Human Services, or HHS, the Department
of Labor and the Department of Treasury. The legislation and regulations are far-reaching and are intended to expand access to
health insurance coverage over time by mandating that most individuals obtain and certain employers offer to their employees
health insurance coverage that meets prescribed minimum benefit requirements, as well as establishing minimum loss ratios,
rating restrictions, mandates for coverage of defined essential health benefits, restrictions or prohibitions on pre-existing
condition exclusions and annual and lifetime policy limits. As a result of the complexity of the law, its impact on health care in
the United States, the continuing modification and interpretation of the Health Care Acts made by statute, rule and/or executive
order, and the ongoing efforts to repeal or replace the ACA, the Company continues to analyze and refine its estimates of the
ultimate impact of the Health Care Acts on its business, cash flows, financial condition and results of operations.
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Item 1A. Risk Factors.
Kemper is exposed to numerous risk factors that could cause actual results to differ materially from recent results or anticipated
future results. The following discussion details the significant risk factors that are specific to the Company. In addition to those
described below, the Company’s business, financial condition and results of operations could be materially affected by other
factors not presently known by, or considered material to, the Company. Readers are advised to consider all of these factors
along with the other information included in this 2019 Annual Report, including the factors set forth under the caption “Caution
Regarding Forward-Looking Statements” beginning on page 1, and to consult any further disclosures Kemper makes on related
subjects in its filings with the SEC.
Risks Relating to Legal and Regulatory Environment
Kemper’s insurance subsidiaries are subject to significant regulation, and the evolving legal and regulatory landscape in
which they operate could result in increased operating costs, reduced profitability and limited growth.
Kemper’s insurance subsidiaries operate under an extensive insurance regulatory system. Current laws and regulations affect a
wide variety of matters, including policy forms, premium rates, licensing, market conduct, trade practices, claims handling
practices, reserve and loss ratio requirements, investment standards, statutory capital and surplus requirements, restrictions on
the payment of dividends, approvals of transactions involving a change in control of one or more insurance companies,
restrictions on transactions among affiliates and consumer privacy and data security. They also require the filing of annual and
quarterly financial reports and holding company reports. Pre-approval requirements often restrict or delay actions by the
companies to implement premium rate changes for property, casualty and health insurance policies, or to introduce new, or
make changes to existing, policy forms and many other actions. Insurance regulators conduct periodic examinations of
Kemper’s insurance subsidiaries and can suspend or delay their operations or licenses, require corrective actions, and impose
penalties or other remedies available for compliance failures. For a more detailed discussion of the regulations applicable to
Kemper’s subsidiaries and related emerging developments, see “Regulation” in Item 1, beginning on page 11.
These laws and regulations, and their interpretation by the various regulators and courts, are subject to continual revision and
expansion. The legal and regulatory landscape within which Kemper’s insurance subsidiaries conduct their businesses is often
unpredictable. As industry practices and regulatory, judicial, political, social and other conditions change, issues may emerge,
whether intended or not. These changes and emerging issues could adversely affect Kemper’s insurance subsidiaries in a variety
of ways, including, for example, by expanding coverages beyond the underwriting intent, increasing the number or size of
claims, accelerating the payment of claims or otherwise adding to operational costs or adversely affecting the Company’s
competitive advantages. Practices in the industry or within the Company that were once considered approved, compliant and
reasonable may suddenly be deemed unacceptable by virtue of a court or regulatory ruling or changes in regulatory
enforcement policies and practices. It is not possible for the Company to predict such shifts in legal or regulatory enforcement
or to accurately estimate the impact they may have on the Company and its operations.
One area where the legal and regulatory landscape has experienced significant change is in connection with the mandated use of
death verification databases by life insurance companies in their policy administration and claims handling practices. Over the
last decade, many states have adopted new laws requiring insurers to proactively use such databases, including the Social
Security Administration’s Death Master File (the “DMF”), to varying degrees in order to ascertain if an insured may be
deceased. More than half of the states have adopted such laws, and Kemper cannot predict whether additional states will enact
similar legislation or, if enacted, what form such legislation may take. These laws require the insurer to initiate the claims
process even though the insureds’ beneficiaries have not submitted a claim, including proof of death, as required by regulator-
approved policy forms and the insurer was otherwise unaware of the insured’s death. In a related development, many states
have expanded the application of their unclaimed property laws, particularly as they relate to life insurance proceeds, and many
states have engaged audit firms to examine the practices of life insurance companies with respect to the reporting and
remittance of such proceeds under unclaimed property laws. The push to alter practices that were previously considered lawful
and appropriate relative to both claims handling and remittance of life insurance policy proceeds under unclaimed property laws
has led to the Company’s involvement in compliance audits, market conduct examinations and litigation. In 2016, the Company
initiated a voluntary, comprehensive process to compare life insurance records against the DMF and other databases to
determine if any of its insured may be deceased. See Note 2, “Summary of Accounting Policies and Accounting Changes,” and
Note 23, “Contingencies,” to the Consolidated Financial Statements for further details.
The financial services industry, including insurance companies and their holding company systems, remains under regulatory
scrutiny. While it is not possible to predict how new laws or regulations or new interpretations of existing laws and regulations
may impact the operations of Kemper’s insurance subsidiaries, several developments have the potential to significantly impact
such operations. This includes increased legislative and regulatory focus on cybersecurity and adoption of extensive
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modifications to state holding company laws that substantially expand the oversight and examination powers of insurance
regulators beyond licensed insurance companies to their non-insurance affiliates and their organizations as a whole, particularly
with respect to enterprise risk. In addition, the Health Care Acts have resulted in regulations affecting health insurers such as
Reserve National, and potential changes to the state insurance regulatory system may result from the Dodd-Frank Act. See the
discussion of these matters under “Regulation” in Item 1, beginning on page 11.
These new developments and significant changes in, or new interpretations of, existing laws and regulations could make it more
expensive for Kemper’s insurance subsidiaries to conduct and grow their businesses which could materially impact the
Company’s operating results.
Kemper has a significant concentration of personal automobile insurance business in California and Florida, and negative
developments in the regulatory, legal or economic conditions in these states may adversely affect our profitability.
California and Florida represented 69% of our total personal automobile insurance gross written premiums in 2019. Consequently,
the dynamic nature of regulatory, legal, competitive and economic conditions in these states affects our revenues and profitability.
Further, both California and Florida have regulations that limit the after-tax return on underwriting profit allowed for an insurer.
Changes in any of these conditions could negatively impact the Company's results of operations.
Legal and regulatory proceedings are unpredictable and could produce one or more unexpected verdicts against the
Company that could materially and adversely affect the Company’s financial results for any given period.
Kemper and its subsidiaries are from time to time involved in lawsuits, regulatory inquiries and other legal proceedings arising
out of the ordinary course of their businesses. Some of these proceedings may involve matters particular to Kemper or one or
more of its subsidiaries, while others may pertain to business practices in the industry in which Kemper and its subsidiaries
operate. Some lawsuits may seek class action status that, if granted, could expose the Company to potentially significant
liability by virtue of the size of the putative classes. These matters often raise difficult factual and legal issues and are subject to
uncertainties and complexities. The outcomes of these matters are difficult to predict, and the amounts or ranges of potential
loss at particular stages in the proceedings are in most cases difficult or impossible to ascertain. A further complication is that
even where the possibility of an adverse outcome is remote under traditional legal analysis, juries sometimes substitute their
subjective views in place of facts and established legal principles. Given the unpredictability of the legal and regulatory
landscape in which the Company operates, there can be no assurance that one or more of these matters will not produce a result
that could materially and adversely affect the Company’s financial results for any given period.
For information about the Company’s pending legal proceedings, see Note 23, “Contingencies,” to the Consolidated Financial
Statements.
Risks Relating to Catastrophes and Estimating Property and Casualty Insurance Losses and Loss Adjustment Expenses
Estimating losses and LAE for determining property and casualty insurance reserves, or determining premium rates, is
inherently uncertain, and the Company’s results of operations may be materially impacted if the Company’s insurance
reserves or premium rates are insufficient.
The Company establishes loss and LAE reserves to cover estimated liabilities, which remain unpaid as of the end of each
accounting period, and to investigate and settle all claims incurred under the property and casualty insurance policies that it has
issued. Loss and LAE reserves are established for claims that have been reported to the Company as of the end of the
accounting period, as well as for estimated claims that have occurred but have not yet been reported to the Company. The
estimates of loss and LAE reserves are based on the Company’s assessment of the facts and circumstances known to it at the
time, as well as estimates of the impact of future trends in the severity of claims, the frequency of claims and other factors.
These estimates can be inaccurate or may change over time due to many variables, including changes driven by the evolving
legal and regulatory landscape and economic conditions in which the Company operates and the rising costs of insurance
claims from increased litigation, higher jury awards, the impact of process change and staffing levels and other effects of
societal trends referred to as social inflation.
The process of estimating property and casualty insurance reserves is complex and imprecise. The reserves established by the
Company are inherently uncertain estimates and could prove to be inadequate to cover its ultimate losses and expenses. The
estimate of the ultimate cost of claims for insured events that have occurred must take into consideration many factors that are
dependent on the outcome of future events associated with the reporting, investigation and settlement of claims. The impacts on
the Company’s estimates of property and casualty insurance reserves from these factors are difficult to assess accurately. A
change in any one or more of the factors is likely to result in a projected ultimate loss that is different than the previous
projected ultimate loss and may have a material impact on the Company’s estimate of the projected ultimate loss. Increases in
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the estimates of ultimate losses and LAE will decrease earnings, while decreases in such estimates will increase earnings, as
reported by the Company in the results of its operations for the periods in which the changes to the estimates are made by the
Company. See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for
Losses and Loss Adjustment Expenses” beginning on page 62 for a discussion of the Company’s reserving process and the
factors considered by the Company’s actuaries in estimating the Company’s Property and Casualty Insurance Reserves.
The Company’s actuaries also consider trends in the severity and frequency of claims and other factors when determining the
premium rates to charge for its property and casualty insurance products. An unanticipated change in any one or more of these
factors or trends, as well as a change in competitive conditions, may also result in inadequate premium rates charged for
insurance policies issued by Kemper’s property and casualty insurance subsidiaries in the future. Such pricing inadequacies
could have a material impact on the Company’s operating results. If the Company’s pricing actuaries overestimate the severity
or frequency of claims and other factors in determining the rates to charge for insurance products, the rates for the Company’s
products could be uncompetitive and result in loss of revenue and market share.
Catastrophe losses could materially and adversely affect the Company’s results of operations, liquidity and/or financial
condition.
Kemper’s property and casualty insurance subsidiaries are subject to claims arising out of catastrophes that may have a
significant effect on their results of operations, liquidity and financial condition. Catastrophes can be caused by various events,
including, but not limited to, hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and
wildfires and may include man-made events, such as terrorist attacks and hazardous material spills. The incidence, frequency
and severity of catastrophes are inherently unpredictable and may be impacted by the uncertain effects of climate change. The
extent of the Company’s losses from a catastrophe is a function of both the total amount of insured exposure in the geographic
area affected by the event and the severity of the event. The Company could experience more than one severe catastrophic
event in any given period.
Kemper’s life and health insurance subsidiaries are particularly exposed to risks of catastrophic mortality, such as pandemic or
other events that result in large numbers of deaths. In addition, the occurrence of such an event in a concentrated geographic
area could have a severe disruptive effect on the Company’s workforce and business operations. The likelihood and severity of
such events cannot be predicted and are difficult to estimate.
The property and casualty insurance subsidiaries use catastrophe modeling tools developed by third parties to project their
potential exposure to property damage resulting from catastrophic events under various scenarios. Such models are based on
various assumptions and judgments which may turn out to be wrong. The actual impact of one or more catastrophic events
could adversely and materially differ from these projections.
Changes in the availability and cost of catastrophe reinsurance and in the ability of reinsurers to meet their obligations
could result in Kemper’s insurance subsidiaries retaining more risk and could adversely and materially affect the
Company’s results of operations, financial condition and/or liquidity.
Kemper’s property and casualty insurance subsidiaries seek to reduce their exposure to catastrophe losses through the purchase
of catastrophe reinsurance. Catastrophe reinsurance does not relieve such subsidiaries of their direct liability to their
policyholders. As long as the reinsurers meet their obligations, the net liability for such subsidiaries is limited to the amount of
risk that they retain. While such subsidiaries’ principal reinsurers are each rated “A-” or better by A.M. Best at the time
reinsurance is purchased, the Company cannot be certain that reinsurers will pay the amounts due from them either now, in the
future, or on a timely basis. A reinsurer’s insolvency or inability to make payments under the terms of its reinsurance agreement
could materially and adversely affect the Company’s financial position, results of operations and liquidity.
In addition, market conditions beyond the Company’s control determine the availability and cost of the reinsurance protection
that Kemper’s property and casualty insurance subsidiaries may purchase. A decrease in the amount of reinsurance coverage
that such subsidiaries purchase generally should increase their risk of a more severe loss. If the amount of available reinsurance
is reduced, such subsidiaries incur additional expenses to obtain reinsurance or may be unable to obtain sufficient reinsurance
on acceptable terms, which could adversely affect the ability of such subsidiaries to write future insurance policies or result in
their retaining more risk with respect to such policies.
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The extent to which Kemper’s insurance subsidiaries can manage their catastrophe exposure through underwriting
strategies may be limited by law or regulatory action and could adversely and materially affect the Company’s results of
operations, financial condition and/or liquidity.
Kemper’s property and casualty insurance subsidiaries also manage their exposure to catastrophe losses through underwriting
strategies such as reducing exposures in, or withdrawing from, catastrophe-prone areas, establishing appropriate guidelines for
insurable structures, and setting appropriate rates, deductibles, exclusions and policy limits. The extent to which such
subsidiaries can manage their exposure through such strategies may be limited by law or regulatory action. For example, laws
and regulations may limit the rate or timing at which insurers may non-renew insurance policies in catastrophe-prone areas or
require insurers to participate in wind pools and joint underwriting associations. Generally, an insurer’s participation in such
pools and associations are based on the insurer’s market share determined on a state-wide basis. Accordingly, even though
Kemper’s property and casualty insurance subsidiaries may not incur a direct insured loss as a result of managing direct
catastrophe exposures, they may incur indirect losses from required participation in pools and associations. In addition, laws
and regulations requiring prior approval of policy forms and premium rates may limit the ability of Kemper’s property and
casualty insurance subsidiaries to increase rates or deductibles on a timely basis, which may result in additional losses or lower
returns than otherwise would have occurred in an unregulated market.
Risks Relating to Competition
A downgrade in the ratings of Kemper or its insurance subsidiaries below A- could materially and adversely affect the
Company.
Third-party rating agencies assess the financial strength and rate the claims-paying ability of insurance companies based on
criteria established by the rating agencies. Third-party ratings are important competitive factors in the insurance industry.
Financial strength ratings are used to assess the financial strength and quality of insurers. Ratings agencies may downgrade the
ratings of Kemper and/or its insurance subsidiaries or require Kemper to retain more capital in its insurance businesses to
maintain existing ratings following developments that they deem negative. This can include factors directly related to the
Company, such as an increase in the catastrophic risk retained by Kemper’s insurance subsidiaries, or developments in industry
or general economic conditions. A downgrade by A.M. Best in the ratings of Kemper’s insurance subsidiaries below A-,
particularly those operating in the preferred and standard market or offering homeowners insurance, could result in a substantial
loss of business if independent agents and brokers or policyholders of such subsidiaries move to other companies with higher
claims-paying and financial strength ratings. Any substantial loss of business could materially and adversely affect the financial
condition and results of operations of such subsidiaries. A downgrade in Kemper’s credit rating by Standard & Poor’s (“S&P”),
Moody’s Investors Services (“Moody’s”) or Fitch Ratings (“Fitch”) may reduce Kemper’s ability to cost-effectively access the
capital markets or may increase the cost to refinance existing debt.
The insurance industry is highly competitive, making it difficult to grow profitability and within expectations of investors.
The Company’s insurance businesses face significant competition, and their ability to compete is affected by a variety of issues
relative to others in the industry, such as management effectiveness, product pricing, service quality, ease of doing business,
innovation, financial strength and name recognition. Competitive success is based on many factors, including, but not limited
to, the following:
Selectiveness of sales markets;
Sophistication of pricing segmentation;
Selection and retention of agents and other business partners;
• Competitiveness of prices charged for insurance policies;
•
• Design and introduction of insurance products to meet emerging consumer trends;
•
• Compensation paid to agents;
• Underwriting discipline;
•
• Effectiveness of marketing materials and name recognition;
•
Product and technological innovation;
• Effectiveness of online servicing platforms
• Ability to settle claims timely and efficiently;
• Ability to detect and prevent fraudulent insurance claims;
• Effectiveness of deployment and use of information technology across all aspects of operations;
• Ability to control operating expenses;
•
• Quality of services provided to, and ease of doing business with, independent agents and brokers or policyholders.
Financial strength ratings; and
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The inability to compete effectively in any of the Company’s insurance businesses could materially reduce the Company’s
customer base and revenues and could materially and adversely affect the future results and financial condition of the Company.
See “Competition” in Item 1 of Part I beginning on page 9 and page 11 for more information on the competitive rankings in the
property and casualty insurance markets and the life and health insurance markets, respectively, in the United States.
Risks Relating to Technology Initiatives, Security of Personal Data and Availability of Critical Systems
Technology initiatives could present significant economic and competitive challenges to the Company. Failure to complete
and implement such initiatives in a timely manner could result in the loss of business and incurrence of internal use
software development costs that may not be recoverable.
Data and analytics play an increasingly important role in the insurance industry. The Company may periodically initiate multi-
year technology projects to enhance operations or replace aging systems. While technology developments can facilitate the use
and enhance the value of data and analytics, streamline business processes and ultimately reduce the cost of operations,
technology initiatives can present significant economic and organizational challenges to the Company and potential short-term
cost and implementation risks. In addition, projections of expenses and implementation schedules could change materially and
costs could escalate over time, while the ultimate utility of a technology initiative could deteriorate over time.
Due to the highly-regulated nature of the financial services industry, the Company also faces rising costs and competing time
constraints in adapting technology to meet compliance requirements of new and proposed regulations. The costs to develop and
implement systems to replace the Company’s existing systems and to comply with new regulatory requirements as needed over
time are expected to be material. Due to the complexities involved, there can be no assurances that new system development
and implementation projects will be successful, that the costs for such projects will not exceed estimates and that the incurred
costs will be recoverable. Furthermore, failure to implement replacement systems in a timely manner could result in loss of
business from the Company’s delay or inability to design and introduce new insurance products that meet emerging consumer
needs and competitive trends.
Failure to maintain the security of personal data may result in lost business, reputational harm, legal costs and regulatory
penalties.
Kemper’s insurance subsidiaries obtain, process and store vast amounts of personal data that can present significant risks to the
Company and its customers, employees and other affected individuals. An increasing array of laws and regulations govern the
use, transfer and storage of such data, including, for example, social security numbers, credit card data and protected health
information. Despite the Company’s use of a sophisticated array of security measures and the maintenance of policies and
procedures designed to enhance security, the Company’s data systems, and those of its third party administrators and other
business partners working on behalf of the Company, may be vulnerable to security breaches due to the increasing
sophistication of cyber attacks, viruses, malware and other infiltration, hackers and other external hazards, as well as equipment
and system failures and inadvertent errors, negligence or intentional misconduct of employees and/or contractors. The
Company also relies on the ability of its business partners to maintain secure systems and processes that comply with legal
requirements and protect personal data.
These increased risks may result in data loss, business interruption, ransom demands and litigation, and together with
expanding regulatory requirements related to personal data privacy and security, expose the Company to potential damages,
regulatory fines and other liabilities, reputational risk and significant increases in compliance and litigation costs. There is no
guarantee that the cyber risk insurance policies Kemper maintains will be sufficient to cover all of the costs of one or more data
breach incidents that could occur.
The Company relies increasingly on electronic payments from policyholders, including, but not limited to, payment by credit
and debit cards. Failure to maintain compliance with laws and industry regulations governing such transactions could result in
additional costs and damages. For example, in the event of non-compliance with the Payment Card Industry Data Security
Standard, an information security framework for organizations that handle cardholder information for the major debit, credit,
prepaid, e-purse, ATM and point-of-sale cards, such organizations could prevent Kemper’s insurance subsidiaries from
collecting premium payments from customers by way of such cards and impose significant fines on Kemper’s insurance
subsidiaries.
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Failure to maintain the availability of critical systems may result in lost business, reputational harm, legal costs and
regulatory penalties.
The Company’s business operations rely on the continuous availability of its own computer systems, systems and software
hosted by vendors, and computer systems used by third party administrators and contractors working on behalf of the
Company. In addition to disruptions caused by cyber attacks or other data breaches, such systems may be adversely affected by
natural and man-made catastrophes. The failure of the Company, or its third party administrators or other business partners, to
maintain business continuity in the wake of such events may prevent the timely performance of critical processes across its
operations, including, for example, insurance policy administration, claims processing, billing, payment processing, treasury
and investment operations and payroll. These failures could result in significant loss of business, increased costs, fines and
litigation.
Risks Relating to Investments
The Company’s investment portfolio is exposed to a variety of risks that may negatively impact net investment income, the
change in fair value of equity and convertible securities and cause realized and unrealized losses.
The Company maintains a diversified investment portfolio that is exposed to significant financial and capital market risks,
including interest rate (risk-free and spread), equity price, and liquidity, as well as risks from changes in tax laws and
regulations and other risks from changes in general economic conditions.
The interest rate environment has a significant impact on the Company’s financial results and position. In recent years, rates
have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on net
investment income, particularly related to fixed income securities, short-term investments and limited liability investment
companies and limited partnerships accounted for under the equity method of accounting (“Equity Method Limited Liability
Investments”) that invest in distressed and mezzanine debt of other companies. A decline in interest rates would generally
increase the carrying value of the Company’s fixed income securities and its Equity Method Limited Liability Investments that
exhibit debt-like characteristics, but it may adversely affect the Company’s investment income as it invests cash in new
investments that may yield less than the portfolio’s average rate. In a declining interest rate environment, borrowers may seek
to refinance their borrowings at lower rates and, accordingly, prepay or redeem securities the Company holds as investments
more quickly than the Company initially expected. Such prepayment or redemption action may cause the Company to reinvest
the redeemed proceeds in lower yielding investments. An increase in interest rates would generally reduce the carrying value
of a substantial portion of the Company’s investment portfolio, particularly fixed income securities and Equity Method
Limited Liability Investments.
Kemper’s Life and Health business writes long duration insurance contracts which are priced in consideration of the interest
rate environment. If the Company is not able to purchase investments that match that duration of the liabilities and there is a
decline in interest rates, the Company could experience a significant deterioration in results.
The Company invests a portion of its investment portfolio in equity securities, which generally have more volatile returns than
fixed income securities and may experience sustained periods of depressed values. There are multiple factors that could
negatively impact the performance of the Company’s equity portfolio, including general economic conditions, industry or
sector deterioration and issuer-specific concerns. A decline in equity values may result in a decrease in dividend income and
significant losses recognized by the Company in the period such changes in fair values occur.
Interest rates and equity returns also have a significant impact on the Company’s pension and other postretirement employee
benefit plans. In addition to the impact on carrying values and yields of the underlying assets of the funded plans, interest rates
also impact the discounting of the projected and accumulated benefit obligations of the plans. A decrease in interest rates may
have a negative impact on the funded status of the plans. The nature and cash flow needs of the Company and the insurance
industry in general present certain liquidity risks that may impact the return of the investment portfolio. If the Company were
to experience several significant catastrophic events over a relatively short period of time, investments may have to be sold in
advance of their maturity dates to fund payments to claimants, which could result in realized losses. Additionally, increases in
illiquidity in the financial markets may increase uncertainty in the valuations of the Company’s investments. This increases the
risk that the fair values reported in the Company’s consolidated financial statements may differ from the actual price that may
be obtained in an orderly sales transaction.
20
The Company has also benefited from certain tax laws related to its investment portfolio, including dividends received
deductions and tax-exempt investment income. Changes in tax laws may have a detrimental effect on the after-tax return of the
Company’s investment portfolio. A reduction in income tax rates could also reduce the demand for tax-preferenced securities
and result in a decline in the value of the Company’s investment portfolio of such securities.
The Company’s entire investment portfolio is subject to broad risks inherent in the financial markets, including, but not limited
to, inflation, regulatory changes, inactive capital markets, governmental and social stability, economic outlooks,
unemployment and recession. Changes to these risks and how the market perceives them may impact the financial
performance of the Company’s investments.
Kemper and its insurance subsidiaries are subject to various capital adequacy measurements that are significantly impacted by
various characteristics of their invested assets, including, but not limited to, asset type, class, duration and credit rating. The
Company’s insurance subsidiaries are also subject to various limitations on the amounts at which they can invest in individual
assets or certain asset classes in the aggregate. Asset risk is one factor used by insurance regulators and rating agencies to
determine required capital for Kemper’s insurance subsidiaries. Accordingly, a deterioration in the quality of the investments
held by Kemper’s insurance subsidiaries or an increase in the investment risk inherent in their investment portfolios could
increase capital requirements. See the risk factor below under the title “The ability of Kemper to service its debt, pay dividends
to its shareholders and/or make repurchases of its stock may be materially impacted by lack of timely and/or sufficient
dividends received from its subsidiaries.” These factors may inhibit the Company from shifting its investment mix to produce
higher returns. The Company is also subject to concentration of investment risk to the extent that the portfolio is heavily
invested, at any particular time, in specific asset types, classes, industries, sectors or collateral types, among other defining
features. Developments and the market’s perception thereof in any of these concentrations may exacerbate the negative effects
on the Company’s investment portfolio compared to other companies.
The determination of the fair values of the Company’s investments and whether a decline in the fair value of an investment
is other-than-temporary are based on management’s judgment and may prove to be materially different than the actual
economic outcome.
The Company holds a significant amount of assets without readily available, active, quoted market prices or for which fair
value cannot be measured from actively quoted prices. These assets are generally deemed to require a higher degree of
judgment in measuring fair value. The assumptions used by management to measure fair values could turn out to be different
than the actual amounts that may be realized in an orderly transaction with a willing market participant could be either lower or
higher than the Company’s estimates of fair value.
The Company reviews its investment portfolio for factors that may indicate that a decline in the fair value of an investment is
other-than-temporary. This evaluation is based on subjective factors, assumptions and estimates and may be materially different
than the actual economic outcome, which may result in the Company recognizing additional losses in the future as new
information emerges or recognizing losses currently that may never materialize in the future in an orderly transaction with a
willing market participant.
Risks Relating to Servicing Debt, Paying Dividends and/or Repurchasing Stock
The ability of Kemper to service its debt, pay dividends to its shareholders and/or make repurchases of its stock may be
materially impacted by lack of timely and/or sufficient dividends received from its subsidiaries.
As a holding company, Kemper depends on the dividend income that it receives from its subsidiaries as the primary source of
funds to meet its payment obligations. Kemper’s insurance subsidiaries are subject to significant regulatory restrictions under
state insurance laws and regulations that limit their ability to declare and pay dividends. These laws and regulations impose
minimum solvency and liquidity requirements on dividends between affiliated companies and require prior notice to, and may
require approval from, state insurance regulators before dividends can be paid. In addition, third-party rating agencies monitor
statutory capital and surplus levels for capital adequacy. Even though a dividend may be payable without regulatory approval,
an insurance subsidiary may forgo paying a dividend to Kemper and retain the capital to maintain or improve the ratings of
Kemper’s insurance subsidiaries, or to offset increases in required capital from increases in premium volume or investment risk.
The inability of one or more of Kemper’s insurance subsidiaries to pay sufficient dividends to Kemper may materially affect
Kemper’s ability to pay its debt obligations on time, to pay dividends to its shareholders or make repurchases of its stock.
21
General Risks Relating to Mergers, Acquisitions and/or Divestitures
The expected benefits and synergies from mergers, acquisitions and/or divestitures may not be realized to the extent
anticipated or within the anticipated time frames.
The Company routinely evaluates opportunities for transactions such as mergers, acquisitions and/or divestitures that would
enhance its business and align with the Company’s strategic plans. Kemper’s ability to achieve the anticipated financial benefits
from transactions may not be realized due to any number of factors, including, but not limited to, integration difficulties or
failures, the loss of key agents/brokers, customers or employees, unexpected or underestimated liabilities, increased costs, fees,
expenses and charges related to transactions, or may be delayed by factors outside of the Company’s control. Furthermore, such
adverse events could result in a decrease in the estimated fair value of goodwill or other intangible assets established as a result
of such transactions, triggering an impairment. These and other factors could have a negative impact on Kemper’s financial
condition, profitability and results from operations.
Risks Relating to the Infinity Merger
Kemper could incur additional integration costs in connection with the Infinity Merger.
Kemper expects to incur additional costs associated with the continued integration of the operations of Kemper and Infinity. A
substantial majority of these costs will be non-recurring expenses resulting from the transaction, including (i) facilities and
systems consolidation and integration costs and (ii) employment related costs. Kemper may incur additional unanticipated costs
to integrate the businesses. As a result of such integration and consolidation activities, the Company may abandon, or shorten
the useful lives, of assets that are currently in use, which may result in us impairing an asset or accelerating depreciation and/or
amortization of such assets. Although Kemper expects that the elimination of redundant costs, as well as the realization of other
efficiencies related to the integration of the businesses, will offset such incremental, non-recurring costs over time, this net
benefit may not be achieved in the near term, or at all.
To realize all of the anticipated results contemplated by the Infinity Merger, the combined company must complete the
successful integration of the Kemper and Infinity business operations, and failure to do so could prevent the Company from
achieving the full benefits it had expected in connection with the Infinity Merger.
The success of the integration, and of the combined company following the Infinity Merger, has been substantially dependent
on the skills, experience and efforts of management and other key personnel for each of Kemper and Infinity. Although the
dependency on specific individuals has decreased since the date of the acquisition as the businesses have been integrated, the
Company will need to continue to devote significant management attention and resources to the integration of the operations of
the businesses. There is no assurance that key managers will remain with the Company, and it is possible that unforeseen
expenses or delays may occur in connection with particular integration efforts. The anticipated benefits, including synergies,
cost savings and growth opportunities, may not be achieved within the expected time frames, or at all. As a result, Kemper
cannot assure shareholders that the Company will realize the full benefits anticipated from the Infinity Merger.
Item 1B.
Unresolved Staff Comments.
The Company has no unresolved staff comments issued more than 180 days before December 31, 2019, the date of this Annual
Report on Form 10-K.
Item 2.
Properties.
Owned Properties
Kemper’s subsidiaries together own and occupy eleven buildings located in seven states consisting of approximately 400,000
square feet in the aggregate. Kemper’s subsidiaries hold, solely for investment purposes, additional properties that are not
occupied by Kemper or its subsidiaries.
Leased Facilities
The Company leases four floors, or approximately 92,000 square feet, in an 83-story office building in Chicago, Illinois, for its
corporate headquarters. The lease expires on December 31, 2033. Kemper’s property and casualty insurance subsidiaries lease
facilities with an aggregate square footage of approximately 550,000 at 27 locations in nine states. The latest expiration date of
the existing leases is in May 2026. Kemper’s life and health insurance subsidiaries lease facilities with aggregate square footage
of approximately 465,000 at 125 locations in 28 states. The latest expiration date of the existing leases is in January 2025.
22
Kemper’s corporate data processing operation leases a facility with aggregate square footage of approximately 30,000 square
feet at one location in one state. The expiration date of the existing lease is in June 2021.
The properties described above are in good condition. The properties utilized in the Company’s operations consist of facilities
suitable for general office space, call centers and data processing operations.
Item 3.
Legal Proceedings.
Proceedings
Information concerning pending legal proceedings is incorporated herein by reference to Note 23, “Contingencies,” to the
Consolidated Financial Statements.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Kemper’s common stock is traded on the NYSE under the symbol of “KMPR.”
Holders
As of January 31, 2020, the number of record holders of Kemper’s common stock was 3,160.
Dividends
Quarterly information pertaining to payment of dividends on Kemper’s common stock is presented below.
DOLLARS PER SHARE
Cash Dividends Paid to Shareholders (per share) ......
Three Months Ended
Mar 31,
2019
Jun 30,
2019
Sep 30,
2019
Dec 31,
2019
Year Ended
Dec 31,
2019
$
0.25
$
0.25
$
0.25
$
0.28
$
1.03
DOLLARS PER SHARE
Cash Dividends Paid to Shareholders (per share) ......
Three Months Ended
Mar 31,
2018
Jun 30,
2018
Sep 30,
2018
Dec 31,
2018
Year Ended
Dec 31,
2018
$
0.24
$
0.24
$
0.24
$
0.24
$
0.96
Kemper’s insurance subsidiaries are subject to various state insurance laws that may restrict the ability of these insurance
subsidiaries to pay dividends without prior regulatory approval. See MD&A, “Liquidity and Capital Resources” and Note 10,
“Shareholders’ Equity,” to the Consolidated Financial Statements for information on Kemper’s ability and intent to pay
dividends.
Issuer Purchases of Equity Securities
On August 6, 2014, Kemper’s Board of Directors authorized the repurchase of up to $300.0 million of Kemper’s common
stock. As of December 31, 2019, the remaining share repurchase authorization was $243.7 million under the repurchase
program. The Company did not repurchase any shares during the year ended December 31, 2019.
23
Kemper Common Stock Performance Graph
The following graph assumes $100 invested on December 31, 2014 in (i) Kemper common stock, (ii) the S&P MidCap 400
Index and (iii) the S&P Supercomposite Insurance Index, in each case with dividends reinvested. Kemper is a constituent of
each of these two indices.
The comparisons in the graph below are based on historical data and are not intended to forecast the possible future
performance of Kemper common stock.
Company / Index
Kemper Corporation ...................................................
S&P MidCap 400 Index..............................................
S&P Supercomposite Insurance Index .......................
2014
$ 100.00
100.00
100.00
2015
$ 105.82
97.82
103.64
2016
$ 129.75
118.11
123.20
2017
$ 205.95
137.30
142.89
2018
$ 201.20
122.08
129.08
2019
$ 238.01
154.07
165.91
24
Item 6.
Selected Financial Data.
Selected financial information as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 is presented below.
See Note 2, “Summary of Accounting Policies and Accounting Changes”, and Note 3, “Acquisition of Business,” to the
Consolidated Financial Statements for items which may affect comparability of selected financial information across the
periods presented.
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
FOR THE YEAR
Earned Premiums .................................................................
Net Investment Income ........................................................
Other Income........................................................................
Loss from Change in Fair value of Equity and Convertible
Securities.........................................................................
Net Realized Gains on Sales of Investments........................
Net Impairment Losses Recognized in Earnings .................
Total Revenues .....................................................................
2019
2018
2017
2016
2015
$ 4,472.4
364.3
35.5
$ 3,384.4
340.9
42.2
$ 2,350.0
327.2
4.0
$ 2,220.0
298.3
3.2
$ 2,009.6
302.6
3.7
138.9
41.9
(13.8)
(64.3)
26.4
(4.5)
—
56.5
(14.3)
—
33.1
(32.7)
—
52.1
(27.2)
$ 5,039.2
$ 3,725.1
$ 2,723.4
$ 2,521.9
$ 2,340.8
531.1
—
531.1
8.04
—
8.04
7.96
—
7.96
1.03
$
$
$
$
$
$
$
188.4
1.7
190.1
3.22
0.03
3.25
3.19
0.03
3.22
0.96
$
$
$
$
$
$
$
119.9
1.0
120.9
2.32
0.02
2.34
2.31
0.02
2.33
0.96
$
$
$
$
$
$
$
12.7
4.1
16.8
0.25
0.08
0.33
0.25
0.08
0.33
0.96
$
$
$
$
$
$
$
80.2
5.5
85.7
1.55
0.10
1.65
1.55
0.10
1.65
0.96
$ 11,544.9
$ 8,376.2
$ 8,210.5
$ 8,036.1
$ 5,366.8
1,424.3
76.8
909.0
717.9
8,494.8
3,050.1
$ 4,470.8
653.9
67.0
592.3
476.6
6,260.6
2,115.6
$ 4,339.9
618.7
66.8
751.6
458.3
6,235.3
1,975.2
$ 4,137.7
613.1
66.1
750.6
476.2
6,043.7
1,992.4
$ 11,544.9
$ 8,376.2
$ 8,210.5
$ 8,036.1
$
47.10
$
41.11
$
38.52
$
38.82
Income from Continuing Operations....................................
$
Income from Discontinued Operations ................................
Net Income ........................................................................... $
Per Unrestricted Share:
Income from Continuing Operations...............................
Income from Discontinued Operations ...........................
Net Income ...................................................................... $
$
Per Unrestricted Share Assuming Dilution:
Income from Continuing Operations...............................
Income from Discontinued Operations ...........................
Net Income ...................................................................... $
Dividends Paid to Shareholders Per Share ........................... $
AT YEAR END
Total Assets...........................................................................
$
$ 12,989.1
Insurance Reserves ...............................................................
$ 5,471.8
1,545.5
Unearned Premiums .............................................................
309.8
Policyholder Contract Liabilities .........................................
778.4
Long-term Debt, Current and Non-current ..........................
911.3
All Other Liabilities .............................................................
9,016.8
Total Liabilities.....................................................................
3,972.3
Shareholders’ Equity ............................................................
Total Liabilities and Shareholders’ Equity ........................... $ 12,989.1
Book Value Per Share...........................................................
$
59.59
25
MDA Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Index to
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Summary of Results ...............................................................................................................................................................
Catastrophes ...........................................................................................................................................................................
Loss and LAE Reserve Development ....................................................................................................................................
Non-GAAP Financial Measures.............................................................................................................................................
Specialty Property & Casualty Insurance...............................................................................................................................
Preferred Property & Casualty Insurance...............................................................................................................................
Life & Health Insurance .........................................................................................................................................................
Investment Results .................................................................................................................................................................
Investment Quality and Concentrations .................................................................................................................................
Investments in Limited Liability Companies and Limited Partnerships................................................................................
Insurance Expenses and Interest and Other Expenses ...........................................................................................................
Income Taxes..........................................................................................................................................................................
Liquidity and Capital Resources ............................................................................................................................................
Off-Balance Sheet Arrangements...........................................................................................................................................
Contractual Obligations..........................................................................................................................................................
Critical Accounting Estimates................................................................................................................................................
Recently Issued Accounting Pronouncements .......................................................................................................................
27
30
31
31
33
38
44
48
51
54
55
55
56
59
60
60
66
26
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SUMMARY OF RESULTS
Net Income was $531.1 million ($8.04 per unrestricted common share) for the year ended December 31, 2019, compared to
$190.1 million ($3.25 per unrestricted common share) for the year ended December 31, 2018. Income from Continuing
Operations was $531.1 million ($8.04 per unrestricted common share) in 2019, compared to $188.4 million ($3.22 per
unrestricted common share) in 2018.
A reconciliation of Net Income to Adjusted Consolidated Net Operating Income (a non-GAAP financial measure) for the years
ended December 31, 2019, 2018 and 2017 is presented below.
DOLLARS IN MILLIONS
Net Income............................................................................... $
Income from Discontinued Operations....................................
Income from Continuing Operations .......................................
Less:
Income from Change in Fair Value of Equity and
Convertible Securities........................................................
Net Realized Gains on Sales of Investments.........................
Net Impairment Losses Recognized in Earnings...................
Acquisition Related Transaction, Integration and Other
Costs...................................................................................
Loss from Early Extinguishment of Debt..............................
Adjusted Consolidated Net Operating Income ........................
Components of Adjusted Consolidated Net Operating
Income:
Segment Net Operating Income: ...........................................
Specialty Property & Casualty Insurance ......................... $
Preferred Property & Casualty Insurance .........................
Life & Health Insurance ...................................................
Segment Net Operating Income...............................................
Corporate and Other Net Operating Income (Loss) From:
Effects of Tax Law Changes..................................................
Partial Satisfaction of Judgment............................................
Other ......................................................................................
Corporate and Other Net Operating Income (Loss).................
Adjusted Consolidated Net Operating Income ........................ $
Net Income
2019 Compared with 2018
Increase
(Decrease)
in Income
from 2018
to 2019
2019
2018
531.1
—
531.1
109.7
33.1
(10.9)
(14.5)
(4.6)
418.3
190.1
1.7
188.4
(50.8)
20.9
(3.6)
(36.5)
—
258.4
283.1
41.9
98.7
423.7
—
15.9
(21.3)
(5.4)
418.3
$
$
115.8
25.7
91.5
233.0
26.4
28.2
(29.2)
25.4
258.4
$
$
341.0
(1.7)
342.7
160.5
12.2
(7.3)
22.0
(4.6)
159.9
167.3
16.2
7.2
190.7
(26.4)
(12.3)
7.9
(30.8)
159.9
Increase
(Decrease)
in Income
from 2017
to 2018
69.2
0.7
68.5
(50.8)
(15.8)
5.7
(36.5)
—
165.9
59.5
71.1
(0.4)
130.2
19.0
28.2
(11.5)
35.7
165.9
2017
120.9
1.0
119.9
—
36.7
(9.3)
—
—
92.5
$
56.3
(45.4) $
91.9
102.8
7.4
—
(17.7)
(10.3)
92.5
$
The Company’s net income increased by $341.0 million in 2019, compared to 2018, due primarily to higher Adjusted
Consolidated Net Operating Income, higher investment results and lower acquisition related transaction, integration and other
costs. Adjusted Consolidated Net Operating Income increased by $159.9 million in 2019, compared to 2018, due primarily to
higher Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segment net operating income,
partially offset by a reduction in Corporate and Other Net Operating Income. Specialty Property & Casualty Insurance segment
net operating income increased by $167.3 million due primarily to the inclusion of Infinity for twelve months of 2019 versus
six months in 2018 and favorable underlying loss and prior year development. See MD&A, “Specialty Property & Casualty
Insurance,” beginning on page 33 for additional discussion of the segment’s results. In the Preferred Property & Casualty
Insurance segment, segment net operating results increased by $16.2 million due primarily to lower incurred catastrophe losses
and LAE (excluding loss and LAE reserve development) and favorable prior year loss and LAE development (including a one-
27
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SUMMARY OF RESULTS (Continued)
time recovery on prior year catastrophes), partially offset by lower net investment income and higher underlying losses and
LAE as a percentage of earned premiums.
In the Life & Health Insurance segment, segment net operating income increased by $7.2 million due primarily from a decrease
in policyholders’ benefits and release in accrued reserves. See MD&A, “Life & Health Insurance,” beginning on page 44 for
additional discussion of the segment’s results. Corporate and Other net operating income decreased due primarily to a tax
benefit as a result of the finalization of certain effects of Public Law 115-97, more commonly referred to as the Tax Cuts and
Jobs Act (the “Tax Act”), on deferred income taxes recognized in the third quarter of 2018 as well as lower gain recognized for
the partial satisfaction of a final judgment against Computer Sciences Corporation (“CSC”). The Company’s investment results
were favorably impacted in 2019, compared to 2018, by a $160.5 million after-tax increase from the change in fair value of the
equity and convertible securities and a $12.2 million after-tax increase from net realized gains on sales of investments, partially
offset by $7.3 million after-tax of higher impairment losses recognized in earnings. See MD&A, “Investment Results,”
beginning on page 48 and MD&A, “Income Taxes,” beginning on page 55 and Note 23, “Contingencies.” to the Consolidated
Financial Statements for additional discussion.
2018 Compared with 2017
The Company’s net income increased by $69.2 million in 2018, compared to 2017. In the Specialty Property & Casualty
Insurance segment, segment net operating results increased by $59.5 million due primarily to the impact of lower underlying
losses and LAE as a percentage of earned premiums on a higher level of earned premiums, higher net investment income and
lower levels of adverse loss and LAE reserve development, partially offset by the impact of higher insurance expenses as a
percentage of earned premiums on a higher level of earned premiums and driven by the amortization of purchase accounting
adjustments associated with Kemper’s acquisition of Infinity. See MD&A, “Specialty Property & Casualty Insurance,”
beginning on page 33 for additional discussion of the segment’s results. In the Preferred Property & Casualty Insurance
segment, segment net operating results increased by $71.1 million due primarily to lower catastrophe losses and LAE
(excluding reserve development) and the favorable impact of loss and LAE reserve development, partially offset by higher
insurance expenses as a percentage of earned premiums. See MD&A, “Preferred Property & Casualty Insurance,” beginning on
page 38 for additional discussion of the segment’s results. In the Life & Health Insurance segment, segment net operating
income decreased by $0.4 million due primarily to higher policyholders’ benefits and incurred losses and LAE and lower net
investment income, almost entirely offset by lower income tax expense due to the lower corporate income tax rate in 2018. See
MD&A, “Life & Health Insurance,” beginning on page 44 for additional discussion of the segment’s results. Additionally, the
Company’s results were impacted in 2018, compared to 2017, by transaction and integration costs associated with Kemper’s
acquisition of Infinity and a loss from the change in the fair value of the Company’s equity security portfolio, for which such
changes are recorded through the Consolidated Statement of Income in 2018, compared to Accumulated Other Comprehensive
Income, in 2017, partially offset by the positive effects of tax law changes and the partial satisfaction of a legal judgment. See
MD&A, “Investment Results,” beginning on page 48 and MD&A, “Income Taxes,” beginning on page 55 and Note 23,
“Contingencies.” to the Consolidated Financial Statements for additional information.
Revenues
2019 Compared with 2018
Earned Premiums were $4,472.4 million in 2019, compared to $3,384.4 million in 2018, an increase of $1,088.0 million.
Earned Premiums increased by $1,051.0 million, $19.6 million and $17.4 million in the Specialty Property & Casualty
Insurance segment, Preferred Property & Casualty Insurance Segment and Life & Health Insurance segment, respectively. See
MD&A, “Specialty Property & Casualty Insurance,” beginning on page 33, MD&A, “Preferred Property & Casualty
Insurance,” beginning on page 38 and MD&A, “Life & Health Insurance,” beginning on page 44 for discussion of the changes
in each segment’s earned premiums.
Net Investment Income increased by $23.4 million in 2019 due primarily to higher levels of investments, largely due to the
inclusion of the Infinity portfolio beginning in July 2018, partially offset by a lower rate of return from Alternative Investments.
Net Investment Income from Alternative Investments, which consist of Equity Method Limited Liability Investments, and other
limited liability investments included in Equity Securities at Fair Value or Equity Securities at Modified Cost, decreased by
$18.4 million. Alternative investment income from Equity Method Limited Liability Investments decreased by $10.0 million.
Alternative investment income from limited liability investments included in either Equity Securities at Fair Value or Equity
Securities at Modified Cost decreased by $8.4 million for the year ended December 31, 2019, compared to the same period in
28
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SUMMARY OF RESULTS (Continued)
2018. See MD&A, “Investment Results,” under the sub-caption “Net Investment Income” beginning on page 48 for additional
discussion.
Other Income decreased by $6.7 million for the year ended December 31, 2019, compared to the same period in 2018. Other
Income for the year ended December 31, 2019 includes a gain of $20.1 million, compared to a gain of $35.7 million for the
same period in 2018 related to the partial satisfaction of a final judgment against CSC. The company cannot make any
assurance as to the final judgment that will actually be collected or when that it may be received. The unpaid balance of the
final judgment is treated as a gain contingency for accounting purposes and, accordingly, is not recognized in these
Consolidated Financial Statements. See Note 23, “Contingencies.” to the Consolidated Financial Statements for additional
discussion. In July 2019, the Company entered into a marketing agreement with Hagerty to transfer the Company’s Classic
Collectors book of business to Hagerty. Other Income for the year ended December 31, 2019 includes a gain of $3.8 million
related to this agreement. Other Income for the year ended December 31, 2019 includes income of $7.8 million, compared to
income of $3.6 million for the same period in 2018 from the Company’s corporate-owned life insurance (“COLI”) policies.
Other Income from COLI increased due in part to the purchase of additional life insurance in the second and fourth quarters of
2019.
Net Realized Gains on Sales of Investments were $41.9 million in 2019, compared to $26.4 million in 2018. See MD&A,
“Investment Results,” under the sub-caption “Net Realized Gains on Sales of Investments” beginning on page 50 for additional
discussion. Net Impairment Losses Recognized in Earnings in 2019 and 2018 were $13.8 million and $4.5 million, respectively.
See MD&A, “Investment Results,” under the sub-caption “Net Impairment Losses Recognized in Earnings” beginning on page
51 for additional discussion. The Company cannot predict when or if similar investment gains or losses may occur in the future.
2018 Compared with 2017
Earned Premiums were $3,384.4 million in 2018, compared to $2,350.0 million in 2017, an increase of $1,034.4 million driven
primarily by growth in Kemper’s legacy specialty personal automobile insurance and the acquisition of Infinity. Earned
Premiums increased by $1,021.7 million, $0.4 million and $12.3 million in the Specialty Property & Casualty Insurance,
Preferred Property & Casualty Insurance, and Life & Health Insurance segments, respectively. See MD&A “Specialty Property
& Casualty Insurance,” beginning on page 33, MD&A, “Preferred Property & Casualty Insurance,” beginning on page 38,
MD&A “Specialty Property & Casualty Insurance,” beginning on page 33, and MD&A, “Life & Health Insurance,” beginning
on page 44 for discussion of the changes in each segment’s earned premiums.
Net Investment Income increased by $13.7 million in 2018 due primarily to a higher level of investments in fixed income
securities and short-term securities, partially offset by a lower rate of return from Alternative Investments, lower yields on fixed
income securities and the impact of presenting Fair Value Option Investments within Loss from Change in Fair Value of Equity
and Convertible Securities (outside of Net Investment Income) as of January 1, 2018. Net Investment Income from Alternative
Investments, which consist of Equity Method Limited Liability Investments, Fair Value Option Investments and other limited
liability investments included in Equity Securities at Fair Value or Equity Securities at Modified Costs, decreased by $17.3
million. Alternative investment income from Equity Method Limited Liability Investments, decreased by $13.8 million.
Alternative investment income from limited liability investments included in either Equity Securities at Fair Value or Equity
Securities at Modified Costs, decreased by $2.2 million for the year ended December 31, 2018, compared to the same period in
2017. No Net Investment Income was recorded on Fair Value Option Investment for the year ended December 31, 2018,
compared to $1.3 million, for the same period in 2017. See MD&A, “Investment Results,” under the sub-caption “Net
Investment Income” beginning on page 48 for additional discussion.
Other Income increased by $38.2 million for the year ended December 31, 2018, compared to the same period in 2017, due
primarily to the the partial satisfaction of a final judgment against CSC. See Note 23, “Contingencies.” to the Consolidated
Financial Statements for additional discussion. The Company cannot make any assurance as to the additional amounts of the
final judgment that will actually be collected or when they may be received. The unpaid balance of the final judgment is treated
as a gain contingency for accounting purposes and accordingly, is not recognized in the Consolidated Financial Statements.
The Company adopted Accounting Standards Update (“ASU”) 2016-01, Financial Instruments—Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, in 2018. As a result of adoption, beginning in
2018, changes in the fair value of the Company’s investments in equity securities with readily determinable fair values are
recognized in the Consolidated Statements of Income. Loss from Change in Fair Value of Equity and Convertible Securities
recognized in the Consolidated Statements of Income was $64.3 million in 2018. Prior to 2018, changes in the fair value of
29
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SUMMARY OF RESULTS (Continued)
equity securities were recognized in other comprehensive income. See MD&A, “Investment Results,” under the sub-caption
“Loss from Change in Fair Value of Equity and Convertible Securities” beginning on page 49 for additional discussion.
Net Realized Gains on Sales of Investments were $26.4 million in 2018, compared to $56.5 million in 2017. See MD&A,
“Investment Results,” under the sub-caption “Net Realized Gains on Sales of Investments” beginning on page 50 for additional
discussion. Net Impairment Losses Recognized in Earnings in 2018 and 2017 were $4.5 million and $14.3 million, respectively.
See MD&A, “Investment Results,” under the sub-caption “Net Impairment Losses Recognized in Earnings” beginning on page
51 for additional discussion. The Company cannot predict when or if similar investment gains or losses may occur in the future.
CATASTROPHES
Catastrophes and natural disasters are inherent risks of the property and casualty insurance business. These catastrophic events
and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and
winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations
and financial position of the Company’s property and casualty insurance companies. Further, because the level of these insured
losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year
fluctuations in the results of operations and financial position of these companies. Specific types of catastrophic events are more
likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty
insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events
promulgated by ISO to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event
causes $25.0 million or more in direct insured losses to property and affects a significant number of policyholders and insurers.
ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry.
The number of ISO-classified catastrophic events and catastrophe losses and LAE, net of reinsurance recoveries, (excluding
loss and LAE reserve development) by range of loss and business segment for the years ended December 31, 2019, 2018 and
2017 are presented below.
DOLLARS IN MILLIONS
Range of Losses and LAE Per Event:
Below $5.......................................................
$5 - $10 .........................................................
$10 - $15 .......................................................
$15 - $20 .......................................................
$20 - $25 .......................................................
Greater Than $25 ..........................................
Total ..............................................................
Specialty Property & Casualty Insurance .......
Preferred Property & Casualty Insurance .......
Life & Health Insurance..................................
Total Catastrophe Losses and LAE .................
Catastrophe Reinsurance
Dec 31, 2019
Year Ended
Dec 31, 2018
Dec 31, 2017
Number of
Events
Losses and
LAE
Number of
Events
Losses and
LAE
Number of
Events
Losses and
LAE
56
$
3
1
—
—
—
60
$
$
42.4
20.8
14.0
—
—
—
77.2
11.1
63.0
3.1
77.2
45
4
—
—
—
1
50
$
$
$
34.7
27.6
—
—
—
33.7
96.0
4.7
87.3
4.0
96.0
39
$
1
2
—
1
2
45
$
$
61.3
5.3
21.4
—
24.4
72.5
184.9
5.5
173.5
5.9
184.9
The Company primarily manages its exposure to catastrophes and other natural disasters through a combination of geographical
diversification, restrictions on the amount and location of new business production in such regions, modifications of, and/or
limitations to coverages and deductibles for certain perils in such regions and a catastrophe reinsurance program for the
Company’s Specialty Property & Casualty Insurance and Preferred Property & Casualty Insurance segments. Coverage under
the catastrophe reinsurance program is provided in various contracts and layers. The Company’s Specialty Property & Casualty
Insurance and Preferred Property & Casualty Insurance segments also purchase reinsurance from the FHCF for hurricane losses
in Florida at retentions lower than its catastrophe reinsurance program. The Life & Health Insurance segment also purchases
30
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
reinsurance from the FHCF for hurricane losses in Florida and is party to the Property & Casualty catastrophe reinsurance
program for its Kemper Home Service companies.
In 2019, 2018 and 2017 the Company had catastrophe reinsurance recoveries of $15.5 million, $31.8 million and $11.9 million
under its catastrophe reinsurance programs, respectively. Catastrophe recoveries under the FHCF were not material in 2019,
2018, or 2017. In 2019, 2018 and 2017 the Company paid $0.0 million, $0.4 million and $0.8 million in reinstatement
premium, respectively. In 2019, the Company received a $0.9 million refund of reinstatement premiums related to the 2017 and
2018 wildfires.
See the “Reinsurance” subsection of the “Property and Casualty Insurance Business” and “Life and Health Insurance Business”
sections of Item 1(c), “Description of Business,” and Note 20, “Catastrophe Reinsurance,” to the Consolidated Financial
Statements for additional information on the Company’s reinsurance programs.
LOSS AND LAE RESERVE DEVELOPMENT
Increases (decreases) in the Company’s property and casualty loss and LAE reserves for the years ended December 31, 2019,
2018 and 2017 to recognize adverse (favorable) loss and LAE reserve development from prior accident years in continuing
operations, hereinafter also referred to as “reserve development” in the discussion of segment results, are presented below.
DOLLARS IN MILLIONS
Increase (Decrease) in Total Loss and LAE Reserves Related to Prior Years:
2019
2018
2017
Non-catastrophe................................................................................................................
Catastrophe .......................................................................................................................
Increase (Decrease) in Total Loss and LAE Reserves Related to Prior Years.......................
$
(54.0)
(17.1)
(71.1) $
1.0
(8.4)
(7.4) $
23.4
(4.5)
18.9
See MD&A, “Specialty Property & Casualty Insurance,” MD&A, “Preferred Property & Casualty Insurance,” MD&A, “Life &
Health Insurance,” and Note 6, “Property and Casualty Insurance Reserves,” to the Consolidated Financial Statements for
additional information on the Company’s reserve development. See MD&A, “Critical Accounting Estimates,” of this 2019
Annual Report for additional information pertaining to the Company’s process of estimating property and casualty insurance
reserves for losses and LAE, and the estimated variability thereof, development of property and casualty insurance losses and
LAE, and a discussion of some of the variables that may impact them.
NON-GAAP FINANCIAL MEASURES
Pursuant to the rules and regulations of the SEC, the Company is required to file consolidated financial statements prepared in
accordance with the accounting principles generally accepted in the United States (“GAAP”). The Company is permitted to
include non-GAAP financial measures in its filings provided that they are defined along with an explanation of their usefulness
to investors, are no more prominent than the comparable GAAP financial measures and are reconciled to such GAAP financial
measures.
These non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial measures, as
they do not fully recognize the overall profitability of the Company’s businesses.
Underlying Losses and LAE and Underlying Combined Ratio
The following discussion of segment results use the non-GAAP financial measures of (i) Underlying Losses and LAE and
(ii) Underlying Combined Ratio. Underlying Losses and LAE (also referred to in the discussion as “Current Year Non-
catastrophe Losses and LAE”) exclude the impact of catastrophe losses and loss and LAE reserve development from prior years
from the Company’s Incurred Losses and LAE, which is the most directly comparable GAAP financial measure. The
Underlying Combined Ratio is computed by adding the Current Year Non-catastrophe Losses and LAE Ratio with the
Insurance Expense Ratio. The most directly comparable GAAP financial measure is the Combined Ratio, which is computed by
adding total incurred losses and LAE, including the impact of catastrophe losses and loss and LAE reserve development from
prior years, with the Insurance Expense Ratio.
The Company believes Underlying Losses and LAE and the Underlying Combined Ratio are useful to investors and uses these
financial measures to reveal the trends in the Company’s Property & Casualty Insurance segment that may be impacted by
catastrophe losses and prior year reserve development. These catastrophe losses may cause the Company’s loss trends to vary
significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on
incurred losses and LAE and the combined ratio. Prior-year reserve developments are caused by unexpected loss development
on historical reserves. Because reserve development relates to the re-estimation of losses from earlier years, it has no bearing on
31
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
the performance of the Company’s insurance products that were in force in the current period. The Company believes it is
useful for investors to evaluate these components separately and in the aggregate when reviewing the Company’s underwriting
performance.
Adjusted Consolidated Net Operating Income
Adjusted Consolidated Net Operating Income is an after-tax, non-GAAP financial measure and is computed by excluding from
Income from Continuing Operations the after-tax impact of:
(i) Income (Loss) from Change in Fair Value of Equity and Convertible Securities;
(ii) Net Realized Gains on Sales of Investments;
(iii) Net Impairment Losses Recognized in Earnings related to investments;
(iv) Acquisition Related Transaction, Integration and Other Costs;
(v) Loss from Early Extinguishment of Debt; and
(vi) Significant non-recurring or infrequent items that may not be indicative of ongoing operations.
Significant non-recurring items are excluded when (a) the nature of the charge or gain is such that it is reasonably unlikely to
recur within two years, and (b) there has been no similar charge or gain within the prior two years. The most directly
comparable GAAP financial measure is Income from Continuing Operations. There were no applicable significant non-
recurring items that the Company excluded from the calculation of Adjusted Consolidated Net Operating Income for the years
ended December 31, 2019, 2018 or 2017.
The Company believes that Adjusted Consolidated Net Operating Income provides investors with a valuable measure of its
ongoing performance because it reveals underlying operational performance trends that otherwise might be less apparent if the
items were not excluded. Income (Loss) from Change in Fair Value of Equity and Convertible Securities, Net Realized Gains
on Sales of Investments and Net Impairment Losses Recognized in Earnings related to investments included in the Company’s
results may vary significantly between periods and are generally driven by business decisions and external economic
developments such as capital market conditions that impact the values of the Company’s investments, the timing of which is
unrelated to the insurance underwriting process. Acquisition Related Transaction and Integration Costs may vary significantly
between periods and are generally driven by the timing of acquisitions and business decisions which are unrelated to the
insurance underwriting process. Loss from Early Extinguishment of Debt is driven by the Company’s financing and refinancing
decisions and capital needs, as well as external economic developments such as debt market conditions, the timing of which is
unrelated to the insurance underwriting process. Significant non-recurring items are excluded because, by their nature, they are
not indicative of the Company’s business or economic trends.
The preceding non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial
measures, as they do not fully recognize the overall profitability of the Company’s businesses.
32
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SPECIALTY PROPERTY & CASUALTY INSURANCE
Selected financial information for the Specialty Property & Casualty Insurance segment is presented below.
DOLLARS IN MILLIONS
Net Premiums Written...................................................................................................... $ 3,211.3
$ 3,078.4
Earned Premiums .............................................................................................................
107.5
Net Investment Income ....................................................................................................
7.0
Other Income ...................................................................................................................
3,192.9
Total Revenues.................................................................................................................
Incurred Losses and LAE related to:
2019
2018
$ 2,067.4
$ 2,027.4
63.4
2.4
2,093.2
2017
$ 1,043.5
$ 1,005.7
39.2
1.1
1,046.0
Current Year:
Non-catastrophe Losses and LAE ..........................................................................
Catastrophe Losses and LAE .................................................................................
2,302.4
11.1
1,517.4
4.7
Prior Years:
Non-catastrophe Losses and LAE ..........................................................................
Catastrophe Losses and LAE .................................................................................
Total Incurred Losses and LAE .......................................................................................
Insurance Expenses..........................................................................................................
Other Expenses ................................................................................................................
Operating Profit ...............................................................................................................
Income Tax Expense ........................................................................................................
Segment Net Operating Income.......................................................................................
(35.1)
0.5
2,278.9
555.6
2.5
355.9
(72.8)
$ 283.1
$
2.0
(0.3)
1,523.8
421.7
2.1
145.6
(29.8)
115.8
$
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio.................................................................................
Insurance Expense Ratio..................................................................................................
Combined Ratio ...............................................................................................................
Underlying Combined Ratio
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Insurance Expense Ratio..................................................................................................
Underlying Combined Ratio ............................................................................................
Non-GAAP Measure Reconciliation
Combined Ratio ...............................................................................................................
Less:
74.7%
0.4
(1.1)
—
74.0
18.0
74.9%
0.2
0.1
—
75.2
20.8
92.0%
96.0%
96.0%
74.7%
18.0
92.7%
74.9%
20.8
95.7%
78.7%
16.4
95.1%
92.0%
96.0%
96.0%
Current Year Catastrophe Losses and LAE Ratio.......................................................
Prior Years Non-catastrophe Losses and LAE Ratio ..................................................
Prior Years Catastrophe Losses and LAE Ratio..........................................................
Underlying Combined Ratio ............................................................................................
0.4
(1.1)
—
92.7%
0.2
0.1
—
95.7%
0.5
0.4
—
95.1%
33
791.2
5.5
4.1
(0.3)
800.5
165.0
—
80.5
(24.2)
56.3
78.7%
0.5
0.4
—
79.6
16.4
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued)
INSURANCE RESERVES
DOLLARS IN MILLIONS
Insurance Reserves:
Dec 31,
2019
Dec 31,
2018
Non-Standard Automobile ..................................................................................................................
Commercial Automobile .....................................................................................................................
Total Insurance Reserves.......................................................................................................................
$ 1,321.9
229.1
$ 1,177.2
209.8
$ 1,551.0
$ 1,387.0
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE .....................................................................................................................
Incurred But Not Reported..................................................................................................................
Total Loss and LAE Reserves...........................................................................................................
Unallocated LAE Reserves .................................................................................................................
Total Insurance Reserves .......................................................................................................................
$
$
730.0
672.2
1,402.2
148.8
$ 1,551.0
692.8
556.2
1,249.0
138.0
$ 1,387.0
See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and
Loss Adjustment Expenses” beginning on page 62 for additional information pertaining to the Company’s process of estimating
property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE
from prior accident years, also referred to as “reserve development” in the discussion of segment results, estimated variability
of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact
development of property and casualty insurance losses and LAE and the estimated variability of property and casualty
insurance reserves for losses and LAE.
Acquisition of Infinity
As discussed in Note 3, “Acquisition of Business,” to the Consolidated Financial Statements, the Company completed its
acquisition of Infinity on July 2, 2018. The results of Infinity’s operations have been included in the Company’s consolidated
financial results from the date of its acquisition and forward.
Overall
2019 Compared with 2018
The Specialty Property & Casualty Insurance segment reported Segment Net Operating Income of $283.1 million for the year
ended December 31, 2019, compared to $115.8 million in 2018. Segment net operating results increased by $167.3 million due
primarily to the acquisition of Infinity in 2018 and favorable loss and LAE reserve development.
Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $1,051.0 million in 2019, compared to
2018. Infinity accounted for $803.2 million of the increase in earned premiums, while higher volume and higher average earned
premium accounted for increases in earned premiums of $224.7 million and $23.1 million, respectively. Both of the segment’s
product lines had higher volume, although the overall impact on Earned Premiums was driven primarily by specialty personal
automobile insurance, which had a volume increase of $213.6 million. Both of the segment’s product lines experienced an
increase from higher average earned premium, although the overall impact on Earned Premiums was driven primarily by
specialty personal automobile insurance which had an increase from higher average earned premium of $21.3 million.
Net Investment Income in the Specialty Property & Casualty Insurance segment increased by $44.1 million in 2019, compared
to 2018, due primarily to a higher investment base, largely due to the inclusion of the Infinity investment portfolio for the entire
year in 2019 versus only a six month period in 2018, partially offset by lower rate of return on Alternative Investments.
Underlying losses and LAE as a percentage of earned premiums were 74.7% in 2019, an improvement of 0.2 percentage points,
compared to 2018, driven primarily by lower underlying losses as a percentage of earned premiums in commercial automobile
insurance. Underlying losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe
34
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued)
losses and LAE (excluding reserve development) were $11.1 million in 2019, compared to $4.7 million in 2018, an increase of
$6.4 million. Favorable loss and LAE reserve development (including catastrophe reserve development) was $34.6 million in
2019, compared to adverse development of $1.7 million in 2018.
Insurance expenses were $555.6 million, or 18.0% of earned premiums, in 2019, a improvement of 2.8% percentage points,
compared to 2018, driven primarily by lower amortization of Infinity purchase accounting adjustments in 2019, versus 2018.
2018 Compared with 2017
The Specialty Property & Casualty Insurance segment reported Segment Net Operating Income of $115.8 million for the year
ended December 31, 2018, compared to $56.3 million in 2017. Segment net operating results improved by $59.5 million due
primarily to the impact of lower underlying losses and LAE as a percentage of earned premiums on a higher level of earned
premiums, particularly in the Company’s specialty personal automobile insurance business, higher net investment income and
lower levels of adverse loss and LAE reserve development, partially offset by the impact of higher insurance expenses as a
percentage of earned premiums on a higher level of earned premiums and driven by the amortization of purchase accounting
adjustments associated with Kemper’s acquisition of Infinity.
Earned Premiums in the Specialty Property & Casualty Insurance segment increased by $1,021.7 million in 2018, compared to
2017. Infinity accounted for $758.1 million of the increase while higher volume and higher average earned premium on
Kemper’s legacy business accounted for increases of $198.9 million and $64.7 million, respectively. Both of Kemper’s legacy
product lines experienced an increase in average earned premium, although the overall impact on Earned Premiums was driven
primarily by specialty personal automobile insurance which had increases due to higher average earned premium of $61.9
million. Kemper’s legacy’s higher volume was driven by specialty personal automobile insurance, which had a volume increase
of $202.9 million, partially offset primarily by a volume decrease in commercial automobile insurance of $4.0 million.
Net Investment Income in the Specialty Property & Casualty Insurance segment increased by $24.2 million in 2018, compared
to 2017, due primarily to higher levels of investments due in large part to growth in Kemper’s legacy specialty automobile
insurance business and the acquisition of Infinity, partially offset by lower income from Alternative Investments. The Specialty
Property & Casualty Insurance segment reported Net Investment Income from Alternative Investments of $19.1 million in
2018, compared to $14.9 million in 2017.
Underlying losses and LAE as a percentage of earned premiums were 74.9% in 2018, an improvement of 3.8% percentage
points, compared to 2017, driven by both specialty personal automobile insurance and commercial automobile insurance
product lines, particularly in the Infinity business which historically had lower underlying losses and LAE as a percentage of
earned premiums. Catastrophe losses and LAE (excluding reserve development) were $4.7 million in 2018, compared to $5.5
million in 2017. Adverse loss and LAE reserve development (including catastrophe reserve development) was $1.7 million in
2018, compared to $3.8 million in 2017.
Insurance expenses were $421.7 million, or 20.8% of earned premiums, in 2018, a deterioration of 4.4 percentage points
compared to 2017, driven primarily by the amortization of Infinity purchase accounting adjustments.
35
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued)
Specialty Personal Automobile Insurance
Selected financial information for the specialty personal automobile insurance product line for the years ended December 31,
2019, 2018 and 2017 is presented below.
DOLLARS IN MILLIONS
2019
$ 2,941.1
Net Premiums Written .......................................................................................................
Earned Premiums............................................................................................................... $ 2,825.6
Incurred Losses and LAE related to: .................................................................................
2018
$1,927.9
$1,889.5
2017
$ 992.3
$ 954.3
Current Year:
Non-catastrophe Losses and LAE ................................................................................ $ 2,131.5
9.9
Catastrophe Losses and LAE........................................................................................
$1,418.2
3.9
$ 750.4
4.8
Prior Years:
Non-catastrophe Losses and LAE ................................................................................
Catastrophe Losses and LAE........................................................................................
Total Incurred Losses and LAE .........................................................................................
(24.3)
0.5
$ 2,117.6
5.7
(0.2)
$1,427.6
3.1
(0.2)
$ 758.1
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio......................................................
Current Year Catastrophe Losses and LAE Ratio .............................................................
Prior Years Non-catastrophe Losses and LAE Ratio.........................................................
Prior Years Catastrophe Losses and LAE Ratio ................................................................
Total Incurred Loss and LAE Ratio...................................................................................
75.4%
0.4
(0.9)
—
74.9%
75.1%
0.2
0.3
—
75.6%
78.6%
0.5
0.3
—
79.4%
2019 Compared with 2018
Earned Premiums on specialty personal automobile insurance increased by $936.1 million in 2019, compared to 2018. Infinity
accounted for $701.2 million of the increase in earned premiums, while higher volume and higher average earned premium
accounted for increases in earned premiums of $213.6 million and $21.3 million, respectively. Incurred losses and LAE were
$2,117.6 million, or 74.9% of earned premiums, in 2019, compared to $1,427.6 million, or 75.6% of earned premiums, in 2018.
Incurred losses and LAE as a percentage of earned premiums improved due primarily to favorable change in loss and LAE
reserve development. Underlying losses and LAE as a percentage of related earned premiums were 75.4% in 2019, compared to
75.1% in 2018. Catastrophe losses and LAE (excluding reserve development) were $9.9 million in 2019, compared to $3.9
million in 2018. Favorable loss and LAE reserve development was $23.8 million in 2019, compared to adverse development of
$5.5 million in 2018.
2018 Compared with 2017
Earned Premiums on specialty personal automobile insurance increased by $935.2 million in 2018, compared to 2017. Infinity
accounted for $670.4 million of the increase, while higher volume and higher average earned premium on Kemper’s legacy
business accounted for increases of $202.9 million and $61.9 million, respectively. Incurred losses and LAE were $1,427.6
million, or 75.6% of earned premiums, in 2018, compared to $758.1 million, or 79.4% of earned premiums, in 2017. Incurred
losses and LAE as a percentage of earned premiums improved due primarily to lower underlying losses and LAE as a
percentage of earned premiums. Underlying losses and LAE as a percentage of related earned premiums were 75.1% in 2018,
compared to 78.6% in 2017, an improvement of 3.5 percentage points due primarily to the inclusion of Infinity and higher
average earned premium and lower frequency of claims in Kemper’s legacy business, partially offset by higher severity of
losses on most coverages in Kemper’s legacy business. Catastrophe losses and LAE (excluding reserve development) were $3.9
million in 2018, compared to $4.8 million in 2017. Adverse loss and LAE reserve development was $5.5 million in 2018,
compared to $2.9 million in 2017.
36
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
SPECIALTY PROPERTY & CASUALTY INSURANCE (Continued)
Commercial Automobile Insurance
Selected financial information for the commercial automobile insurance product line is presented below.
DOLLARS IN MILLIONS
Net Premiums Written...................................................................................................... $ 270.2
2019
Earned Premiums .............................................................................................................
$ 252.8
2018
139.5
137.9
$
$
Incurred Losses and LAE related to:
Current Year:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
$ 170.9
$
1.2
Prior Years:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
Total Incurred Losses and LAE .......................................................................................
(10.8)
—
$ 161.3
$
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio .................................................................................
67.6%
0.5
(4.3)
—
63.8%
2019 Compared with 2018
99.2
0.8
(3.7)
(0.1)
96.2
72.0%
0.6
(2.7)
(0.1)
69.8%
$
$
$
$
2017
51.2
51.4
40.8
0.7
1.0
(0.1)
42.4
79.4%
1.4
1.9
(0.2)
82.5%
Earned premiums in commercial automobile insurance increased by $114.9 million in 2019, compared to 2018. Infinity
accounted for $101.8 million of the increase in earned premiums, while higher volume and higher average earned premium
accounted for increases in earned premiums of $11.3 million and $1.8 million, respectively. Incurred losses and LAE were
$161.3 million, or 63.8% of earned premiums, in 2019, compared to $96.2 million, or 69.8% of earned premiums, in 2018.
Incurred losses and LAE as a percentage of earned premiums improved due primarily to lower underlying losses and LAE as a
percentage of earned premiums as well as higher levels of favorable loss and LAE reserve development. Underlying losses and
LAE as a percentage of earned premiums were 67.6% in 2019, compared to 72.0% in 2018, an improvement of 4.4 percentage
points due primarily to lower frequency of claims in 2019 relative to the prior year. Favorable loss and LAE reserve
development was $10.8 million in 2019, compared to $3.8 million in 2018.
2018 Compared with 2017
Earned premiums in commercial automobile insurance increased by $86.5 million in 2018, compared to 2017. Infinity
accounted $87.8 million of the increase, while higher average earned premium on Kemper legacy business accounted for an
increase of $2.8 million, partially offset by lower volume of $4.1 million. Incurred losses and LAE were $96.2 million, or
69.8% of earned premiums, in 2018, compared to $42.4 million, or 82.5% of earned premiums, in 2017. Incurred losses and
LAE as a percentage of earned premiums improved due primarily to lower underlying losses and LAE as a percentage of
earned premiums and a favorable change in loss and LAE reserve development. Underlying losses and LAE as a percentage of
earned premiums were 72.0% in 2018, compared to 79.4% in 2017, an improvement of 7.4 percentage points due primarily to
the inclusion of Infinity and higher average earned premium and lower frequency of claims, partially offset by higher severity
of losses. Favorable loss and LAE reserve development was $3.8 million in 2018, compared to adverse development of $0.9
million in 2017.
37
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
PREFERRED PROPERTY & CASUALTY INSURANCE
Selected financial information for the Preferred Property & Casualty Insurance segment is presented below.
DOLLARS IN MILLIONS
Net Premiums Written...................................................................................................... $ 739.3
$ 750.3
Earned Premiums .............................................................................................................
44.1
Net Investment Income ....................................................................................................
794.4
Total Revenues.................................................................................................................
Incurred Losses and LAE related to:
2019
$
$
2018
748.8
730.7
61.8
792.5
$
$
2017
726.1
730.3
58.9
789.2
Current Year:
Non-catastrophe Losses and LAE ..........................................................................
Catastrophe Losses and LAE .................................................................................
Prior Years:
Non-catastrophe Losses and LAE ..........................................................................
Catastrophe Losses and LAE .................................................................................
Total Incurred Losses and LAE .......................................................................................
Insurance Expenses..........................................................................................................
Operating Profit (Loss) ....................................................................................................
Income Tax Benefit (Expense).........................................................................................
Segment Net Operating Income (Loss)............................................................................
481.8
63.0
(17.6)
(18.4)
508.8
233.3
52.3
(10.4)
$
41.9
$
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio.................................................................................
Insurance Expense Ratio..................................................................................................
Combined Ratio ...............................................................................................................
Underlying Combined Ratio
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Insurance Expense Ratio..................................................................................................
Underlying Combined Ratio ............................................................................................
Non-GAAP Measure Reconciliation
Combined Ratio ...............................................................................................................
Less:
64.2%
8.4
(2.3)
(2.5)
67.8
31.1
98.9%
64.2%
31.1
95.3%
$
459.4
87.3
(0.1)
(8.2)
538.4
225.5
28.6
(2.9)
25.7
62.9%
11.9
—
(1.1)
73.7
30.9
104.6%
62.9%
30.9
93.8%
460.3
173.5
20.4
(4.7)
649.5
217.8
(78.1)
32.7
(45.4)
62.9%
23.8
2.8
(0.6)
88.9
29.8
118.7%
62.9%
29.8
92.7%
98.9%
104.6%
118.7%
Current Year Catastrophe Losses and LAE Ratio.......................................................
Prior Years Non-catastrophe Losses and LAE Ratio ..................................................
Prior Years Catastrophe Losses and LAE Ratio..........................................................
Underlying Combined Ratio ............................................................................................
8.4
(2.3)
(2.5)
95.3%
11.9
—
(1.1)
93.8%
23.8
2.8
(0.6)
92.7%
38
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
PREFERRED PROPERTY & CASUALTY INSURANCE (Continued)
CATASTROPHE FREQUENCY AND SEVERITY
DOLLARS IN MILLIONS
Range of Losses and LAE Per Event:
Dec 31, 2019
Dec 31, 2018
Number of
Events
Losses and
LAE
Number of
Events
Losses and
LAE
Below $5 ...............................................................................................
$5 - $10 .................................................................................................
$10 - $15 ...............................................................................................
$15 - $20 ...............................................................................................
$20 - $25 ...............................................................................................
Greater Than $25...................................................................................
Total.......................................................................................................
53
3
1
—
—
—
57
$
$
30.9
19.0
13.1
—
—
—
63.0
45
3
—
—
—
1
49
$
$
32.9
21.3
—
—
—
33.1
87.3
DOLLARS IN MILLIONS
Insurance Reserves:
INSURANCE RESERVES
Dec 31,
2019
Dec 31,
2018
Preferred Automobile........................................................................................................................
Homeowners .....................................................................................................................................
Other .................................................................................................................................................
Total Insurance Reserves.......................................................................................................................
$
$
262.3
95.3
30.9
388.5
$
$
Insurance Reserves:
Loss and Allocated LAE Reserves:
Case and Allocated LAE..............................................................................................................
Incurred But Not Reported...........................................................................................................
Total Loss and LAE Reserves...........................................................................................................
Unallocated LAE Reserves...............................................................................................................
Total Insurance Reserves .......................................................................................................................
$
241.3
$
118.8
360.1
28.4
388.5
$
$
270.0
147.9
35.0
452.9
312.5
110.0
422.5
30.4
452.9
See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and
Loss Adjustment Expenses” beginning on page 62 for additional information pertaining to the Company’s process of estimating
property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE
from prior accident years, also referred to as “reserve development” in the discussion of segment results, estimated variability
of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact
development of property and casualty insurance losses and LAE and the estimated variability of property and casualty
insurance reserves for losses and LAE.
Overall
2019 Compared with 2018
The Preferred Property & Casualty Insurance segment reported Segment Net Operating Income of $41.9 million for the year
ended December 31, 2019, compared to $25.7 million in 2018. Segment net operating results improved by $16.2 million due
primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and favorable prior year
loss and LAE development (including a recovery on prior year catastrophes) partially offset by higher underlying losses and
LAE as a percentage of earned premiums and lower net investment income.
Earned Premiums in the Preferred Property & Casualty Insurance segment increased by $19.6 million in 2019, compared to
2018, due primarily to higher average earned premium. Earned Premiums was driven primarily by preferred automobile
insurance, which had an increase in earned premiums of $30.3 million due to higher average earned premium. Other personal
39
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
PREFERRED PROPERTY & CASUALTY INSURANCE (Continued)
insurance had an increase in earned premiums from higher average earned premium of $4.4 million. Overall volume declined
with decreases in preferred automobile, homeowners, and other insurance of $0.3 million, $8.8 million, and $6.0 million,
respectively.
Net Investment Income in the Preferred Property & Casualty Insurance segment decreased by $17.7 million in 2019, compared
to 2018, due primarily to a lower rate of return on Alternative Investments.
Underlying losses and LAE as a percentage of earned premiums were 64.2% and 62.9% in 2019 and 2018, respectively.
Underlying incurred losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe
losses and LAE (excluding reserve development) were $63.0 million in 2019, compared to $87.3 million in 2018, which is a
decrease of $24.3 million. Catastrophe losses and LAE (excluding reserve development) decreased due primarily to fewer
catastrophic events in the greater than $25 million per event range in 2019, compared to 2018, and lower severity of other
catastrophic events in 2019, compared to 2018. Favorable loss and LAE reserve development (including catastrophe reserve
development) was $36.0 million in 2019, compared to favorable development of $8.3 million in 2018. Favorable catastrophe
reserve development in 2019 included the impact of the recognition and sale in the third quarter of 2019 of the Company’s
subrogation rights related to certain California wildfires that had occurred in 2017 and 2018.
Insurance expenses were $233.3 million, or 31.1% of earned premiums, in 2019, a deterioration of 0.2 percentage points
compared to 2018.
2018 Compared with 2017
The Preferred Property & Casualty Insurance segment reported Segment Net Operating Income of $25.7 million for the year
ended December 31, 2018, compared to Segment Net Operating Loss of $45.4 million in 2017. Segment net operating results
improved by $71.1 million due primarily to lower current year catastrophe losses and LAE (excluding loss and LAE reserve
development) and the favorable impact of loss and LAE reserve development, partially offset by higher insurance expense as a
percentage of earned premiums.
Earned Premiums in the Preferred Property & Casualty Insurance segment increased by $0.4 million in 2018, compared to
2017, as higher average earned premium accounted for an increase of $21.4 million partially offset by a decrease in volume of
$21.0 million, All product lines experienced an increase average earned premium, although the overall impact on Earned
Premiums was driven primarily by preferred personal automobile insurance, which had increases due to higher average earned
premium of $19.5 million. The lower volume was driven by homeowners insurance and preferred personal automobile
insurance which had volume decreases of $15.5 million and $2.1 million, respectively.
Net Investment Income in the Preferred Property & Casualty Insurance segment increased by $2.9 million in 2018, compared to
2017, due primarily to higher levels of fixed maturity investments and higher income from fixed maturity investments, partially
offset by lower income from Alternative Investments. The Preferred Property & Casualty Insurance segment reported Net
Investment Income from Alternative Investments of $18.6 million in 2018, compared to $22.5 million in 2017.
Underlying losses and LAE as a percentage of earned premiums were 62.9% in both 2018 and 2017. Underlying losses and
LAE exclude the impact of catastrophe and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve
development) were $87.3 million in 2018, compared to $173.5 million in 2017, which is a decrease of $86.2 million due
primarily to lower losses on California wildfires in 2018 and 2017, due in part to reinsurance recoveries in 2018 under the
aggregate property catastrophe reinsurance contract and fewer catastrophe losses and LAE (excluding reserve development)
from events with greater than $20 million in losses and LAE. Favorable loss and LAE reserve development (including
catastrophe reserve development) was $8.3 million in 2018, compared to adverse development of $15.7 million in 2017.
Adverse development in 2017 was driven primarily by preferred personal automobile insurance.
Insurance expenses were $225.5 million, or 30.9% of earned premiums, in 2018, a deterioration of 1.1 percentage points
compared to 2017, driven primarily by increased ceded premiums in 2018 under the Company’s aggregate property catastrophe
reinsurance contract.
40
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
PREFERRED PROPERTY & CASUALTY INSURANCE (Continued)
Preferred Personal Automobile Insurance
Selected financial information for the preferred personal automobile insurance product line is presented below.
DOLLARS IN MILLIONS
Net Premiums Written...................................................................................................... $ 468.9
$ 470.2
Earned Premiums .............................................................................................................
Incurred Losses and LAE related to:
2019
2018
462.1
440.2
$
$
2017
424.4
422.8
$
$
Current Year:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
332.5
7.8
308.8
7.2
309.0
11.3
Prior Years:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
Total Incurred Losses and LAE .......................................................................................
(8.2)
—
$ 332.1
(5.7)
(0.1)
310.2
19.5
(0.2)
339.6
$
$
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio .................................................................................
70.6%
70.2%
73.0%
1.7
(1.7)
—
1.6
(1.3)
—
2.7
4.6
—
70.6%
70.5%
80.3%
2019 Compared with 2018
Earned premiums in preferred personal automobile insurance increased by $30.0 million in 2019, compared to 2018, as higher
average earned premiums accounted for an increase in earned premiums of $30.3 million, partially offset by lower volume in
earned premiums of $0.3 million. Incurred losses and LAE were $332.1 million, or 70.6% of earned premiums, in 2019,
compared to $310.2 million, or 70.5% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned
premiums increased due primarily to a deterioration in the underlying loss and LAE ratio, partially offset by a favorable change
in loss and LAE reserve development. Underlying losses and LAE as a percentage of related earned premiums were 70.6% in
2019, compared to 70.2% in 2018, which was a deterioration of 0.4 percentage points due primarily to the impact of business
mix in 2019. Catastrophe losses and LAE (excluding reserve development) were $7.8 million in 2019, compared to $7.2 million
in 2018. Favorable loss and LAE reserve development was $8.2 million in 2019, compared to $5.8 million in 2018.
2018 Compared with 2017
Earned premiums in preferred personal automobile insurance increased by $17.4 million in 2018, compared to 2017, as higher
average earned premium accounted for an increase of $19.5 million, while lower volume accounted for a decrease of $2.1
million. The decrease in earned premium attributed to lower volume was primarily due to the run-off of the direct-to-consumer
business. Incurred losses and LAE were $310.2 million, or 70.5% of earned premiums, in 2018, compared to $339.6 million, or
80.3% of earned premiums, in 2017. Incurred losses and LAE as a percentage of earned premiums decreased due primarily to a
favorable change in loss and LAE reserve development, lower underlying losses and LAE as a percentage of related earned
premiums and lower catastrophe losses and LAE (excluding reserve development). Underlying losses and LAE as a percentage
of related earned premiums were 70.2% in 2018, compared to 73.0% in 2017, which was an improvement of 2.8 percentage
points due primarily to lower frequency of claims and higher average earned premiums, partially offset by higher severity of
losses, particularly on bodily injury coverages. Catastrophe losses and LAE (excluding reserve development) were $7.2 million
in 2018, compared to $11.3 million in 2017. Favorable loss and LAE reserve development was $5.8 million in 2018, compared
to adverse development of $19.3 million in 2017.
41
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
PREFERRED PROPERTY & CASUALTY INSURANCE (Continued)
Homeowners Insurance
Selected financial information for the homeowners insurance product line is presented below.
DOLLARS IN MILLIONS
Net Premiums Written...................................................................................................... $ 233.1
$ 241.3
Earned Premiums .............................................................................................................
Incurred Losses and LAE related to:
2019
2018
247.3
250.1
$
$
2017
260.5
264.8
$
$
Current Year:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
131.6
54.0
131.5
75.2
129.5
157.3
Prior Years:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
Total Incurred Losses and LAE .......................................................................................
(2.7)
(17.0)
$ 165.9
$
10.4
(7.2)
209.9
4.7
(3.7)
287.8
$
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio .................................................................................
54.5%
22.4
(1.1)
(7.0)
68.8%
52.5%
30.1
4.2
(2.9)
83.9%
48.9%
59.4
1.8
(1.4)
108.7%
2019 Compared with 2018
Earned premiums in homeowners insurance decreased by $8.8 million in 2019, compared to 2018, with lower volume
accounting for the entirety of the decrease. Incurred losses and LAE were $165.9 million, or 68.8% of earned premiums, in
2019, compared to $209.9 million, or 83.9% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned
premiums decreased due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve
development) and higher favorable loss and LAE reserve development, partially offset by higher underlying losses and LAE as
a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 54.5% in 2019,
compared to 52.5% in 2018, a deterioration of 2.0 percentage points due primarily to higher severity of non-catastrophe large
losses in 2019 compared to 2018. Catastrophe losses and LAE (excluding reserve development) were $54.0 million in 2019,
compared to $75.2 million in 2018. Loss and LAE reserve development was favorable by $19.7 million in 2019, compared to
adverse development of $3.2 million in 2018. Favorable loss and LAE reserve development in 2019 included the impact of the
recognition and sale of the Company’s subrogation rights related to certain California wildfires that had occurred in 2017 and
2018.
2018 Compared with 2017
Earned premiums in homeowners insurance decreased by $14.7 million in 2018, compared to 2017, as lower volume accounted
for a decrease of $15.5 million, while higher average earned premium accounted for an increase of $0.8 million. Incurred losses
and LAE were $209.9 million, or 83.9% of earned premiums, in 2018, compared to $287.8 million, or 108.7% of earned
premiums, in 2017. Incurred losses and LAE as a percentage of earned premiums decreased due to reinsurance recoveries from
the Company’s 2018 catastrophe aggregate reinsurance program, partially offset by an unfavorable change in loss and LAE
reserve development and higher underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as
a percentage of earned premiums were 52.5% in 2018, compared to 48.9% in 2017, a deterioration of 3.6 percentage points due
primarily to higher severity of losses, and to a lesser extent, higher frequency of claims, partially offset by higher average
earned premium. Catastrophe losses and LAE (excluding reserve development) were $75.2 million in 2018, compared to
$157.3 million in 2017. This decrease was driven primarily by fewer catastrophe losses and LAE (excluding reserve
development) from events with greater than $20.0 million in losses and LAE and reinsurance recoveries under the Company’s
42
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
PREFERRED PROPERTY & CASUALTY INSURANCE (Continued)
2018 aggregate property catastrophe reinsurance program. Loss and LAE reserve development was adverse by $3.2 million in
2018, compared to $1.0 million in 2017.
Other Personal Insurance
Other personal insurance products include umbrella, dwelling fire, inland marine, earthquake, boat owners and other liability
coverages. Selected financial information for other personal insurance product lines is presented below.
DOLLARS IN MILLIONS
Net Premiums Written...................................................................................................... $
$
Earned Premiums .............................................................................................................
Incurred Losses and LAE related to:
2019
2018
2017
37.3
38.8
$
$
39.4
40.4
$
$
41.2
42.7
Current Year:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
Prior Years:
Non-catastrophe Losses and LAE...............................................................................
Catastrophe Losses and LAE ......................................................................................
Total Incurred Losses and LAE .......................................................................................
17.7
1.2
(6.7)
(1.4)
$
10.8
$
19.1
4.9
(4.8)
(0.9)
18.3
$
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio .................................................................................
45.6%
3.1
(17.3)
(3.6)
27.8%
47.3%
12.1
(11.9)
(2.2)
45.3%
21.8
4.9
(3.8)
(0.8)
22.1
51.1%
11.5
(8.9)
(1.9)
51.8%
2019 Compared with 2018
Earned premiums in other personal insurance decreased by $1.6 million in 2019, compared to 2018, as lower volume accounted
for a decrease in earned premiums of $6.0 million, while higher average earned premium accounted for an increase in earned
premiums of $4.4 million. Incurred losses and LAE were $10.8 million, or 27.8% of earned premiums, in 2019, compared to
$18.3 million, or 45.3% of earned premiums, in 2018. Incurred losses and LAE as a percentage of earned premiums improved
due primarily to higher favorable loss and LAE reserve development in 2019, compared to 2018. Underlying losses and LAE as
a percentage of earned premiums were 45.6% in 2019, compared to 47.3% in 2018, which was an improvement of 1.7
percentage points. Catastrophe losses and LAE (excluding reserve development) were $1.2 million in 2019, compared to $4.9
million in 2018. Favorable loss and LAE reserve development was $8.1 million in 2019, compared to $5.7 million in 2018.
2018 Compared with 2017
Earned premiums in other personal insurance decreased by $2.3 million in 2018, compared to 2017, as lower volume accounted
for a decrease of $3.4 million, while higher average earned premium accounted for an increase of $1.1 million. Incurred losses
and LAE were $18.3 million, or 45.3% of earned premiums, in 2018, compared to $22.1 million, or 51.8% of earned premiums,
in 2017. Incurred losses and LAE as a percentage of earned premiums improved due to lower underlying losses and LAE as a
percentage of earned premiums and a higher level of favorable loss and LAE reserve development. Underlying losses and LAE
as a percentage of earned premiums were 47.3% in 2018, compared to 51.1% in 2017, which was an improvement of 3.8
percentage points due primarily to lower frequency of claims and higher average earned premiums, partially offset by higher
severity of losses. Favorable loss and LAE reserve development was $5.7 million in 2018, compared to $4.6 million in 2017.
43
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIFE & HEALTH INSURANCE
Selected financial information for the Life & Health Insurance segment is presented below.
DOLLARS IN MILLIONS
Earned Premiums...................................................................................................................
Net Investment Income..........................................................................................................
Other Income .........................................................................................................................
Total Revenues ......................................................................................................................
Policyholders’ Benefits and Incurred Losses and LAE.........................................................
Insurance Expenses ...............................................................................................................
Operating Profit .....................................................................................................................
Income Tax Expense..............................................................................................................
Segment Net Operating Income ............................................................................................ $
$
2019
643.7
206.4
8.5
858.6
402.7
334.0
121.9
(23.2)
98.7
2018
626.3
210.9
4.0
841.2
404.2
321.1
115.9
(24.4)
91.5
$
$
2017
614.0
223.2
2.6
839.8
387.4
312.2
140.2
(48.3)
91.9
$
$
DOLLARS IN MILLIONS
Insurance Reserves:
INSURANCE RESERVES
Dec 31,
2019
Dec 31,
2018
Future Policyholder Benefits................................................................................................................
Incurred Losses and LAE Reserves:
$ 3,385.3
$ 3,333.6
Life ..................................................................................................................................................
Accident and Health ........................................................................................................................
Property ...........................................................................................................................................
Total Incurred Losses and LAE Reserves ............................................................................................
Total Insurance Reserves...........................................................................................................................
89.2
27.5
3.3
120.0
$ 3,505.3
130.5
27.8
4.4
162.7
$ 3,496.3
Use of Death Verification Databases
In the third quarter of 2016, the Company’s Life & Health segment voluntarily began implementing a comprehensive process
under which it cross-references its life insurance policies against the DMF and other death verification databases to identify
potential situations where the beneficiaries may not have filed a claim following the death of an insured and initiate an outreach
process to identify and contact beneficiaries and settle claims. Policyholders’ Benefits and Incurred Losses and Loss
Adjustment Expenses for the year ended December 31, 2016 included a pre-tax charge of $77.8 million to recognize the initial
impact of using death verification databases in the Company’s operations, including to determine its IBNR liability for unpaid
claims and claims adjustment expenses for life insurance products. During 2019, the Company reduced its estimate of the initial
impact of using death verification databases by $21.0 million.
See Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements under the
sub-caption “Insurance Reserves” for additional discussion.
2019 Compared with 2018
Earned Premiums in the Life & Health Insurance segment increased by $17.4 million for the year ended December 31, 2019,
compared to 2018, due primarily to higher volume from accident and health insurance products offered by Reserve National,
and sales volume on life insurance products.
Net Investment Income decreased by $4.5 million in 2019, compared to 2018, due primarily to lower investment yields on fixed
income securities and a lower rate of return from alternative investments, partially offset by a higher investment base. The
weighted-average book yield on the Company’s life and health insurance subsidiaries’ investments in fixed maturities was
approximately 5.1% and 5.3% at December 31, 2019 and 2018, respectively.
Other income increased by $4.5 million in 2019, compared to 2018, due primarily to a higher level of corporate owned life
insurance.
44
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIFE & HEALTH INSURANCE (Continued)
Policyholders’ Benefits and Incurred Losses and LAE decreased by $1.5 million in 2019, compared to 2018, due primarily to
decrease of $21.0 million in the company’s estimate of the ultimate cost of using death verification databases in the Company’s
operations, partially offset by higher severity on accident and health insurance claims. Insurance Expenses in the Life & Health
Insurance segment increased by $12.9 million due primarily to higher commissions on increased volume within the business
and investments to enhance the capabilities of the business. Segment Net Operating Income in the Life & Health Insurance
segment was $98.7 million for the year ended December 31, 2019, compared to $91.5 million in 2018.
2018 Compared with 2017
Earned Premiums in the Life & Health Insurance segment increased by $12.3 millions for the year ended December 31, 2018,
compared to 2017, due primarily to higher volume from accident and health insurance products offered by Reserve National,
partially offset by lower volume from life products offered by Reserve National and property insurance products offered by
Kemper Home Service Companies (“KHSC”).
Net Investment Income increased by $12.3 million in 2018, compared to 2017, due primarily to lower investment returns from
alternative investments and lower income from fixed maturities, partially offset by higher levels of fixed maturities. The
weighted-average book yield on the Company’s life and health insurance subsidiaries’ investments in fixed maturities was
approximately 5.3% and 5.4% at December 31, 2018 and 2017, respectively.
Policyholders’ Benefits and Incurred Losses and LAE increased by $16.8 million in 2018, compared to 2017 due primarily to
higher policyholders’ benefits and incurred losses and LAE on life and accident and health business and overall growth in the
accident and health business. Insurance Expenses in the Life & Health Insurance segment increased by $8.9 million due
primarily to growth in the accident and health business for Reserve National and higher general expenses, incentive
commissions and fringe benefits for KHSC, partially offset by lower expenses related to lower volume of life insurance sold by
Reserve National. Segment Net Operating Income in the Life & Health Insurance segment was $91.5 million for the year ended
December 31, 2018, compared to $91.9 million in 2017.
Life Insurance
Selected financial information for the life insurance product line is presented below.
DOLLARS IN MILLIONS
Earned Premiums .............................................................................................................
Net Investment Income ....................................................................................................
Other Income ...................................................................................................................
Total Revenues.................................................................................................................
Policyholders’ Benefits and Incurred Losses and LAE ...................................................
Insurance Expenses..........................................................................................................
Operating Profit ...............................................................................................................
Income Tax Expense ........................................................................................................
Total Product Line Net Operating Income....................................................................... $
$
2019
2018
2017
384.6
198.8
8.1
591.5
270.1
215.3
106.1
(20.0)
86.1
$
$
378.4
202.6
3.5
584.5
279.4
207.7
97.4
(20.7)
76.7
$
379.7
216.0
2.4
598.1
274.1
207.9
116.1
(39.9)
76.2
45
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIFE & HEALTH INSURANCE (Continued)
2019 Compared with 2018
Earned premiums on life insurance increased by $6.2 million in 2019, compared to 2018, due primarily to a higher volume of
new business sales. Policyholders’ benefits and incurred losses and LAE on life insurance were $270.1 million in 2019,
compared to $279.4 million in 2018, a decrease of $9.3 million due primarily to adjustment of the company’s estimate of the
ultimate cost of using death verification databases in the company’s operations. Insurance expenses increased by $7.6 million in
2019, compared to 2018 due primarily to higher commissions on increased volume and investments to enhance the capabilities
of the business.
2018 Compared with 2017
Earned premiums on life insurance decreased by $1.3 million in 2018, compared to 2017, due primarily to lower volume on
products offered by Reserve National, offset by slightly higher premium for KHSC. Policyholders’ benefits and incurred losses
and LAE on life insurance were $279.4 million in 2018, compared to $274.1 million in 2017, an increase of $5.3 million due
primarily to higher incurred claims on life policies offered by KHSC, partially offset by the favorable impact on policyholders’
benefits due to the reduction in Reserve National’s life business. Insurance expenses decreased by $0.2 million in 2018,
compared to 2017.
Accident and Health Insurance
Selected financial information for the accident and health insurance product line is presented below.
DOLLARS IN MILLIONS
Earned Premiums .............................................................................................................
Net Investment Income ....................................................................................................
Other Income ...................................................................................................................
Total Revenues.................................................................................................................
Policyholders’ Benefits and Incurred Losses and LAE ...................................................
Insurance Expenses..........................................................................................................
Operating Profit (Loss) ....................................................................................................
Income Tax Expense (Benefit).........................................................................................
Total Product Line Net Operating Income (Loss)............................................................
$
$
2019
2018
2017
$
190.9
6.0
0.4
197.3
109.8
88.7
(1.2)
0.3
(0.9) $
$
177.5
6.1
0.5
184.1
98.9
82.2
3.0
(0.6)
2.4
$
161.7
5.2
0.2
167.1
88.7
71.7
6.7
(2.5)
4.2
2019 Compared with 2018
Earned premiums on accident and health insurance increased by $13.4 million in 2019, compared to 2018, due primarily to
higher volume of in force business. Policyholders’ benefits and incurred losses and LAE on accident and health insurance were
$109.8 million, or 57.5% of accident and health insurance earned premiums, in 2019, compared to $98.9 million, or 55.7% of
accident and health insurance earned premiums, in 2018. The increase of 1.8 percentage points was due primarily to higher
severity of claims for certain health products. Insurance expenses increased by $6.5 million in 2019, compared to 2018, due
primarily to premium growth.
2018 Compared with 2017
Earned premiums on accident and health insurance increased by $15.8 million in 2018, compared to 2017, due primarily to
higher volume on accident and health insurance products offered by Reserve National. Incurred accident and health insurance
losses and LAE were $98.9 million, or 55.7% of accident and health insurance earned premiums, in 2018, compared to $88.7
million, or 54.9% of accident and health insurance earned premiums, in 2017, an increase of 0.8 percentage points due
primarily to higher incurred claims on certain health products offered by Reserve National. Insurance expenses increased by
$10.5 million in 2018, compared to 2017, due primarily to growth in Reserve National’s accident and health business.
46
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIFE & HEALTH INSURANCE (Continued)
Property Insurance
Selected financial information for the property insurance product line is presented below.
DOLLARS IN MILLIONS
Earned Premiums .............................................................................................................
Net Investment Income ....................................................................................................
Total Revenues.................................................................................................................
Incurred Losses and LAE related to:
2019
2018
2017
$
68.2
1.6
69.8
$
$
70.4
2.2
72.6
72.6
2.0
74.6
Current Year:
Non-catastrophe Losses and LAE ..........................................................................
Catastrophe Losses and LAE .................................................................................
Prior Years:
Non-catastrophe Losses and LAE ..........................................................................
Catastrophe Losses and LAE .................................................................................
Total Incurred Losses and LAE .......................................................................................
Insurance Expenses..........................................................................................................
Operating Profit ...............................................................................................................
Income Tax Expense ........................................................................................................
Total Product Line Net Operating Income....................................................................... $
Ratios Based On Earned Premiums
Current Year Non-catastrophe Losses and LAE Ratio.....................................................
Current Year Catastrophe Losses and LAE Ratio............................................................
Prior Years Non-catastrophe Losses and LAE Ratio .......................................................
Prior Years Catastrophe Losses and LAE Ratio...............................................................
Total Incurred Loss and LAE Ratio .................................................................................
18.1
3.1
0.8
0.8
22.8
30.0
17.0
(3.5)
13.5
26.5%
4.5
1.2
1.2
33.4%
$
20.5
4.0
1.3
0.1
25.9
31.2
15.5
(3.1)
12.4
29.2%
5.7
1.8
0.1
36.8%
$
17.8
5.9
0.4
0.5
24.6
32.6
17.4
(5.9)
11.5
24.5%
8.1
0.6
0.7
33.9%
2019 Compared with 2018
Earned premiums on property insurance decreased by $2.2 million in 2019, compared to 2018, due primarily to a lower volume
of insurance sold. Incurred losses and LAE on property insurance were $22.8 million, or 33.4% of property insurance earned
premiums, in 2019, compared to $25.9 million, or 36.8% of property insurance earned premiums, in 2018. Current year non-
catastrophe losses and LAE on property insurance were $18.1 million, or 26.5% of property insurance earned premiums, in
2019, compared to $20.5 million, or 29.2% of property insurance earned premiums, in 2018, a decrease of 2.7 percentage points
due to lower frequency of claims. Catastrophe losses and LAE (excluding development) were $3.1 million in 2019, compared
to $4.0 million in 2018, due primarily to a lower frequency of claims and severity of losses in connection with catastrophic
events. Adverse loss and LAE reserve development was $1.6 million in 2019, compared to $1.4 million in 2018. Insurance
expenses decreased $1.2 million in 2019, compared to 2018, due primarily to lower volume of policies issued.
2018 Compared with 2017
Earned premiums on property insurance decreased by $2.2 million in 2018, compared to 2017, due primarily to a lower volume
of insurance sold. Incurred losses and LAE on property insurance were $25.9 million, or 36.8% of property insurance earned
premiums, in 2018, compared to $24.6 million, or 33.9% of property insurance earned premiums, in 2017. Current year non-
catastrophe losses and LAE on property insurance were $20.5 million, or 29.2% of property insurance earned premiums, in
2018, compared to $17.8 million, or 24.5% of property insurance earned premiums, in 2017, an increase of 4.7 percentage
points due to a higher frequency of claims. Catastrophe losses and LAE (excluding development) were $4.0 million in 2018,
compared to $5.9 million in 2017, due primarily to a higher frequency of claims and severity of losses in connection with
47
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIFE & HEALTH INSURANCE (Continued)
catastrophic events in the prior year. Adverse loss and LAE reserve development was $1.4 million in 2018, compared to $0.9
million in 2017. Insurance expenses decreased $1.4 million in 2018, compared to 2017, due primarily to lower commission
expense due in part to a lower volume of earned premium.
INVESTMENT RESULTS
Net Investment Income
Net Investment Income for the years ended December 31, 2019, 2018 and 2017 is presented below.
DOLLARS IN MILLIONS
Investment Income:
Interest on Fixed Income Securities .................................................................................
Dividends on Equity Securities Excluding Alternative Investments................................
Alternative Investments:
Equity Method Limited Liability Investments.............................................................
Fair Value Option Investments.....................................................................................
Limited Liability Investments Included in Equity Securities ......................................
Total Alternative Investments ...........................................................................................
Short-term Investments.....................................................................................................
Loans to Policyholders .....................................................................................................
Real Estate ........................................................................................................................
Other .................................................................................................................................
Total Investment Income .......................................................................................................
Investment Expenses:
Real Estate ........................................................................................................................
Other Investment Expenses ..............................................................................................
Total Investment Expenses ....................................................................................................
Net Investment Income.......................................................................................................... $
2019 Compared with 2018
2019
2018
2017
$
$
299.4
22.9
$
268.9
13.6
246.6
9.3
1.0
—
18.0
19.0
8.2
22.6
9.8
1.5
383.4
9.6
9.5
19.1
364.3
$
11.0
—
26.4
37.4
7.0
22.5
9.6
0.9
359.9
9.7
9.3
19.0
340.9
$
24.8
1.3
28.6
54.7
1.6
21.6
10.7
0.5
345.0
10.5
7.3
17.8
327.2
Net Investment Income increased by $23.4 million for the year ended December 31, 2019, compared to 2018, due primarily to
the inclusion of the Infinity investment portfolio for the entire year in 2019 versus only six months in 2018, partially offset by a
lower rate of return from Alternative Investments.
2018 Compared with 2017
Net Investment Income increased by $13.7 million for the year ended December 31, 2018, compared to 2017, due primarily to
higher levels of investments in fixed income securities, partially offset by lower returns from Alternative Investments and lower
yields on fixed income securities.
48
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INVESTMENT RESULTS (Continued)
Total Comprehensive Investment Gains (Losses)
The components of Total Comprehensive Investment Gains (Losses) for the years ended December 31, 2019, 2018 and 2017
are presented below.
DOLLARS IN MILLIONS
Recognized in Consolidated Statements of Income:
2019
2018
2017
Income (Loss) from Change in Fair Value of Equity and Convertible Securities ...... $
Gains on Sales .............................................................................................................
Losses on Sales ...........................................................................................................
Net Impairment Losses Recognized in Earnings ........................................................
Net Gains on Trading Securities .................................................................................
Net Gain (Loss) Recognized in Consolidated Statements of Income..............................
Recognized in Other Comprehensive Income (Loss) ......................................................
Total Comprehensive Investment Gains (Losses)............................................................ $
138.9
46.9
(5.0)
(13.8)
—
167.0
405.3
572.3
$
$
(64.3) $
37.6
(11.2)
(4.5)
—
(42.4)
(235.8)
(278.2) $
—
56.9
(1.0)
(14.3)
0.6
42.2
85.5
127.7
Gain (Loss) From Change in Fair Value of Equity and Convertible Securities
The components of Gain (Loss) from Change in Fair Value of Equity and Convertible Securities for the years ended
December 31, 2019 and 2018 are presented below.
DOLLARS IN MILLIONS
Preferred Stocks.....................................................................................................................................
Common Stocks.....................................................................................................................................
Other Equity Interests:
2019
2018
$
$
6.2
1.9
(6.9)
(2.0)
Exchange Traded Funds....................................................................................................................
Limited Liability Companies and Limited Partnerships...................................................................
Total Other Equity Interests...................................................................................................................
Income (Loss) from Change in Fair Value of Equity Securities............................................................
Income (Loss) from Change in Fair Value of Convertible Securities ...................................................
Income (Loss) from Change in Fair Value of Equity and Convertible Securities................................. $
121.0
4.2
125.2
133.3
5.6
138.9
$
(54.7)
0.2
(54.5)
(63.4)
(0.9)
(64.3)
49
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INVESTMENT RESULTS (Continued)
Net Realized Gains on Sales of Investments
The components of Net Realized Gains on Sales of Investments for the year ended December 31, 2019, 2018 and 2017 are
presented below.
DOLLARS IN MILLIONS
Fixed Maturities:
2019
2018
2017
Gains on Sales...................................................................................................................
Losses on Sales .................................................................................................................
$
$
41.1
(4.8)
$
25.3
(11.1)
8.4
(0.9)
Equity Securities:
Gains on Sales...................................................................................................................
Losses on Sales .................................................................................................................
Real Estate:
Gains on Sales...................................................................................................................
Other Investments:
Gains on Sales...................................................................................................................
Losses on Sales .................................................................................................................
Net Gains on Trading Securities .......................................................................................
Net Realized Gains on Sales of Investments.........................................................................
Gross Gains on Sales .............................................................................................................
Gross Losses on Sales ...........................................................................................................
Net Gains on Trading Securities............................................................................................
Net Realized Gains on Sales of Investments.........................................................................
Fixed Maturities
5.8
(0.2)
—
—
—
—
41.9
46.9
(5.0)
—
41.9
12.3
—
42.0
—
—
6.4
—
(0.1)
—
26.4
37.6
(11.2)
—
26.4
$
$
$
$
$
$
0.1
(0.1)
0.6
56.5
56.9
(1.0)
0.6
56.5
$
$
$
Net Realized Gains on Sales of Fixed Maturities for the year ended December 31, 2019 primarily relate to a repositioning of the
portfolio for duration extension purposes.
During the fourth quarter of 2018, the Company began repositioning the fixed maturity investment portfolio in in its Life and
Health Insurance segment and recognized Realized Gains on Sales of Fixed Maturities of $13.3 million and Realized Losses on
Sales of Fixed Maturities of $4.4 million in connection with the repositioning.
Equity Securities
Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2019 primarily relate to transactions
whereby the Company’s investments were acquired by other companies.
Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2018 primarily relate to gains on dispositions
of certain Investments in Equity Securities at Modified Cost resulting from transactions whereby the Company’s investments
were acquired by other companies.
Net Realized Gains on Sales of Equity Securities for the year ended December 31, 2017 includes $35.2 million recognized on
the sale of exchange traded fund shares due to tax planning initiatives and portfolio allocation adjustments.
Other sales activity in 2019, 2018 and 2017 was due to normal portfolio management.
50
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INVESTMENT RESULTS (Continued)
Net Impairment Losses Recognized in Earnings
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in the fair values of an
investment is other-than-temporary. Losses arising from other-than-temporary declines in fair value are reported in the
Consolidated Statements of Income in the period that the declines are determined to be other-than-temporary.
Information pertaining to Net Impairment Losses Recognized in Earnings reported in the Consolidated Statements of Income
for the year ended December 31, 2019, 2018 and 2017 is presented below.
2019
2018
2017
DOLLARS IN MILLIONS
Fixed Maturities ................................................................
Equity Securities ...............................................................
Net Impairment Losses Recognized in Earnings ..............
Amount
$ (13.3)
(0.5)
$ (13.8)
Number of
Issuers
Amount
Number of
Issuers
14 $
1
$
(2.0)
(2.5)
(4.5)
24
5
Fixed Maturities
Number of
Issuers
10
5
Amount
$
(12.1)
(2.2)
(14.3)
$
Net Impairment Losses Recognized in the Consolidated Statements of Income for the year ended December 31, 2019 related to
Investments in Fixed Maturities were due to the Company’s intent to sell or requirement to sell.
Net Impairment Losses Recognized in the Consolidated Statements of Income for the year ended December 31, 2018 related to
Investments in Fixed Maturities were due to the Company’s intent to sell or requirement to sell.
Net Impairment Losses Recognized in the Consolidated Statements of Income for the year ended December 31, 2017 related to
Investments in Fixed Maturities include losses of $10.4 million due to the Company’s intent to sell or requirement to sell bonds
of eight issuers and credit losses of $1.7 million from other-than-temporary declines in the fair values of investments in fixed
maturities of two issuers.
Real Estate
The Company did not recognize any impairment losses related to Investments in Real Estate in the Consolidated Statements of
Income for the year ended December 31, 2019 or 2018 or 2017.
INVESTMENT QUALITY AND CONCENTRATIONS
The Company’s fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency
bonds. At December 31, 2019, approximately 93% of the Company’s fixed maturity investment portfolio was rated investment-
grade, which the Company defines as a security issued by a high quality obligor with at least a relatively stable credit profile
and where it is highly likely that all contractual payments of principal and interest will timely occur and carry a rating from the
NAIC of 1 or 2. Securities with a rating of 1 or 2 from the NAIC typically are rated by one of more Nationally Recognized
Statistical Rating Organizations and either have a rating of AAA, AA, A or BBB from S&P; a rating of Aaa, Aa, A or Baa from
Moody’s; or a rating of AAA, AA, A or BBB from Fitch.
The following table summarizes the credit quality of the Company’s fixed maturity investment portfolio at December 31, 2019
and 2018.
NAIC
Rating
1
2
3-4
5-6
Rating
AAA, AA, A...............................................................................
BBB............................................................................................
BB, B..........................................................................................
CCC or Lower ............................................................................
Total Investments in Fixed Maturities .......................................................
Fair Value
in Millions
$ 4,387.1
2,044.1
319.2
171.7
$ 6,922.1
Percentage
of Total
Fair Value
in Millions
63.4% $ 4,156.6
29.5
1,752.6
4.6
333.7
2.5
181.3
100.0% $ 6,424.2
Percentage
of Total
64.7%
27.3
5.2
2.8
100.0%
Dec 31, 2019
Dec 31, 2018
51
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
Gross unrealized losses on the Company’s investments in below-investment-grade fixed maturities were $11.7 million and
$17.1 million at December 31, 2019 and 2018, respectively.
The following table summarizes the fair value of the Company’s investments in governmental fixed maturities at December 31,
2019 and 2018.
Dec 31, 2019
Dec 31, 2018
DOLLARS IN MILLIONS
U.S. Government and Government Agencies and Authorities ..................
States and Political Subdivisions:
Fair Value
815.9
$
958.6
Revenue Bonds........................................................................................
427.5
States........................................................................................................
129.7
Political Subdivisions ..............................................................................
16.8
Foreign Governments.................................................................................
Total Investments in Governmental Fixed Maturities ............................... $ 2,348.5
Percentage
of Total
Investments
Fair Value
865.7
9.0% $
Percentage
of Total
Investments
10.7%
10.6
991.6
4.7
479.7
1.4
147.8
0.2
5.9
25.9% $ 2,490.7
12.3
5.9
1.8
0.1
30.8%
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by industry
at December 31, 2019 and 2018.
Dec 31, 2019
Dec 31, 2018
DOLLARS IN MILLIONS
Fair Value
Finance, Insurance and Real Estate ........................................................... $ 1,522.8
1,356.4
Manufacturing............................................................................................
650.2
Transportation, Communication and Utilities............................................
604.4
Services ......................................................................................................
183.3
Retail Trade................................................................................................
Mining........................................................................................................
Wholesale Trade.........................................................................................
Agriculture, Forestry and Fishing ..............................................................
Other ..........................................................................................................
Total Investments in Non-governmental Fixed Maturities ........................
16.6
$ 4,573.5
154.5
72.9
12.4
Percentage
of Total
Investments
Fair Value
16.8% $ 1,269.3
15.0
1,270.0
7.2
449.0
6.7
516.4
2.0
164.8
1.7
0.8
0.1
158.6
78.4
13.7
Percentage
of Total
Investments
15.7%
15.7
5.6
6.4
2.0
2.0
1.0
0.2
0.2
13.3
50.5% $ 3,933.5
0.2
48.8%
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by range of
amount invested at December 31, 2019.
DOLLARS IN MILLIONS
Below $5 ...............................................................................................................................................
$5 -$10 ..................................................................................................................................................
$10 - $20 ...............................................................................................................................................
$20 - $30 ...............................................................................................................................................
Greater Than $30...................................................................................................................................
Total.......................................................................................................................................................
Number of
Issuers
457
181
122
28
1
789
Aggregate
Fair Value
992.6
$
1,224.5
1,653.5
667.7
35.2
$ 4,573.5
The Company’s short-term investments primarily consist of U.S. treasury bills, money market funds and overnight interest
bearing accounts. At December 31, 2019, the Company had $365.0 million invested in U.S. treasury bills, $83.9 million
invested in money market funds which primarily invest in U.S. Treasury securities and $22.0 million invested in overnight
interest bearing accounts with one of the Company’s custodial banks.
52
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
The following table summarizes the fair value of the Company’s ten largest investment exposures, excluding investments in
U.S. Government and Government Agencies and Authorities and Short-term Investments, at December 31, 2019.
DOLLARS IN MILLIONS
Fixed Maturities:
States including their Political Subdivisions:
Fair
Value
Percentage
of Total
Investments
Texas ............................................................................................................................................. $
Georgia..........................................................................................................................................
Colorado........................................................................................................................................
Louisiana .......................................................................................................................................
Michigan .......................................................................................................................................
California ......................................................................................................................................
New York ......................................................................................................................................
Ohio...............................................................................................................................................
Equity Securities at Fair Value—Other Equity Interests:
Vanguard Long-Term Corp Bond ETF .............................................................................................
iShares Long-Term Corporate Bond ETF..........................................................................................
Total ........................................................................................................................................................ $
118.6
101.8
86.0
70.9
69.6
67.8
60.4
55.1
106.1
69.7
806.0
1.3%
1.1
1.0
0.8
0.8
0.7
0.7
0.6
1.2
0.8
9.0%
53
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INVESTMENTS IN LIMITED LIABILITY COMPANIES AND LIMITED PARTNERSHIPS
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest
in mezzanine debt, distressed debt, real estate and senior debt. Beginning January 1, 2018, the Company’s investments in these
limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability
Investments at Cost Plus Cumulative Undistributed Earnings, Other Equity Interests and included in Equity Securities at Fair
Value, or Equity Securities at Modified Cost depending on the accounting method used to report the investment. Additional
information pertaining to these investments at December 31, 2019 and 2018 is presented below.
Asset Class
Unfunded
Commitment
in Millions
Dec 31,
2019
Reported Value in Millions
Dec 31,
2019
Dec 31,
2018
Reported as Equity Method Limited Liability Investments at Cost Plus
Cumulative Undistributed Earnings:
Mezzanine Debt .............................................................................................. $
Senior Debt .....................................................................................................
Distressed Debt ...............................................................................................
Secondary Transactions...................................................................................
Leveraged Buyout ...........................................................................................
Growth Equity.................................................................................................
Real Estate.......................................................................................................
Other................................................................................................................
Total Equity Method Limited Liability Investments ...........................................
Reported as Other Equity Interests at Fair Value:
Mezzanine Debt ..............................................................................................
Senior Debt .....................................................................................................
Distressed Debt ...............................................................................................
Secondary Transactions...................................................................................
Hedge Funds ...................................................................................................
Leveraged Buyout ...........................................................................................
Other................................................................................................................
Total Reported as Other Equity Interests at Fair Value........................................
Reported as Equity Securities at Modified Cost:
Mezzanine Debt ..............................................................................................
Other................................................................................................................
Total Reported as Equity Securities at Modified Cost.........................................
Total Investments in Limited Liability Companies and Limited Partnerships ....
$
59.9
21.7
—
15.6
—
—
—
—
97.2
94.7
23.2
18.7
6.8
—
2.2
8.0
153.6
—
0.1
0.1
250.9
$
$
129.3
16.0
22.7
11.5
0.1
5.3
29.9
5.6
220.4
126.1
39.5
16.8
4.9
48.2
4.4
8.2
248.1
1.6
18.9
20.5
489.0
$
$
99.6
15.4
34.5
21.2
4.2
5.4
—
6.7
187.0
111.7
34.3
14.5
6.7
14.7
4.2
5.9
192.0
1.5
22.1
23.6
402.6
The Company expects that it will be required to fund its commitments over the next several years. The Company expects that
the proceeds from distributions from these investments will be the primary source of funding of such commitments.
54
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INSURANCE EXPENSES AND INTEREST AND OTHER EXPENSES
Insurance Expenses and Interest and Other Expenses for the year ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Insurance Expenses:
Commissions .......................................................................................................................
General Expenses ................................................................................................................
Premium Tax Expense.........................................................................................................
Total Costs Incurred ............................................................................................................
Policy Acquisition Costs:
Deferred ............................................................................................................................
Amortized .........................................................................................................................
Net Policy Acquisition Costs Amortized ............................................................................
Amortization of Value of Business Acquired (“VOBA”) ...................................................
Insurance Expenses ...............................................................................................................
Loss from Early Extinguishment of Debt..............................................................................
Interest Expense.....................................................................................................................
Other Expenses:
2019
2018
2017
$
$
708.8
278.0
93.5
1,080.3
$
558.7
231.9
71.0
861.6
425.6
196.2
50.7
672.5
(475.2)
408.3
(66.9)
6.3
1,019.7
5.8
42.5
(481.5)
377.1
(104.4)
143.3
900.5
—
43.4
—
Loss on Cash Flow Hedge ..................................................................................................
18.4
Acquisition Related Transaction, Integration and Other Costs...........................................
102.9
Other....................................................................................................................................
121.3
Other Expenses......................................................................................................................
163.8
Interest and Other Expenses ..................................................................................................
Total Expenses....................................................................................................................... $ 1,189.3
—
44.7
70.9
115.6
159.0
$ 1,059.5
$
(351.6)
318.3
(33.3)
5.1
644.3
—
34.9
1.1
—
44.6
45.7
80.6
724.9
Insurance Expenses
Insurance Expenses increased by $119.2 million for the year ended December 31, 2019, compared to 2018, due primarily to the
inclusion of Infinity for the full twelve months in 2019 as compared to only six months in 2018, partially offset by a reduction
in the amortization of VOBA. Insurance Expenses increased by $256.2 million for the year ended December 31, 2018,
compared to 2017, due primarily to the acquisition of Infinity and the amortization of purchase accounting adjustments in 2018.
Interest and Other Expenses
Interest expense decreased by $0.9 million for the year ended December 31, 2019, compared to 2018, due primarily to lower
levels of debt outstanding in the current year. Interest expense increased by $8.5 million for the year ended December 31, 2018,
compared to 2017, due primarily to higher levels of debt outstanding to facilitate the funding of the acquisition of Infinity. See
MD&A, “Liquidity and Capital Resources,” and Note 8, “Debt,” to the Consolidated Financial Statements for additional
discussion of debt activity.
Other Expenses increased by $5.7 million for the year ended December 31, 2019, compared to 2018, due primarily to higher
employee compensation, bonuses and legal fees, partially offset by a reduction in costs associated with the acquisition of
Infinity and the related transaction and integration cost. Other Expenses increased by $69.9 million for the year ended
December 31, 2018, compared to 2017, due primarily to the acquisition of Infinity, the inclusion of acquisition related
transaction, integration and other costs and higher employee compensation.
INCOME TAXES
The Company’s effective income tax rate from continuing operations differs from the Federal statutory income tax rate due
primarily to (1) the effects of tax-exempt investment income and dividends received deductions, (2) a permanent difference
between the amount of long-term equity-based compensation expense recognized under GAAP and the amount deductible in
the computation of Federal taxable income, (3) a permanent difference associated with nondeductible executive compensation,
and (4) the Tax Act.
55
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
INCOME TAXES (Continued)
Tax-exempt investment income and dividends received deductions were $20.4 million, $22.4 million and $28.0 million for the
years ended December 31, 2019, 2018 and 2017, respectively. The amount of expense recognized for long-term equity-based
compensation expense under U.S. GAAP was $21.0 million, $6.7 million, and $1.1 million lower than the amount that would
be deductible under the Internal Revenue Code (the “IRC”) for the years ended December 31, 2019, 2018 and 2017,
respectively. The amount of nondeductible executive compensation was $11.9 million, $6.7 million, and $0.0 million for years
ended December 31, 2019, 2018 and 2017, respectively. The tax benefit recorded pursuant to the Tax Act was $26.4 million
and $7.4 million for the years ended December 31, 2018 and 2017, respectively. See Note 16, “Income Taxes,” to the
Consolidated Financial Statements for additional discussion of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Common Stock Offering
On June 7, 2019 the Company completed a public offering of its common stock and issued 1,552,500 shares of common stock,
at $83.00 per share. Gross proceeds from the offering were $128.9 million. Transaction costs, including the underwriting
discount, were $1.7 million, of which $0.1 million was accrued for and reflected in Accrued Expenses and Other Liabilities on
the Company’s Consolidated Balance Sheets at December 31, 2019. In July 2019, the Company used the net proceeds of $127.2
million, together with a portion of the proceeds from delayed-draw term loan facility entered into by the Company on June 4,
2019 (the “2023 Term Loan”) to redeem all $150.0 million in aggregate outstanding principal of its 7.375% Subordinated
Debentures due 2054.
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 included a delayed draw feature with borrowing capacity
of $250.0 million and a maturity date two years from the borrowing date (see discussion below under the heading, “Repayment
of Term Loan Due 2020,”for additional information regarding the initial borrowing and subsequent repayment of this delayed-
draw term loan). On June 4, 2019, the Company utilized the the accordion feature under the credit agreement to increase its
credit borrowing capacity by $100.0 million, resulting in the available credit commitments increasing from $300.0 million to
$400.0 million. The Company incurred $0.1 million in additional debt issuance costs in connection with the utilization of the
accordion feature, which in addition to the $1.1 million of remaining unamortized costs under the credit agreement, will be
amortized under the remaining term of the credit agreement. There were no outstanding borrowings under the credit agreement
at either December 31, 2019 or December 31, 2018.
Long-term 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 outstanding at December 31, 2019 and December 31, 2018 was:
(Dollars in Millions)
Term Loan due June 29, 2020.................................................................................................................. $
5.0% Senior Notes due September 19, 2022............................................................................................
Term Loan due July 5, 2023 ....................................................................................................................
4.35% Senior Notes due February 15, 2025 ............................................................................................
7.375% Subordinated Debentures due February 27, 2054 ......................................................................
Total Long-term Debt Outstanding..........................................................................................................
$
Dec 31,
2019
Dec 31,
2018
— $
279.9
49.9
448.6
—
778.4
$
34.9
281.5
—
448.4
144.2
909.0
Repayment of Term Loan Due 2020
On June 29, 2018, the Company borrowed $250.0 million under its delayed-draw term loan facility dated June 8, 2018, 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. On December 28, 2018, the Company repaid $215.0 million of the outstanding term loan. On May 31, 2019, the
remaining outstanding balance of $35.0 million was repaid.
56
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Term Loan Due 2023
On June 4, 2019, the Company entered into the 2023 Term Loan with a borrowing capacity of $50.0 million and a maturity date
four years from the borrowing date. On July 5, 2019, the Company borrowed $49.9 million, net of debt issuance costs, under
the 2023 Term Loan, with a final maturity date of July 5, 2023. The agreement includes a mutual option to extend the maturity
date by one year.
5.0% Senior Notes Due 2022
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%. On November 30, 2018, Kemper executed a guarantee to fully and unconditionally guarantee
the payment and performance obligations of the 2022 Senior Notes.
4.35% Senior Notes Due 2025
Kemper has $450.0 million aggregate principal of 4.35% senior notes due February 15, 2025 (the “2025 Senior Notes”)
outstanding as of December 31, 2019. Kemper initially issued $250.0 million of the notes in February of 2015 and issued an
additional $200.0 million of the notes in June of 2017. The additional notes are fungible with the initial notes issued in 2015,
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.
Redemption of 7.375% Subordinated Debentures Due 2054
On June 7, 2019, Kemper issued a notice of redemption for the entire $150.0 million aggregate principal outstanding of its
7.375% Subordinated Debentures due 2054 (the “7.375% Subordinated Debentures”) at a redemption price equal to 100% of
their principal, plus accrued and unpaid interest on the redemption date. On July 8, 2019, Kemper completed the redemption,
and the 7.375% Subordinated Debentures were repaid in full. The Company recognized a loss on early extinguishment of debt
of $5.8 million in the Consolidated Statement of Income for the year ended December 31, 2019.
The Company used the proceeds received from Kemper’s common stock offering on June 7, 2019, as well as a portion of the
proceeds from its July 5, 2019 borrowing under the 2023 Term Loan, to repay the 7.375% Subordinated Debentures. See Note
8, “Debt,” and Note 10, “Shareholders’ Equity,” to the Consolidated Financial Statements for additional information.
Policyholder Contract Liabilities
Kemper’s subsidiaries, 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 common stock and additional amounts based on the level
of outstanding borrowings. The Company’s investment in FHLB common stock are reported at cost and included in Equity
Securities at Modified Cost. The carrying value of FHLB of Chicago common stock was $4.9 million and $0.8 million at
December 31, 2019 and December 31, 2018, respectively. The carrying value of FHLB of Dallas common stock was $3.3
million at both December 31, 2019 and December 31, 2018. The Company periodically uses short-term and long-term FHLB
borrowings for a combination of cash management, risk management, and spread lending purposes.
In March of 2018, United Insurance received advances of $10.0 million from the FHLB of Chicago. These advances were made
in connection with the start-up of the Company’s spread lending program, were collateralized by U.S Government Agency
securities held in a custodial account with the FHLB of Chicago with a fair value of $15.7 million at December 31, 2018. These
advances were repaid in March of 2019.
During 2019, United Insurance received advances of $614.5 million from the FHLB of Chicago and made repayments of
$381.1 million under the spread lending program. United Insurance had outstanding advances from the FHLB of Chicago
totaling $243.4 million at December 31, 2019. These advances were made in connection with the Company’s spread lending
program. The proceeds related to these advances were used to purchase fixed maturity securities to earn incremental net
investment income. With respect to these advances, United Insurance held pledged securities in a custodial account with the
57
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
FHLB of Chicago with a fair value of $287.8 million at December 31, 2019. 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. See Note 7, “Policyholder Contract Liabilities,” to the
Consolidated Financial Statements.
Subsidiary Dividends and Capital Contributions
Various state insurance laws restrict the ability of Kemper’s insurance subsidiaries to pay dividends without regulatory
approval. Such insurance laws generally restrict the amount of dividends paid in an annual period to the greater of statutory net
income from the previous year or 10% of statutory capital and surplus. Kemper’s direct insurance subsidiaries collectively paid
$239.0 million, $130.4 million and $108.1 million in dividends to Kemper in 2019, 2018 and 2017, respectively. In 2020,
Kemper estimates that its direct insurance subsidiaries would be able to pay approximately $435.4 million in dividends to
Kemper without prior regulatory approval.
Kemper made capital contributions to insurance subsidiaries of $83 million and $20 million during 2019 and 2018, respectively.
Dividends to Shareholders
Kemper paid a quarterly dividend of $0.25 per common share for the first three quarters of 2019 and $0.28 for the fourth
quarter of 2019. The quarterly dividend rate was $0.24 for each quarter of 2018. Dividends and dividend equivalents paid were
$67.8 million and $56.4 million for the years ended December 31, 2019 and 2018, respectively.
Sources and Uses of Funds
Kemper directly held cash and investments totaling $206.8 million at December 31, 2019, compared to $100.6 million at
December 31, 2018.
The primary sources of funds available for the repayment of the Company’s indebtedness, repurchases of common stock, future
shareholder dividend payments and the payment of interest on Kemper’s senior notes and term loan, include cash and
investments directly held by Kemper, receipt of dividends from Kemper’s insurance subsidiaries and borrowings under the
credit agreement and from subsidiaries.
The primary sources of funds for Kemper’s insurance subsidiaries are premiums, investment income, proceeds from the sales
and maturity of investments, advances from the FHLBs of Dallas and Chicago, and capital contributions from Kemper. The
primary uses of funds are the payment of policyholder benefits under life insurance contracts, claims under property and
casualty insurance contracts and accident and health insurance contracts, the payment of commissions and general expenses, the
purchase of investments, repayments of advances from the FHLBs of Dallas and Chicago and dividends to Kemper. Generally,
there is a time lag between when premiums are collected and when policyholder benefits and insurance claims are paid.
During periods of growth, property and casualty insurance companies typically experience positive operating cash flows and
are able to invest a portion of their operating cash flows to fund future policyholder benefits and claims. During periods in
which premium revenues decline, insurance companies may experience negative cash flows from operations and may need to
sell investments to fund payments to policyholders and claimants. In addition, if the Company’s property and casualty insurance
subsidiaries experience several significant catastrophic events over a relatively short period of time, investments may have to be
sold in advance of their maturity dates to fund payments, which could result in either investment gains or losses. Management
believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they were to
experience several future catastrophic events over a relatively short period of time.
Net Cash Provided by Operating Activities decreased by $4.9 million for the year ended December 31, 2019, compared to 2018.
Net Cash Provided by Operating Activities increased by $298.6 million for the year ended December 31, 2018, compared to
2017.
58
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Net Cash Provided by Financing Activities was $160.8 million for the year ended December 31, 2019, compared to net cash
used of $12.2 million for the same period in 2018. Net proceeds from Policyholder Contract Liabilities provided $232.2 million
of cash for the year ended December 31, 2019 compared to $8.9 million for the year ended December 31, 2018. Net proceeds
from the issuance of common stock were $127.5 million for the year ended December 31, 2019. Net proceeds from borrowing
under the term loan facilities provided $49.9 million of cash for the year ended December 31, 2019, compared to $249.4 million
for the year ended December 31, 2018. Kemper used $185.0 million of cash to repay long-term debt for the year ended
December 31, 2019 compared to $215.0 million for the year ended December 31, 2018. Kemper did not use any cash during
2019 or 2018 to repurchase shares of its common stock. Kemper used $67.8 million of cash to pay dividends for the year ended
December 31, 2019, compared to $56.4 million of cash used to pay dividends in the same period of 2018. The quarterly
dividend rate was $0.25 per common share for the first three quarters of 2019 and $0.28 for the fourth quarter of 2019. The
quarterly dividend rate was $0.24 for each quarter of 2018.
Net Cash Used by Financing Activities was $12.2 million for the year ended December 31, 2018, compared to $205.2 million
for the same period in 2017. Net proceeds from the issuance of long-term debt, which was used to fund the acquisition of
Infinity, provided $249.4 million of cash for the year ended December 31, 2017. Kemper used $215.0 million of cash to repay
long-term debt for the year ended December 31, 2018. Kemper did not use any cash during 2018 or 2017 to repurchase shares
of its common stock. Kemper used $56.4 million of cash to pay dividends for the year ended December 31, 2018, compared to
$49.5 million of cash used to pay dividends in the same period of 2017. The quarterly dividend rate was $0.24 per common
share for each quarter of 2018 and 2017.
Cash available for investment activities in total is dependent on cash flow from Operating Activities and Financing Activities
and the level of cash the Company elects to maintain. Net Cash Used by Investing Activities was $633.4 million for the year
ended December 31, 2019, compared to $497.6 million in 2018. Net cash used to acquire short-term investments was $176.0
million for the year ended December 31, 2019, compared to net cash provided by dispositions of short-term investments of
$52.7 million in 2018. Fixed Maturities investing activities used net cash of $55.8 million for the year ended December 31,
2019, compared to providing net cash of $230.1 million in 2018. Equity Securities investing activities used net cash of $89.7
million for the year ended December 31, 2019, compared to $126.6 million in 2018. Equity Method Limited Liability
Investments investing activities used net cash of $44.2 million for the year ended December 31, 2019, compared to $29.0
million in 2018.
Net Cash Used by Investing Activities was $497.6 million for the year ended December 31, 2018, compared to $105.4 million
in 2017. Net cash provided by dispositions of short-term investments was $52.7 million for the year ended December 31, 2018,
compared to $39.4 million in 2017. Fixed Maturities investing activities provided net cash of $230.1 million for the year ended
December 31, 2018, compared to net cash used of $181.9 million in 2017. Equity Securities investing activities used net cash of
$126.6 million for the year ended December 31, 2018, compared to $0.7 million in 2017. Equity Method Limited Liability
Investments investing activities used net cash of $29.0 million for the year ended December 31, 2018, compared to providing
net cash of $20.2 million in 2017. As of January 1, 2018, with the adoption of new accounting guidance, the Company’s
historical Fair Value Option Investments are carried as Equity Securities at Fair Value or Equity Securities at Modified Cost.
Accordingly, no activity was recorded for Fair Value Option Investments for the year ended December 31, 2018, compared net
cash provided by Fair Value Option Investing Activities of $35.2 million in 2017.
OFF–BALANCE SHEET ARRANGEMENTS
The Company has no material obligations under guarantee contracts. The Company has no material retained or contingent
interests in assets transferred to an unconsolidated entity. The Company has no material obligations, including contingent
obligations, under contracts that would be accounted for as derivative instruments. The Company has no obligations, including
contingent obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, the Company,
where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research
and development services with the Company. Accordingly, the Company has no material off–balance sheet arrangements.
59
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
CONTRACTUAL OBLIGATIONS
Estimated cash disbursements pertaining to the Company’s contractual obligations at December 31, 2019 are presented below.
DOLLARS IN MILLIONS
Long Term Debt Obligations...................................... $
Finance Lease Obligations .........................................
Operating Lease Obligations ......................................
Purchase Obligations..................................................
Life and Health Insurance Policy Benefits.................
Property and Casualty Insurance Reserves ................
Other Contractual Obligations Reflected in Long
Term Liabilities on the Consolidated Balance
Sheet under GAAP..................................................
Total Contractual Obligations ....................................
$
Jan 1, 2020 to
Dec 31, 2020
Jan 1, 2021 to
Dec 31, 2022
275.0
0.2
36.3
4.0
516.3
584.7
— $
0.3
20.5
11.7
294.5
1,189.7
Jan 1, 2023 to
Dec 31, 2024
50.0
$
—
23.0
0.4
493.4
138.7
After Dec 31,
2024
$
$
450.0
—
28.1
—
7,408.9
56.7
Total
775.0
0.5
107.9
16.1
8,713.1
1,969.8
39.9
1,556.6
$
75.2
1,491.7
$
49.2
754.7
$
42.4
7,986.1
206.7
$ 11,789.1
Amounts included in Life and Health Insurance Policy Benefits within the contractual obligations table above represent the
estimated cash payments to be made to policyholders and beneficiaries. Such cash outflows are based on the Company’s current
assumptions for mortality, morbidity and policy lapse, but are undiscounted with respect to interest. Policies must remain in
force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy,
future premiums from the policyholder may be required for the policy to remain in force. The Company estimates that future
cash inflows would total $4.4 billion using the same assumptions used to estimate the cash outflows. The Company’s Life
Insurance Reserves in the Company’s Consolidated Balance Sheets are generally based on the historical assumptions for
mortality and policy lapse rates and are on a discounted basis. Accordingly, the sum of the amounts presented above for Life
and Health Insurance Policy Benefits significantly exceeds the amount of Life and Health Insurance Reserves reported on the
Company’s Consolidated Balance Sheet at December 31, 2019.
In addition to the purchase obligations included above, the Company had certain investment commitments totaling $515.4
million at December 31, 2019. The funding of such investment commitments is dependent on a number of factors, the timing of
which is indeterminate. The Company cannot make a reasonably reliable estimate of the amount and period of related future
payments, if any, for such liability. Other Contractual Obligations Reflected in Long Term Liabilities on the Consolidated
Balance Sheets under GAAP primarily consist of interest obligations related to Long Term Debt Obligations.
CRITICAL ACCOUNTING ESTIMATES
Kemper’s subsidiaries conduct their operations in two industries: property and casualty insurance and life and health insurance.
Accordingly, the Company is subject to several industry-specific accounting principles under GAAP. The preparation of
financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly,
actual results could ultimately differ materially from the estimated amounts reported in a company’s financial statements.
Different assumptions are likely to result in different estimates of reported amounts. The Company’s critical accounting policies
most sensitive to estimates include the valuation of investments, the valuation of reserves for property and casualty insurance
incurred losses and LAE, the assessment of recoverability of goodwill and the valuation of pension benefit obligations.
Valuation of Investments
The reported value of the Company’s investments was $9,044.4 million at December 31, 2019, of which $7,866.7 million, or
87%, was reported at fair value, $220.4 million, or 2%, was reported under the equity method of accounting, $305.6 million, or
3%, was reported at unpaid principal balance and $651.7 million, or 7%, was reported at cost, modified cost or depreciated cost.
Investments, in general, are exposed to various risks, such as interest rate risk, credit risk and overall market volatility risk.
Accordingly, it is reasonably possible that changes in the fair values of the Company’s investments reported at fair value will
occur in the near term and such changes could materially affect the amounts reported in the financial statements. Also, it is
reasonably possible that changes in the carrying values of the Company’s Equity Method Limited Liability Investments will
occur in the near term and such changes could materially affect the amounts reported in the financial statements because these
issuers follow specialized industry accounting rules which require that they report all of their investments at fair value (See
60
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
Item 1A., “Risk Factors” under the title “The Company’s investment portfolio is exposed to a variety of risks that may
negatively impact net investment income and cause realized and unrealized losses”).
As more fully described under the heading, “Fair Value Measurements,” in Note 2, “Summary of Accounting Policies and
Accounting Changes,” to the Consolidated Financial Statements, the Company uses a hierarchical framework which prioritizes
and ranks the market observability used in fair value measurements.
The fair value of the Company’s investments measured and reported at fair value was $7,866.7 million at December 31, 2019,
of which $6,574.4 million, or 84%, were investments that were based on quoted market prices or significant value drivers that
are observable, $1,044.2 million, or 13%, were investments where at least one significant value driver was unobservable and
$248.1 million or 3% were investments for which fair value is measured using the net asset value per share practical expedient.
Fair value measurements based on readily available, active, quoted market prices or for which fair value can be measured from
actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of
judgment, compared to fair value measurements based on significant unobservable inputs used in measuring fair value. The
prices that the Company might realize from actual sales of investments are likely to vary from their respective estimated fair
values at December 31, 2019 due to changing market conditions and limitations inherent in the estimation process.
The classification of a company’s investment in a financial instrument may affect its reported results. Under GAAP, a company
may elect to use the fair value option method of accounting for some or all of its investments in financial instruments. Under
the fair value option method of accounting, a company is required to recognize changes in fair values into income for the period
reported. The Company has elected the fair value option for investments in fixed maturities with equity conversion features
which are recorded on the Consolidated Balance Sheets as Convertible Securities. Accordingly, both the reported and fair
values of the Company’s investments in Convertible Securities accounted for under the fair value option method of accounting
were $37.3 million at December 31, 2019. For investments in fixed maturities classified as held to maturity, a company is
required to carry the investment at amortized cost, with only amortization occurring during the period recognized into income.
None of the Company’s investments in fixed maturities were classified as held to maturity at December 31, 2019. Changes in
the fair value of investments in fixed maturities classified as available for sale are not recognized in income during the period,
but rather are recognized as a separate component of Accumulated Other Comprehensive Income (“AOCI”) until realized. Both
the reported and fair values of the Company’s investments in fixed maturities classified as available for sale were $6,922.1
million at December 31, 2019.
Equity securities with readily determinable fair values are recorded as Equity Securities at Fair Value with changes in fair
values recognized into income for the period reported. Accordingly, both the reported and fair values of the Company’s
investments in Equity Securities at Fair Value were $907.3 million at December 31, 2019. The Company holds certain equity
investments without readily determinable fair values at cost, less impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for identical or similar investments from the same issuer. Changes in the
carrying value of Equity Securities at Modified Cost due to observable price changes are recorded into income for the period
reported.
Had the Company elected the fair value option for all of its investments in financial instruments, the Company’s reported net
income for the year ended December 31, 2019, would have increased by $323.7 million.
The Company regularly reviews its fixed maturity investment portfolio and holdings in Equity Securities at Modified Cost for
factors that may indicate that a decline in the fair value of an investment below its cost, amortized cost or modified cost basis is
other than temporary. Such reviews are inherently uncertain in that the value of the investment may not fully recover or may
decline further in future periods. Some factors considered in evaluating whether or not a decline in fair value of an investment
is other than temporary include, but are not limited to, the following:
Fixed Maturity Securities
• The financial condition, credit rating and prospects of the issuer;
• The length of time and magnitude of the unrealized loss;
• The ability of the issuer to make scheduled principal and interest payments;
• The volatility of the investment;
61
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
Equity Securities at Modified Cost
• Opinions of the Company’s external investment managers;
• The financial condition and prospects of the issuer;
• Current market conditions;
• Changes in credit ratings; and
• Changes in the regulatory environment.
Changes in these factors from their December 31, 2019 evaluation date could result in the Company determining that a
temporary decline in the fair value of an investment held and evaluated at December 31, 2019 is no longer temporary at a
subsequent evaluation date. Such determination would result in an impairment loss recognized in earnings in the period such
determination is made.
Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses
The Company’s Property and Casualty Insurance Reserves are reported using the Company’s estimate of its ultimate liability
for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. The
Company had $1,969.8 million and $1,874.9 million of gross loss and LAE reserves at December 31, 2019 and 2018,
respectively.
Property and Casualty Insurance Reserves for the Company’s business segments at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Business Segments:
2019
2018
Specialty Property & Casualty Insurance ..........................................................................................
Preferred Property & Casualty Insurance ..........................................................................................
Life & Health Insurance.....................................................................................................................
Total Business Segments...........................................................................................................................
Unallocated Reserves ................................................................................................................................
Total Property and Casualty Insurance Reserves ......................................................................................
1,551.0
388.5
3.3
1,942.8
27.0
$ 1,969.8
1,387.0
452.9
4.4
1,844.3
30.6
$ 1,874.9
In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s actuaries exercise professional
judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of
estimating and establishing the Company’s Property and Casualty Insurance Reserves is inherently uncertain, and the actual
ultimate cost of known and unknown claims may vary materially from the estimated amounts reserved.
The Company’s actuaries generally estimate reserves at least quarterly for most product lines and/or coverage levels using
accident quarters or years spanning 10 or more years, depending on the product line and/or coverage level or emerging issues
relating to them. The Company’s actuaries use a variety of generally accepted actuarial loss reserving estimation
methodologies, including, but not limited to, the following:
Incurred Loss Development Methodology;
Paid Loss Development Methodology;
•
•
• Bornhuetter-Ferguson Incurred Loss Methodology;
• Bornhuetter-Ferguson Paid Loss Methodology; and
•
Frequency and Severity Methodology.
The Company’s actuaries generally review the results of at least four of the estimation methodologies, two based on paid data
and two based on incurred data, to initially estimate the ultimate losses and LAE for the current accident quarter or year and re-
estimate the ultimate losses and LAE for previous accident quarters or years to determine if changes in the previous estimates
of the ultimate losses and LAE are indicated by the most recent data. In some cases, the methodologies produce a cluster of
estimates with a tight band of indicated possible outcomes. In other cases, however, the methodologies produce conflicting
results and wider bands of indicated possible outcomes, and the Company’s actuaries perform additional analyses before
making their final selections. However, such bands do not necessarily constitute a range of outcomes, nor does the Company’s
management or the Company’s actuaries calculate a range of outcomes.
62
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
The key assumption in these estimation methodologies is that patterns observed in prior periods are indicative of how losses
and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses
and LAE. However, changes in the Company’s business processes, by their very nature, are likely to affect the development
patterns, which means the Company’s actuaries must routinely make assumptions about how changes in business practices
would affect historical patterns.
The ultimate impact of a single change in a business process is difficult to quantify and detect, and even more difficult if several
changes to business processes occur over several years. Initially after a change is implemented, there are fewer data points, as
compared to the historical data, for the Company’s actuaries to analyze. With fewer data points to analyze, the Company’s
actuaries cannot be certain that observed differences from the historical data trends are a result of the change in business
process or merely a random fluctuation in the data. As the Company’s actuaries observe more data points following the change
in business process, the Company’s actuaries can gain more confidence in whether the change in business process is affecting
the development pattern. The challenge for the Company’s actuaries is how much weight to place on the development patterns
based on the older historical data and how much weight to place on the development patterns based on more recent data.
For each accident quarter or year, the point estimate selected by the Company’s actuaries is not necessarily one of the points
produced by any particular one of the methodologies utilized, but often is another point selected by the Company’s actuaries,
using their professional judgment, that takes into consideration each of the points produced by the several loss reserving
estimation methodologies used. In some cases, for a particular product, the current accident quarter or year may not have
enough paid claims data to rely upon, leading the Company’s actuaries to conclude that the incurred loss development
methodology provides a better estimate than the paid loss development methodology. Therefore, the Company’s actuaries may
give more weight to the incurred loss development methodology for that particular accident quarter or year. As an accident
quarter or year ages for that same product, the actuary may gain more confidence in the paid loss development methodology
and begin to give more weight to the paid loss development methodology. The Company’s actuaries’ quarterly selections are
summed by product and/or coverage levels to create the actuarial indication of the ultimate losses. More often than not, the
actuarial indication for a particular product line and accident quarter or year is most heavily weighted toward the incurred loss
development methodology, particularly for short-tail lines such as personal automobile insurance. Historically, the incurred loss
development methodology has been more reliable in predicting ultimate losses for short-tail lines, especially in the more recent
accident quarters or years, compared with the paid loss development methodology. However, in some circumstances changes
can occur which impact numerous variables, including, but not limited to, those variables identified below that are difficult to
quantify and/or impact the predictive value of prior development patterns relied upon in the incurred loss development
methodology and paid loss development methodology. In those circumstances, the Company’s actuaries must make adjustments
to these loss reserving estimation methodologies or use additional generally accepted actuarial estimation methodologies. In
those circumstances, the Company’s actuaries, using their professional judgment, may place more weight on the adjusted loss
reserving estimation methodologies or other generally accepted actuarial estimation methodologies until the newer development
patterns fully emerge and the Company’s actuaries can fully rely on the unadjusted loss reserving estimation methodologies. In
the event of a wide variation among results generated by the different projection methodologies, the Company’s actuaries
further analyze the data using additional techniques.
In estimating reserves, the Company’s actuaries exercise professional judgment and must consider, and are influenced by, many
variables that are difficult to quantify, such as:
• Changes in the level of minimum case reserves, and the automatic aging of those minimum case reserves;
• Changes to claims practices, including, but not limited to, changes in the reporting and impact of large losses, timing
of reported claims, changes in claims closing and re-opening patterns, adequacy of case reserves, implementation of
new systems for handling claims, turnover of claims department staffs, timing and depth of the audit review of claims
handling procedures;
• Changes in underwriting practices;
• Changes in the mix of business by state, class and policy limit within product line;
• Growth in new lines of business;
63
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
• Changes in the attachment points of the Company’s reinsurance programs;
• Medical costs, including, but not limited to, the ability to assess the extent of injuries and the impact of inflation;
• Repair costs, including, but not limited to, the impact of inflation and the availability of labor and materials;
• Changes in the judicial environment, including, but not limited to, the interpretation of policy provisions, the impact of
jury awards and changes in case law; and
• Changes in state regulatory requirements.
A change in any one or more of the foregoing factors is likely to result in a projected ultimate net loss and LAE that is different
from the previously estimated reserve and/or previous frequency and severity trends. Such changes in estimates may be
material.
For example, the Company’s actuaries review frequency (number of claims per policy or exposure), severity (dollars of loss per
claim) and average premium (dollars of premium per exposure). Actual frequency and severity experienced will vary depending
on changes in mix by class of insured risk. Similarly, the actual frequency and rate of recovery from reinsurance will vary
depending on changes in the attachment point for reinsurance. In particular, in periods of high growth or expansion into new
markets, there may be additional uncertainty in estimating the ultimate losses and LAE. The contributing factors of this
potential risk are changes in the Company’s mix by policy limit and mix of business by state or jurisdiction.
Actuaries use historical experience and trends as predictors of how losses and LAE will emerge over time. However, historical
experience may not necessarily be indicative of how actual losses and LAE will emerge. Changes in case reserve adequacy,
changes in minimum case reserves and changes in internal claims handling procedures could impact the timing and recognition
of incurred claims and produce an estimate that is either too high or too low if not adjusted for by the actuary. For example, if,
due to changes in claims handling procedures, actual claims are settled more rapidly than they were settled historically, the
estimate produced by the paid loss development methodology would tend to be overstated if the actuary did not identify and
adjust for the impact of the changes in claims handling procedures. Similarly, if, due to changes in claims handling procedures,
actual claim reserves are set at levels higher than past experience, the estimate produced by the incurred loss development
methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims
handling procedures.
The final step in the quarterly loss and LAE reserving process involves a comprehensive review of the actuarial indications by
the Company’s corporate actuary and corporate management who apply their collective judgment and determine the appropriate
estimated level of reserves to record. Numerous factors are considered in this determination process, including, but not limited
to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current actuarial
indications, changes in claim handling practices or other changes that affect the timing of payment or development patterns,
changes in the mix of business, the maturity of the accident quarter or year, pertinent trends observed over the recent past, the
level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current
period as compared to prior periods, and the amount of reserves related to third party pools for which the Company does not
have access to the underlying data and, accordingly, relies on calculations provided by such pools.
Estimated Variability of Property and Casualty Insurance Reserves
The Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover
all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and
LAE are fully paid. Changes in the Company’s estimates of these losses and LAE over time, also referred to as “development,”
will occur and may be material. Favorable development is recognized and reported in the Consolidated Financial Statements
when the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the
period recognized, whereas adverse development is recognized and reported in the Consolidated Financial Statements when the
Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income.
Although development will emerge in all of the Company’s product lines, development in the Company’s specialty personal
automobile insurance product line could have the most significant impact due to the relative size of its loss and LAE reserves.
To further illustrate the sensitivity of the Company’s reserves for specialty personal automobile insurance losses and LAE, the
Company measures the standard deviation of the mean reserve estimate using a bootstrapping methodology. The Company
believes that one standard deviation of variability is a reasonably likely scenario to measure variability for its loss and LAE
reserves for specialty personal automobile insurance. The Company estimates that the Company’s specialty personal
64
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
automobile insurance loss and LAE reserves could have varied by $71.6 million in either direction at December 31, 2019 for all
accident years combined under this scenario. In addition to the factors described above, other factors may also impact loss
reserve development in future periods. These factors include governmental actions, including court decisions interpreting
existing laws, regulations or policy provisions, developments related to insurance policy claims and coverage issues, adverse or
favorable outcomes in pending claims litigation, the number and severity of insurance claims, the impact of inflation on
insurance claims and the impact of required participation in windpools and joint underwriting associations and residual market
assessments. Although the Company’s actuaries do not make specific numerical assumptions about these factors, changes in
these factors from past patterns will impact historical loss development factors and, in turn, future loss reserve development.
Significant favorable changes in one or more factors will lead to favorable future loss reserve development, which could result
in the actual loss developing closer to, or even below, the lower end of the Company’s estimated reserve variability. Significant
unfavorable changes in one or more factors will lead to unfavorable loss reserve development, which could result in the actual
loss developing closer to, or even above, the higher end of the Company’s estimated reserve variability. Accordingly, due to
these factors and the other factors enumerated throughout the MD&A and the inherent limitations of the loss reserving
estimation methodologies, the estimated and illustrated reserve variability may not necessarily be indicative of the Company’s
future reserve variability, which could ultimately be greater than the estimated and illustrated variability. In addition, as
previously noted, development will emerge in all of the Company’s product lines over time. Accordingly, the Company’s future
reserve variability could ultimately be greater than the illustrated variability. Additional information pertaining to the estimation
of, and development of, the Company’s Property and Casualty Insurance Reserves is contained in Item 1 of Part I of this 2019
Annual Report under the heading “Property and Casualty Loss and Loss Adjustment Expense Reserves.”
Goodwill Recoverability
The Company tests goodwill for recoverability at the reporting unit level on an annual basis, or whenever events or
circumstances indicate the fair value of a reporting unit may have declined below its carrying value. The Company performed a
qualitative goodwill impairment assessment for all reporting units with goodwill as of October 1, 2019. The qualitative
assessment takes into consideration changes in macroeconomic conditions, industry and market considerations, cost factors,
overall financial performance, changes in management or key personnel, changes in strategy and changes in our stock price
since the last quantitative assessment, which was performed on January 1, 2017. Based on its qualitative assessment, the
Company concluded that the associated goodwill was recoverable for each reporting unit tested.
Pension Benefit Obligations
The process of estimating the Company’s pension benefit obligations and pension benefit costs is inherently uncertain and the
actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their
long-term nature and are based on several assumptions. The main assumptions used in the valuation of the Company’s pension
benefit obligations and pension costs are:
• Estimated mortality of the participants and beneficiaries eligible for benefits;
• Estimated expected long-term rates of returns on investments; and
• Estimated rate used to discount the expected benefit payment to a present value.
A change in any one or more of these assumptions is likely to result in a projected benefit obligation or pension cost that differs
from the actuarial estimates at December 31, 2019. Such changes in estimates may be material. For example, a one–percentage
point decrease in the Company’s estimated discount rate would increase the pension benefit obligation at December 31, 2019 by
$90.8 million, while a one–percentage point increase in the rate would decrease the pension benefit obligation at December 31,
2019 by $74.1 million. A one–percentage point decrease in the Company’s estimated long-term rate of return on plan assets
would increase the pension expense for the year ended December 31, 2019 by $5.4 million, while a one–percentage point
increase in the rate would decrease pension expense by $5.4 million for the same period.
65
Kemper Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of
grandfathered standards, the FASB Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP
recognized by the Financial Accounting Standards Board (“FASB”) that is applicable to the Company. The FASB issues ASUs
to amend the authoritative literature in ASC.
The Company has adopted all recently issued accounting pronouncements with effective dates prior to January 1, 2020. See
Note 2, “Summary of Accounting Policies and Accounting Changes” to the Consolidated Financial Statements for discussion on
adoption of these ASUs and impacts to the Company’s financial statements, which were not material. For all recently issued
accounting pronouncements with effective dates after December 31, 2019, the Company does not expect adoption to have a
material impact on its financial statements, with the possible exception of ASU 2018-12, Financial Services - Insurance (Topic
944): Targeted Improvements to Accounting for Long-Duration Contracts.
66
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative Information About Market Risk
The Company’s consolidated balance sheets include three types of financial instruments subject to the material market risk
disclosures required by the SEC:
Investments in Fixed Maturities;
Investments in Equity Securities at Fair Value; and
1.
2.
3. Debt.
Investments in Fixed Maturities and Debt are subject to material interest rate risk. The Company’s Investments in Equity
Securities include common and preferred stocks and hedge funds and, accordingly, are subject to material equity price risk and
interest rate risk.
For purposes of this disclosure, market risk sensitive financial instruments are divided into two categories: financial instruments
acquired for trading purposes and financial instruments acquired for purposes other than trading. The Company’s market risk
sensitive financial instruments are generally classified as held for purposes other than trading. The Company has no significant
holdings of financial instruments acquired for trading purposes. The Company has no significant holdings of derivatives.
The Company measures its sensitivity to market risk by evaluating the change in its financial assets and liabilities relative to
fluctuations in interest rates and equity prices. The evaluation is made using instantaneous changes in interest rates and equity
prices on a static balance sheet to determine the effect such changes would have on the Company’s market value at risk and the
resulting pre-tax effect on Shareholders’ Equity. The changes chosen represent the Company’s view of adverse changes which
are reasonably possible over a one-year period. The selection of the changes chosen should not be construed as the Company’s
prediction of future market events, but rather an illustration of the impact of such possible events.
For the interest rate sensitivity analysis presented below, the Company assumed an adverse and instantaneous increase of 100
basis points in the yield curve at both December 31, 2019 and 2018 for Investments in Fixed Maturities. Such 100 basis point
increase in the yield curve may not necessarily result in a corresponding 100 basis point increase in the interest rate for all
investments in fixed maturities. For example, a 100 basis point increase in the yield curve for risk-free, taxable investments in
fixed maturities may not result in a 100 basis point increase for tax-exempt investments in fixed maturities. For Investments in
Fixed Maturities, the Company also anticipated changes in cash flows due to changes in the likelihood that investments would
be called or prepaid prior to their contractual maturity. All other variables were held constant. For preferred stock equity
securities, the Company assumed an adverse and instantaneous increase of 100 basis points in market interest rates from their
levels at both December 31, 2019 and 2018. All other variables were held constant. For Debt, the Company assumed an adverse
and instantaneous decrease of 100 basis points in market interest rates from their levels at December 31, 2019 and 2018. All
other variables were held constant. The Company measured equity price sensitivity assuming an adverse and instantaneous 30%
decrease in the Standard and Poor’s Stock Index (the “S&P 500”) from its level at December 31, 2019 and 2018, with all other
variables held constant. The Company’s investments in common stock equity securities were correlated with the S&P 500 using
the portfolio’s weighted-average beta of 0.99 and 0.97 at December 31, 2019 and 2018, respectively. Beta measures a stock’s
relative volatility in relation to the rest of the stock market, with the S&P 500 having a beta coefficient of 1.00. The common
stock portfolio’s weighted-average beta was calculated using each security’s beta for the five-year periods ended December 31,
2019 and 2018, and weighted on the fair value of such securities at December 31, 2019 and 2018, respectively. For equity
securities without observable market inputs, the Company assumed a beta of 1.00 at December 31, 2019 and 2018.
67
Quantitative Information About Market Risk (continued)
The estimated adverse effects on the fair value of the Company’s financial instruments at December 31, 2019 using these
assumptions were:
DOLLARS IN MILLIONS
ASSETS
Investments in Fixed Maturities.................................................................
Investments in Equity Securities................................................................
LIABILITIES
Debt............................................................................................................ $
Fair Value
$ 6,922.1
907.3
Pro Forma Increase (Decrease)
Interest
Rate Risk
Equity
Price Risk
Total
Market Risk
$
(489.1) $
(40.2)
— $
(175.1)
(489.1)
(215.3)
820.2
$
29.2
$
— $
29.2
The estimated adverse effects on the fair value of the Company’s financial instruments at December 31, 2018 using these
assumptions were:
DOLLARS IN MILLIONS
ASSETS
Investments in Fixed Maturities.................................................................
Investments in Equity Securities................................................................
LIABILITIES
Debt............................................................................................................
Pro Forma Increase (Decrease)
Equity
Price Risk
Total
Market Risk
Interest
Rate Risk
Fair Value
$ 6,424.2
684.4
$
(393.5) $
(7.4)
— $
(175.6)
(393.5)
(183.0)
$
911.2
$
34.3
$
— $
34.3
The market risk sensitivity analysis assumes that the composition of the Company’s interest rate sensitive assets and liabilities,
including, but not limited to, credit quality, and the equity price sensitive assets existing at the beginning of the period remains
constant over the period being measured. It also assumes that a particular change in interest rates is uniform across the yield
curve regardless of the time to maturity. Interest rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Also, any
future correlation, either in the near term or the long term, between the Company’s common stock equity securities and fair
value option portfolios and the S&P 500 may differ from the historical correlation as represented by the weighted-average
historical beta of the common stock equity securities and fair value option portfolios. Accordingly, the market risk sensitivity
analysis may not be indicative of, is not intended to provide, and does not provide, a precise forecast of the effect of changes of
market rates on the Company’s income or shareholders’ equity. Further, the computations do not contemplate any actions the
Company may undertake in response to changes in interest rates or equity prices.
To the extent that any adverse 100 basis point change occurs in increments over a period of time instead of instantaneously, the
adverse impact on fair values would be partially mitigated because some of the underlying financial instruments would have
matured. For example, proceeds from any maturing assets could be reinvested and any new liabilities would be incurred at the
then current interest rates.
Qualitative Information About Market Risk
Market risk is a broad term related to economic losses due to adverse changes in the fair value of a financial instrument and is
inherent to all financial instruments. SEC disclosure rules focus on only one element of market risk—price risk. Price risk
relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors
that relate to market volatility of the rate, index, or price underlying the financial instrument. The Company’s primary market
risk exposures are to changes in interest rates and equity prices.
The Company manages its interest rate exposures with respect to Investments in Fixed Maturities by investing primarily in
investment-grade securities of moderate effective duration.
68
Item 8.
Financial Statements and Supplementary Data.
Index to the Consolidated Financial Statements of
Kemper Corporation and Subsidiaries
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017...................................
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017 ....................
Notes to the Consolidated Financial Statements
Note 1—Basis of Presentation and Significant Estimates............................................................................................
Note 2—Summary of Accounting Policies and Accounting Changes..........................................................................
Note 3—Acquisition of Business .................................................................................................................................
Note 4—Investments ....................................................................................................................................................
Note 5—Goodwill and Intangible Assets .....................................................................................................................
Note 6—Property and Casualty Insurance Reserves ....................................................................................................
Note 7—Policyholder Contract Liabilities ...................................................................................................................
Note 8—Debt................................................................................................................................................................
70
71
72
73
74
75
75
81
82
87
88
98
99
Note 9—Leases.............................................................................................................................................................
100
Note 10—Shareholders’ Equity....................................................................................................................................
102
Note 11—Long-term Equity-based Compensation ......................................................................................................
103
Note 12—Income from Continuing Operations per Unrestricted Share ......................................................................
108
Note 13—Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income............................
109
Note 14—Income from Investments ............................................................................................................................
111
Note 15—Insurance Expenses......................................................................................................................................
112
Note 16—Income Taxes ...............................................................................................................................................
113
Note 17—Pension Benefits...........................................................................................................................................
115
Note 18—Postretirement Benefits Other Than Pensions .............................................................................................
118
Note 19—Business Segments.......................................................................................................................................
120
Note 20—Catastrophe Reinsurance..............................................................................................................................
123
Note 21—Other Reinsurance........................................................................................................................................
126
Note 22—Fair Value Measurements.............................................................................................................................
126
Note 23—Contingencies...............................................................................................................................................
132
Note 24—Related Parties .............................................................................................................................................
133
Note 25—Quarterly Financial Information (Unaudited)..............................................................................................
133
Report of Independent Registered Public Accounting Firm ................................................................................................
135
69
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Revenues:
Earned Premiums..............................................................................................................
Net Investment Income.....................................................................................................
Other Income ....................................................................................................................
Income (Loss) from Change in Fair Value of Equity and Convertible Securities............
Net Realized Gains on Sales of Investments ....................................................................
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses ............................................................
Portion of Gains (Losses) Recognized in Other Comprehensive Income......................
Net Impairment Losses Recognized in Earnings..............................................................
Total Revenues ......................................................................................................................
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses.................
Insurance Expenses...........................................................................................................
Loss from Early Extinguishment of Debt.........................................................................
Interest and Other Expenses .............................................................................................
Total Expenses.......................................................................................................................
Income from Continuing Operations before Income Taxes ..................................................
Income Tax Expense..............................................................................................................
Income from Continuing Operations.....................................................................................
Income from Discontinued Operations .................................................................................
Net Income ............................................................................................................................
Income from Continuing Operations Per Unrestricted Share:
Basic .................................................................................................................................
Diluted ..............................................................................................................................
Net Income Per Unrestricted Share:
Basic .................................................................................................................................
Diluted ..............................................................................................................................
For the Year Ended December 31,
2019
2018
2017
$ 4,472.4
364.3
35.5
138.9
41.9
$ 3,384.4
340.9
42.2
(64.3)
26.4
$ 2,350.0
327.2
4.0
—
56.5
(13.7)
(0.1)
(13.8)
5,039.2
3,188.3
1,019.7
5.8
163.8
4,377.6
661.6
(130.5)
531.1
—
531.1
8.04
7.96
8.04
7.96
$
$
$
$
$
(4.5)
—
(4.5)
3,725.1
(14.4)
0.1
(14.3)
2,723.4
2,466.5
1,837.4
900.5
—
159.0
3,526.0
199.1
(10.7)
188.4
1.7
190.1
3.22
3.19
3.25
3.22
$
$
$
$
$
644.3
—
80.6
2,562.3
161.1
(41.2)
119.9
1.0
120.9
2.32
2.31
2.34
2.33
$
$
$
$
$
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
70
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
DOLLARS IN MILLIONS
Net Income ............................................................................................................................
2019
531.1
$
2018
190.1
$
2017
120.9
$
For The Years Ended December 31,
Other Comprehensive Income (Loss) Before Income Taxes:
Unrealized Holding Gains (Losses)..................................................................................
Foreign Currency Translation Adjustments......................................................................
Decrease (Increase) in Net Unrecognized Postretirement Benefit Costs .........................
Gain (Loss) on Cash Flow Hedges ...................................................................................
Other Comprehensive Income (Loss) Before Income Taxes.................................................
Other Comprehensive Income Tax Benefit (Expense)..........................................................
Other Comprehensive Income (Loss)....................................................................................
Total Comprehensive Income (Loss).....................................................................................
$
405.3
—
(7.8)
0.4
397.9
(83.6)
314.3
845.4
(236.1)
0.3
(6.9)
1.2
(241.5)
50.7
(190.8)
$
(0.7) $
83.8
1.7
3.3
(6.7)
82.1
(24.7)
57.4
178.3
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
71
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized Cost: 2019 - $6,372.7; 2018 - $6,284.5)................ $
Equity Securities at Fair Value (Cost: 2019 - $818.8; 2018 - $720.8).......................................
Equity Securities at Modified Cost ............................................................................................
Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed
Earnings..................................................................................................................................
Convertible Securities at Fair Value ..........................................................................................
Short-term Investments at Cost which Approximates Fair Value..............................................
Other Investments ......................................................................................................................
Total Investments............................................................................................................................
Cash ................................................................................................................................................
Receivables from Policyholders .....................................................................................................
Other Receivables...........................................................................................................................
Deferred Policy Acquisition Costs..................................................................................................
Goodwill .........................................................................................................................................
Current Income Tax Assets.............................................................................................................
Other Assets....................................................................................................................................
Total Assets..................................................................................................................................... $
Liabilities and Shareholders’ Equity:
Insurance Reserves:
Life and Health .......................................................................................................................... $
Property and Casualty ................................................................................................................
Total Insurance Reserves ................................................................................................................
Unearned Premiums........................................................................................................................
Policyholder Contract Liabilities....................................................................................................
Deferred Income Tax Liabilities.....................................................................................................
Liabilities for Unrecognized Tax Benefits......................................................................................
Accrued Expenses and Other Liabilities.........................................................................................
Long-term Debt, Current and Non-current, at Amortized Cost (Fair Value: 2019 - $820.2; 2018
- $911.2)..........................................................................................................................................
Total Liabilities...............................................................................................................................
Shareholders’ Equity:
Common Stock, $0.10 Par Value Per Share, 100 Million Shares Authorized; 66,665,888
Shares Issued and Outstanding at December 31, 2019 and 64,756,833 Shares Issued and
Outstanding at December 31, 2018 ........................................................................................
Paid-in Capital ...........................................................................................................................
Retained Earnings ......................................................................................................................
Accumulated Other Comprehensive Income .............................................................................
Total Shareholders’ Equity..............................................................................................................
Total Liabilities and Shareholders’ Equity...................................................................................... $
December 31,
2019
2018
6,922.1
907.3
41.9
220.4
37.3
470.9
444.5
9,044.4
136.8
1,117.1
219.7
537.7
1,114.0
44.7
$
6,424.2
684.4
41.5
187.0
31.5
286.1
414.8
8,069.5
75.1
1,007.1
245.4
470.0
1,112.4
38.9
774.7
12,989.1
$
526.5
11,544.9
3,502.0
$
1,969.8
5,471.8
1,545.5
309.8
178.2
—
733.1
778.4
9,016.8
3,491.9
1,874.9
5,366.8
1,424.3
76.8
26.2
4.4
687.3
909.0
8,494.8
6.7
1,819.2
1,810.3
336.1
3,972.3
12,989.1
$
6.5
1,666.3
1,355.5
21.8
3,050.1
11,544.9
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
72
For The Years Ended December 31,
2017
2018
2019
531.1
$
190.1
$
120.9
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN MILLIONS
Operating Activities:
Net Income ........................................................................................................................... $
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Increase in Deferred Policy Acquisition Costs.....................................................................
Amortization of Intangible Assets Acquired ........................................................................
Equity in Earnings of Equity Method Limited Liability Investments..................................
Contribution to Defined Benefit Pension Plan.....................................................................
Distribution of Accumulated Earnings of Equity Method Limited Liability Investments...
Decrease (Increase) in Value of Fair Value Option Investments reported in Investment
Income.............................................................................................................................
Decrease (Increase) in Value of Equity and Convertible Securities at Fair Value ...............
Amortization of Investment Securities and Depreciation of Investment Real Estate ..........
Net Realized Gains on Sales of Investments........................................................................
Net Impairment Losses Recognized in Earnings .................................................................
Loss from Early Extinguishment of Debt ............................................................................
Depreciation and Amortization of Property, Equipment and Software................................
Increase in Receivables ........................................................................................................
Increase in Insurance Reserves ............................................................................................
Increase in Unearned Premiums...........................................................................................
Change in Income Taxes ......................................................................................................
Change in Accrued Expenses and Other Liabilities .............................................................
Other, Net .............................................................................................................................
Net Cash Provided by Operating Activities ..............................................................................
Investing Activities:
Sales, Paydowns and Maturities of Fixed Maturities ...........................................................
Purchases of Fixed Maturities ..............................................................................................
Sales of Equity and Convertible Securities ..........................................................................
Purchases of Equity and Convertible Securities ..................................................................
Acquisition and Improvements of Investment Real Estate ..................................................
Sales of Investment Real Estate ...........................................................................................
Sale of and Return of Investment of Equity Method Limited Liability Investments...........
Acquisitions of Equity Method Limited Liability Investments ...........................................
Sales of Fair Value Option Investments ...............................................................................
Purchases of Fair Value Option Investments........................................................................
Decrease (Increase) in Short-term Investments ...................................................................
Acquisition of Business, Net of Cash Acquired...................................................................
Acquisitions of Mortgage Loans ..........................................................................................
Paydowns of Mortgage Loans..............................................................................................
Increase in Other Investments ..............................................................................................
Purchases of Corporate-owned Life Insurance ....................................................................
Acquisition of Software and Long-lived Assets...................................................................
Other, Net .............................................................................................................................
Net Cash Used by Investing Activities .....................................................................................
Financing Activities:
(66.9)
29.7
(1.0)
(55.3)
11.9
—
(138.9)
0.5
(41.9)
13.8
5.8
32.8
(84.3)
102.3
121.2
58.8
(16.0)
30.7
534.3
1,229.1
(1,284.9)
217.3
(307.0)
(1.4)
—
29.5
(73.7)
—
—
(176.0)
—
(44.5)
17.2
(0.1)
(150.0)
(84.0)
(4.9)
(633.4)
Net Proceeds from Issuance of Long-term Debt ..................................................................
Repayment of Long-term Debt ............................................................................................
Proceeds from Policyholder Contract Liabilities .................................................................
Repayment of Policyholder Contract Liabilities ..................................................................
Proceeds from Issuance of Common Stock, Net of Transaction Costs................................
Dividends and Dividend Equivalents Paid...........................................................................
Proceeds from Shares Issued under Employee Stock Purchase Plan...................................
Cash Exercise of Stock Options ...........................................................................................
Net Cash Provided (Used) by Financing Activities ..................................................................
Increase (Decrease) in Cash ......................................................................................................
Cash, Beginning of Year ...........................................................................................................
Cash, End of Year...................................................................................................................... $
49.9
(185.0)
615.8
(383.6)
127.5
(67.8)
1.6
2.4
160.8
61.7
75.1
136.8
$
(104.6)
156.3
(11.0)
(5.1)
13.9
—
64.3
7.7
(26.4)
4.5
—
15.6
(80.7)
183.2
54.7
13.1
49.9
13.7
539.2
2,643.3
(2,413.2)
351.9
(478.5)
(1.5)
—
14.1
(43.1)
—
—
52.7
(560.6)
—
—
(2.0)
—
(65.3)
4.6
(497.6)
249.4
(215.0)
11.4
(2.5)
—
(56.4)
—
0.9
(12.2)
29.4
45.7
75.1
$
(33.3)
5.1
(24.8)
—
19.6
(1.3)
—
16.7
(56.5)
14.3
—
13.1
(29.2)
131.1
35.2
28.9
2.9
(2.1)
240.6
528.2
(710.1)
342.0
(342.7)
(1.5)
26.7
48.1
(27.9)
42.2
(7.0)
39.4
—
—
—
(4.5)
—
(35.5)
(2.8)
(105.4)
200.2
(360.0)
3.0
(2.9)
—
(49.5)
—
4.0
(205.2)
(70.0)
115.7
45.7
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
73
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
DOLLARS AND SHARES IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
BALANCE, DECEMBER 31, 2016 ........................
Cumulative Effect of Adoption of New Accounting
Standard................................................................
Net Income .................................................................
Other Comprehensive Income (Loss) (Note 13) ........
Cash Dividends and Dividend Equivalents to
Shareholders ($0.96 per share)...................................
Equity-based Compensation Cost (Note 11) ..............
Equity-based Awards, Net of Shares Exchanged
(Note 11)...............................................................
BALANCE, DECEMBER 31, 2017 As Reported ..
Cumulative Effect of Adoption of New Accounting
Standards ..............................................................
BALANCE, JANUARY 1, 2018 As Adjusted.........
Net Income .................................................................
Other Comprehensive Income (Loss) (Note 13) ........
Cash Dividends and Dividend Equivalents to
Shareholders ($0.96 per share).............................
Issuances of Common Stock (Note 3)........................
Equity-based Compensation Cost (Note 11) ..............
Equity-based Awards, Net of Shares Exchanged
(Note 11)...............................................................
BALANCE, DECEMBER 31, 2018 ........................
Net Income .................................................................
Other Comprehensive Income (Loss) (Note 13) ........
Cash Dividends and Dividend Equivalents to
Shareholders ($1.03 per share).............................
Issuances of Common Stock (Note 10)......................
Shares Issued Under Employee Stock Purchase Plan
(Note 10)...............................................................
Equity-based Compensation Cost (Note 11) ..............
Equity-based Awards, Net of Shares Exchanged
(Note 11)...............................................................
BALANCE, DECEMBER 31, 2019 ........................
For the Years Ended December 31, 2019, 2018 and 2017
Number
of
Shares
51.3
Common
Stock
$
5.1
Paid-in
Capital
660.3
$
Retained
Earnings
$ 1,172.8
Accumulated
Other
Comprehensive
Income (Loss)
137.0
$
Total
Shareholders’
Equity
$
1,975.2
—
—
—
—
—
0.2
51.5
—
51.5
—
—
—
13.1
—
0.1
64.7
—
—
—
1.6
—
—
$
$
0.4
66.7
$
—
—
—
—
—
—
5.1
—
5.1
—
—
—
1.4
—
—
6.5
—
—
—
0.2
—
—
—
6.7
—
—
—
—
9.4
0.5
120.9
—
(49.5)
—
—
—
57.4
—
—
3.4
673.1
(1.7)
$ 1,243.0
$
$
—
194.4
$
—
673.1
—
—
—
977.2
18.6
(18.2)
1,224.8
190.1
—
(56.4)
—
—
18.2
212.6
—
(190.8)
—
—
—
(2.6)
$ 1,666.3
—
—
(3.0)
$ 1,355.5
531.1
—
$
$
—
21.8
—
314.3
—
127.0
1.9
25.3
(68.4)
—
—
—
—
—
—
—
0.5
120.9
57.4
(49.5)
9.4
1.7
2,115.6
—
2,115.6
190.1
(190.8)
(56.4)
978.6
18.6
(5.6)
3,050.1
531.1
314.3
(68.4)
127.2
1.9
25.3
(1.3)
$ 1,819.2
(7.9)
$ 1,810.3
$
—
336.1
$
(9.2)
3,972.3
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
74
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ESTIMATES
The Consolidated Financial Statements included herein have been prepared on the basis of accounting principles generally
accepted in the United States (“GAAP”) and include the accounts of Kemper Corporation (“Kemper”) and its subsidiaries
(individually and collectively referred to herein as the “Company”). All significant intercompany accounts and transactions
have been eliminated. Certain prior year amounts for policyholder contract amounts have been reclassified to conform to the
current presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from
those estimates and assumptions.
The fair values of the Company’s Investments in Fixed Maturities, Investments in Convertible Securities at Fair Value,
Investments in Equity Securities at Fair Value and Debt are estimated using a hierarchical framework which prioritizes and
ranks market price observability. The carrying amounts reported in the Consolidated Balance Sheets approximate fair value for
Cash, Short-term Investments and certain other assets and other liabilities because of their short-term nature. The actual value at
which financial instruments could be sold or settled with a willing buyer or seller may differ from estimated fair values
depending on a number of factors, including, but not limited to, current and future economic conditions, the quantity sold or
settled, the presence of an active market and the availability of a willing buyer or seller.
The process of estimating and establishing reserves for losses and loss adjustment expenses ("LAE") for property and casualty
insurance is inherently uncertain, and the actual ultimate net cost of known and unknown claims may vary materially from the
estimated amounts reserved. The reserving process is particularly imprecise for claims involving long-tailed exposures, which
may not be discovered or reported until years after the insurance policy period has ended. Management considers a variety of
factors, including, but not limited to, past claims experience, current claim trends and relevant legal, economic and social
conditions, in estimating reserves. A change in any one or more factors is likely to result in the ultimate net claim costs differing
from the estimated reserve. Changes in such estimates may be material and would be recognized in the Consolidated Financial
Statements when such estimates change.
The process of determining whether an asset is impaired or recoverable relies on projections of future cash flows, operating
results and market conditions. Projections are inherently uncertain, and, accordingly, actual future cash flows may differ
materially from projected cash flows. As a result, the Company’s assessment of the impairment of long-lived assets is
susceptible to the risk inherent in making such projections.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES
Investments
Investments in Fixed Maturities include bonds, notes and redeemable preferred stocks. Investments in Fixed Maturities are
classified as available for sale and reported at fair value. Net Investment Income, including amortization of purchased
premiums and accretion of market discounts, on Investments in Fixed Maturities is recognized as interest over the period that it
is earned using the effective yield method. Unrealized appreciation or depreciation, net of applicable deferred income taxes, on
fixed maturities classified as available for sale is reported in Accumulated Other Comprehensive Income (“AOCI”) included in
Shareholders’ Equity.
Investments in Convertible Securities include fixed maturities with equity conversion features. The Company has elected the
fair value option method of accounting for investments in Convertible Securities and records Convertible Securities at fair value
on the Consolidated Balance Sheets. Changes in fair value of Convertible Securities are recorded in the Consolidated
Statements of Income during the period such changes occur.
Equity investments include common stocks, non-redeemable preferred stocks, exchange traded funds, money market mutual
funds and limited liability companies and investment partnerships in which the Company’s interests are deemed minor. Equity
investments with readily determinable fair values are recorded as Equity Securities at Fair Value on the Consolidated Balance
Sheets. Effective January 1, 2018, changes in the fair value of such equity securities are reported in the Consolidated Statements
of Income. Prior to January 1, 2018, changes in the fair values of such equity securities were reported in AOCI. Dividend
income on investments in common and non-redeemable preferred stocks is recognized on the ex-dividend date. The Company
75
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
holds certain equity investments without readily determinable fair values at cost, less impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on the
Consolidated Balance Sheets as Equity Securities at Modified Cost. Changes in the carrying value of Modified Cost
investments due to observable price changes are recorded as Income (Loss) from Change in Fair Value of Equity and
Convertible Securities.
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.
Short-term Investments include certificates of deposit and other fixed maturities that mature within one year from the date of
purchase, U.S. Treasury bills, money market mutual funds and overnight interest bearing accounts. Short-term Investments are
reported at cost, which approximates fair value.
Other Investments primarily include loans to policyholders, real estate and mortgage loans. Loans to policyholders are carried
at unpaid principal balance. Real estate is carried at cost, net of accumulated depreciation. Real estate is depreciated over the
estimated useful life of the asset using the straight-line method of depreciation. Real estate is evaluated for impairment when
events or circumstances indicate the carrying value may not be recoverable. An impairment loss on real estate is recognized
when the carrying value exceeds the sum of undiscounted projected future cash flows as well as the fair value, or, in the case of
a property classified as held for sale, when the carrying value exceeds the fair value, net of costs to sell. Mortgage loans are
carried at amortized cost, net of a reserve for expected credit losses.
Gains and losses on sales of investments are computed on the specific identification method and are reported in the
Consolidated Statements of Income in the period in which the sales occur. 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. Losses are computed
on the specific identification method and reported in the Consolidated Statements of Income in the period that the decline is
determined to be other than temporary. The portion of an impairment of an investment in a fixed maturity attributed to a credit
loss is reported in Net Impairment Losses Recognized in Earnings in the Consolidated Statements of Income, with the portion
of the impairment that is not attributed to a credit loss reported in AOCI.
Fair Value Measurements
The Company uses a hierarchical framework which prioritizes and ranks the market observability of inputs used in fair value
measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the
characteristics specific to the asset or liability being measured. Assets and liabilities with readily available, active, quoted
market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree
of market price observability and a lesser degree of judgment used in measuring fair value. The Company classifies the inputs
used to measure fair value into one of three levels as follows:
• Level 1 — Quoted prices in an active market for identical assets or liabilities;
• Level 2 — Observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose
inputs are observable or whose significant value drivers are observable; and
• Level 3 — Significant unobservable inputs for the asset or liability being measured.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the
Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases,
the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those cases, the fair
value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level of input that is
significant to the entire measurement. Such determination requires significant management judgment.
Deferred Policy Acquisition Costs
Costs directly associated with the successful acquisition of business, principally commissions and certain premium taxes and
policy issuance costs, are deferred. Costs deferred on property and casualty insurance contracts and short duration health
76
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
insurance contracts are amortized over the period in which premiums are earned. Costs deferred on traditional life insurance
products and other long-duration insurance contracts are primarily amortized over the anticipated premium-paying period of the
related policies in proportion to the ratio of the annual premiums to the total premiums anticipated, which is estimated using the
same assumptions used in calculating policy reserves.
Goodwill
The cost of an acquired entity over the fair value of net assets acquired is reported as Goodwill. Goodwill is not amortized, but
rather is tested for recoverability annually or when certain triggering events require testing.
Insurance Reserves
Reserves for losses and LAE on property and casualty insurance coverage and health insurance coverage represent the
estimated claim cost and loss adjustment expense necessary to cover the ultimate net cost of investigating and settling all losses
incurred and unpaid at the end of any given accounting period. Such estimates are based on individual case estimates for
reported claims and estimates for incurred but not reported (“IBNR”) losses, including expected development on reported
claims. These estimates are adjusted in the aggregate for ultimate loss expectations based on historical experience patterns and
current economic trends, with any change in the estimated ultimate liabilities being reported in the Consolidated Statements of
Income in the period of change. Changes in such estimates may be material.
For traditional life insurance products, the reserves for future policy benefits are estimated on the net level premium method
using assumptions as of the issue date for mortality, interest, policy lapses and expenses, including provisions for adverse
deviations. These assumptions vary by such characteristics as plan, age at issue and policy duration. Mortality assumptions are
based on the Company’s historical experience and industry standards. Interest rate assumptions principally range from 3% to
7%. Lapse rate assumptions are based on actual and industry experience. Insurance Reserves for life insurance products are
comprised of reserves for future policy benefits plus an estimate of the Company’s liability for unpaid life insurance claims and
claims adjustment expenses, which includes an estimate for IBNR life insurance claims. Prior to 2016, except when required by
applicable law, the Company did not utilize the database of reported deaths maintained by the Social Security Administration or
any other comparable database (a “Death Master File” or “DMF”) in its operations, including to determine its IBNR liability for
life insurance products. Instead of using such a database, the Company calculated its IBNR liability for life insurance products
using Company-specific historical information, which included analyzing average paid claims and the average lag between date
of death and the date reported to the Company for claims for which proof of death had been provided. In 2016, the Company
initiated a voluntary enhancement of its claims handling procedures for its life insurance policies. The Company is now
utilizing a DMF to identify potential situations where the Company has yet to be notified of an insured’s death and, as
appropriate, initiating an outreach process to identify and contact beneficiaries and settle claims. Policyholders’ Benefits and
Incurred Losses and Loss Adjustment Expenses for the year ended December 31, 2016 included a charge of $77.8 million to
recognize the initial impact of using a DMF in the Company’s operations, including to determine its IBNR liability for unpaid
claims and claims adjustment expenses for life insurance products. The Company reduced its estimate of the initial impact of
using death verification databases by $21.0 million for the year ended December 31, 2019.
Policyholder Contract Liabilities
Policyholder contract liabilities include Federal Home Loan Bank (“FHLB”) funding agreements used for spread lending
purposes and universal life-type policyholder contracts and are stated at account balances.
Other Receivables
Other Receivables primarily include reinsurance recoverables and accrued investment income. Reinsurance Recoverables were
$122.6 million and $158.3 million at December 31, 2019 and 2018, respectively. Accrued Investment Income was $78.7 million
and $77.9 million at December 31, 2019 and 2018, respectively.
Other Assets
Other Assets primarily include property and equipment, internal use software, right-of-use assets, insurance licenses acquired in
business combinations, the value of other intangible assets acquired, corporate-owned life insurance (“COLI”) and prepaid
expenses. Property and equipment is depreciated over the useful lives of the assets, generally using the straight-line or double
declining balance methods of depreciation depending on the asset involved. Internal use software is amortized over the useful
life of the asset using the straight-line method of amortization and is evaluated for recoverability upon identification of
77
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
impairment indicators. Insurance licenses acquired in business combinations and other indefinite life intangibles are not
amortized, but rather tested periodically for recoverability.
COLI is reported at cash surrender value with changes due to cost of insurance and investment experience reported in Other
Income in the Consolidated Statements of Income. COLI was $217.0 million and $59.3 million at December 31, 2019 and
2018, respectively.
The Company accounts for the value of business acquired (“VOBA”) based on actuarial estimates of the present value of future
cash flows embedded in insurance in force as of an acquisition date. VOBA was $24.1 million and $30.2 million at
December 31, 2019 and 2018, respectively. VOBA is amortized over the expected profit emergence period of the policies in
force as of the acquisition date. The Company evaluates VOBA assets for recoverability annually.
The Company accounts for the future profits embedded in customer relationships (“Customer Relationships”) acquired based
on the present value of estimated future cash flows from such relationships. Customer Relationships was $4.3 million and $6.7
million at December 31, 2019 and 2018, respectively, and are amortized on a straight-line basis over the estimated useful life of
the relationship. Customer Relationships are tested for recoverability using undiscounted projections of future cash flows and
written down to estimated fair value if the carrying value exceeds the sum of such projections of undiscounted cash flows.
The Company accounts for the present value of the future profits embedded in broker or agent relationships acquired (“Agent
Relationships”) based on the present value of estimated future cash flows from such acquired relationships or, using the cost
recovery method, which estimates the ultimate cost to build a comparable distribution network. Agent Relationships was $62.5
million and $68.0 million at December 31, 2019 and 2018, respectively, and are amortized on a straight-line basis over the
estimated useful life of the relationship. Agent Relationships are tested for recoverability using undiscounted projections of
future cash flows and written down to estimated fair value if the carrying value exceeds the sum of such projections of
undiscounted cash flows.
Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities primarily include drafts payable, accrued salaries and commissions, pension benefits,
postretirement medical benefits, lease liability and accrued taxes, licenses and fees.
Recognition of Earned Premiums and Related Expenses
Property and casualty insurance and short duration health insurance premiums are deferred when written and recognized and
earned ratably over the periods to which the premiums relate. Unearned Premiums represent the portion of the premiums
written related to the unexpired portion of policies in force which has been deferred and is reported as a liability. The Company
performs a premium deficiency analysis typically at a product line level, namely automobile insurance, homeowners insurance
and other insurance, which is consistent with the manner in which the Company acquires and services policies and measures
profitability. Anticipated investment income is excluded from such analysis. A premium deficiency is recognized when the sum
of expected claim costs, claim adjustment expenses, unamortized deferred policy acquisition costs and maintenance costs
exceeds the related unearned premiums by first reducing related deferred policy acquisition costs to an amount, but not below
zero, at which the premium deficiency would not exist. If a premium deficiency remains after first reducing deferred policy
acquisition costs, a premium deficiency reserve is established and reported as a liability in the Company’s financial statements.
Traditional life insurance premiums are recognized as revenue when due. Policyholders’ benefits are associated with related
premiums to result in recognition of profits over the periods for which the benefits are provided using the net level premium
method.
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses include provisions for future policy benefits under
life and certain accident and health insurance contracts and provisions for reported claims, estimates for IBNR claims and loss
adjustment expenses. Benefit payments in excess of policy account balances are expensed.
78
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
Reinsurance
In the normal course of business, Kemper’s insurance subsidiaries reinsure certain risks above certain retention levels with
other insurance enterprises. These reinsurance agreements do not relieve Kemper’s insurance subsidiaries of their legal
obligations to the policyholder. Amounts recoverable from reinsurers are included in Other Receivables.
Gains related to long-duration reinsurance contracts are deferred and amortized over the life of the underlying reinsured
policies. Losses related to long-duration reinsurance contracts are recognized immediately. Any gain or loss associated with
reinsurance agreements for which Kemper’s insurance subsidiaries have been legally relieved of their obligations to the
policyholder is recognized in the period of relief.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A valuation allowance, if any, is maintained for the portion of deferred income tax
assets that the Company does not expect to recover. Increases, if any, in the valuation allowance for deferred income tax assets
are recognized as income tax expense. Decreases, if any, in the valuation allowance for deferred income tax assets are generally
recognized as income tax benefit. The effect on deferred income tax assets and liabilities of a change in tax law including a
change in tax rates is recognized in income from continuing operations in the period in which the change is enacted.
The Company reports a liability for unrecognized tax benefits, if any, resulting from uncertain tax positions taken, or expected
to be taken, in an income tax return, if any. The Company recognizes interest and penalties, if any, related to unrecognized tax
benefits in income tax expense.
Discontinued Operations
In 2008, the Company sold its Unitrin Business Insurance operations and retained certain liabilities for unpaid insured losses
that occurred prior to the date of the sale. Changes in the Company’s estimate of such retained liabilities after the sale are
reported in Income from Discontinued Operations.
Change in Accounting and Adoption of New Accounting Standards
Accounting Standards Adopted in 2019
Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards
Update (“ASU”) 2016-02, Leases—(Topic 842). ASU 2016-02 introduced a lessee model that requires the recognition of a
right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than twelve months. The Company adopted
ASU 2016-02 using the modified retrospective method at the beginning of the period of the adoption and elected the permitted
practical expedients to not reassess whether any expired or existing contracts contain leases, the lease classification for any
expired or existing leases and initial direct costs for any existing leases. The adoption of ASU 2016-02 had no impact on the
Company’s Shareholders’ Equity as of January 1, 2019, but resulted in the establishment of a ROU asset of $66.5 million, a
lease liability of $82.5 million and an adjustment to deferred rent liability of $16.0 million. The ROU asset and related
liabilities were included in Other Assets and Accrued Expenses and Other Liabilities, respectively, on the Consolidated Balance
Sheet at December 31, 2019.
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. The impact
of adoption of ASU 2017-12 on the Company’s consolidated financial position was not material.
79
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which made a
number of changes meant to simplify interim disclosures. The new rule required a presentation of changes in stockholders’
equity in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the
current and comparative year-to-date interim periods. In July 2019, the FASB issued ASU 2019-07, “Codification Updates to
SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and
Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates
(SEC Update).” ASU 2019-07 codifies Final Rule Release No. 33-10532 and was effective immediately. The additional
elements of this release did not have a material impact on the Company’s overall Consolidated Financial Statements.
Accounting Standards Not Yet Adopted
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 existing incurred loss impairment model with an expected credit
loss impairment model. The expected credit loss impairment model requires the entity to recognize its estimate of expected
credit losses for affected financial assets using an allowance for credit losses 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. 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
occurred during the period. Credit losses on available-for-sale debt securities are measured in a manner similar to current
GAAP, although ASU 2016-13 requires that they be presented as an allowance rather than as a write-down of the amortized
cost. In situations where the estimate of credit loss on an available-for-sale debt security declines, entities will be able to record
a reversal of the allowance to income in the current period, which was prohibited prior to the adoption of ASU 2016-13. ASU
2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The
impact of the initial adoption of ASU 2016-13 is not expected to be material.
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 January 1, 2022. 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.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 clarifies certain aspects of
accounting for credit losses, hedging activities, and financial instruments, previously addressed by ASU 2016-13, Measurement
of Credit Losses on Financial Instruments, ASU 2017-12, Targeted Improvements to Derivatives and Hedging Activities, and
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The Company adopted ASU
2017-12 in the first quarter of 2019. Accordingly, the amendments in ASU 2019-04 related to clarifications on accounting for
hedging activities are effective for the Company in the first quarter of 2020. The amendments of ASU 2019-04 related to ASU
2016-01 and ASU 2016-13 are effective for annual periods beginning after December 15, 2019, and interim periods within
those annual periods. The impact of the initial adoption of ASU 2019-04 is not expected to be material.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.
ASU 2019-05 provides transition relief for entities adopting the credit loss standard, ASU 2016-13. Specifically ASU 2019-05
amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for
financial instruments that are: (i) within the scope of the credit loss guidance in Accounting Standards Codification (“ASC”)
Topic 326, Financial Instruments—Credit Losses; (ii) were previously recorded at amortized cost; (iii) are eligible for the fair
value option under ASC Topic 825, Financial Instruments; and (iv) are not held to maturity debt. ASU 2019-05 is effective for
annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company does not
intend to elect the fair value option upon adoption of ASU 2016-13 for financial instruments outlined above.
80
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
ASU 2019-12 is intended to simplify accounting for income taxes by eliminating certain exceptions to the guidance in ASC
Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim
period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the
accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in
a step-up in the tax basis of goodwill. Further, ASU 2019-12 clarifies that single-member limited liability companies and
similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income
tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for annual periods
beginning after December 15, 2020 and interim periods within those annual periods. 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 January 1, 2020.
Other than the adoption of ASU 2016-02, Leases—(Topic 842), there were no adoptions of such accounting pronouncements
during the year ended December 31, 2019 that had a material impact on the Company’s Consolidated Financial Statements.
With the exception of 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 December 31, 2019 to have a material impact on the Company’s financial statements and/or disclosures.
NOTE 3. 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 stock 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 stock 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. On December 28, 2018, Kemper repaid $215.0 million of the delayed draw
term loan facility. See Note 8, “Debt,” to the Consolidated Financial Statements for additional information. Infinity is a national
provider of auto insurance focused on serving the specialty automobile market.
In 2019, the Company completed the process of estimating the fair value of assets acquired and liabilities assumed. In
accordance with ASC Topic 805, Business Combinations, changes to the preliminary estimates and allocation as a result of
events or conditions as of the acquisition date, are reported in the Company’s financial statements as an adjustment to the assets
acquired and liabilities assumed. The Company finalized its estimate of certain legal and tax accruals, increasing liabilities
assumed by $1.8 million, increasing current income tax assets by $0.2 million and increasing goodwill by $1.6 million
compared with balances as of December 31, 2018. The Company has allocated all of the goodwill associated with the Infinity
acquisition to the Specialty Property & Casualty Insurance segment. The factors that contributed to the recognition of goodwill
include synergies from economies of scale within the underwriting and claims operations, acquiring a talented workforce and
cost savings opportunities.
81
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 3. ACQUISITION OF BUSINESS (Continued)
Based on the Company’s final allocation of the purchase price, the fair value of the assets acquired and liabilities assumed were:
DOLLARS IN MILLIONS
Investments..................................................................................................................................................................
Short-term Investments at Cost which Approximates Fair Value
Investments..................................................................................................................................................................
Cash .............................................................................................................................................................................
Receivables from Policyholders ..................................................................................................................................
Other Receivables........................................................................................................................................................
Value of Intangible Assets Acquired (Reported in Other Assets)................................................................................
Current Income Tax Assets..........................................................................................................................................
Goodwill1.....................................................................................................................................................................
Other Assets.................................................................................................................................................................
Property and Casualty Insurance Reserves..................................................................................................................
Unearned Premiums ....................................................................................................................................................
Debt .............................................................................................................................................................................
Deferred Income Tax Liabilities..................................................................................................................................
Accrued Expenses and Other Liabilities .....................................................................................................................
Total Purchase Price ....................................................................................................................................................
$ 1,569.3
98.8
4.0
583.4
31.7
262.7
1.0
791.0
102.1
(717.2)
(715.6)
(282.1)
(10.8)
(169.6)
$ 1,548.7
1Non-deductible for tax-purposes.
NOTE 4. INVESTMENTS
Fixed Maturities
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2019 were:
Gross Unrealized
Gains
Losses
$
$
32.5
130.5
1.2
401.8
—
2.1
2.1
570.2
$
$
Fair Value
815.9
1,515.8
16.8
(1.3) $
(1.1)
(1.6)
(7.1)
3,859.7
(0.1)
6.7
(8.5)
618.2
(1.1)
89.0
(20.8) $ 6,922.1
DOLLARS IN MILLIONS
U.S. Government and Government Agencies and Authorities ..........................
States and Political Subdivisions .......................................................................
Foreign Governments.........................................................................................
Corporate Securities:
Bonds and Notes ...........................................................................................
Redeemable Preferred Stocks .......................................................................
Collateralized Loan Obligations ...................................................................
Other Mortgage- and Asset-backed...............................................................
Investments in Fixed Maturities.........................................................................
$
Amortized
Cost
784.7
1,386.4
17.2
3,465.0
6.8
624.6
88.0
$ 6,372.7
82
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS (Continued)
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2018 were:
DOLLARS IN MILLIONS
U.S. Government and Government Agencies and Authorities ..........................
States and Political Subdivisions .......................................................................
Foreign Governments.........................................................................................
Corporate Securities:
Amortized
Cost
865.9
1,553.7
$
6.5
$
Bonds and Notes ...........................................................................................
Collateralized Loan Obligations ...................................................................
Other Mortgage- and Asset-backed...............................................................
Investments in Fixed Maturities.........................................................................
3,307.8
535.7
14.9
$ 6,284.5
$
Gross Unrealized
Gains
Losses
14.8
74.0
—
135.1
1.5
0.9
226.3
$
$
Fair Value
865.7
1,619.1
5.9
(15.0) $
(8.6)
(0.6)
3,393.8
524.0
(49.1)
(13.2)
(0.1)
15.7
(86.6) $ 6,424.2
Other Receivables included $1.0 million and $0.5 million of unsettled sales of Investments in Fixed Maturities at December 31,
2019 and December 31, 2018, respectively.Accrued Expenses and Other Liabilities included unsettled purchases of Investments
in Fixed Maturities of $19.5 million and $10.5 million at December 31, 2019 and 2018, respectively.
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2019 by
contractual maturity were:
DOLLARS IN MILLIONS
Due in One Year or Less............................................................................................................................
Due after One Year to Five Years ..............................................................................................................
Due after Five Years to Ten Years .............................................................................................................
Due after Ten Years ...................................................................................................................................
Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date ............................................
Investments in Fixed Maturities ................................................................................................................
Amortized
Cost
$
82.5
882.3
1,581.7
2,535.3
1,290.9
$ 6,372.7
Fair Value
85.1
$
909.2
1,708.9
2,916.6
1,302.3
$ 6,922.1
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 December 31, 2019 consisted of
securities issued by the Government National Mortgage Association with a fair value of $575.9 million, securities issued by the
Federal National Mortgage Association with a fair value of $7.1 million, securities issued by the Federal Home Loan Mortgage
Corporation with a fair value of $12.2 million and securities of other non-governmental issuers with a fair value of $707.1
million.
83
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS (Continued)
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at December 31, 2019 is presented below.
DOLLARS IN MILLIONS
Fixed Maturities:
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government and Government Agencies and
Authorities ........................................................
States and Political Subdivisions ...........................
Foreign Governments.............................................
Corporate Securities:
$
Bonds and Notes ...............................................
Redeemable Preferred Stocks ...........................
Collateralized Loan Obligations .......................
Other Mortgage- and Asset-backed...................
Total Fixed Maturities.................................................
118.5
63.0
1.0
160.0
5.5
95.5
72.8
516.3
$
(1.3) $
(0.7)
(0.3)
5.1
5.4
3.1
(2.1)
(0.1)
(1.9)
(1.1)
(7.5)
70.7
—
355.6
—
439.9
$
— $
(0.4)
(1.3)
(5.0)
—
(6.6)
—
(13.3)
$
123.6
68.4
4.1
230.7
5.5
451.1
72.8
956.2
(1.3)
(1.1)
(1.6)
(7.1)
(0.1)
(8.5)
(1.1)
(20.8)
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 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 December 31, 2019, were $20.8
million, of which $13.3 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer.
There were $0.3 million of unrealized losses at December 31, 2019 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, 2019 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 $9.1 million and below-
investment-grade fixed maturity investments comprised $11.7 million of the unrealized losses on investments in fixed
maturities at December 31, 2019. 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,
2019, 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 December 31, 2019 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.
84
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS (Continued)
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at December 31, 2018 is presented below.
DOLLARS IN MILLIONS
Fixed Maturities:
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government and Government Agencies and
Authorities.........................................................
States and Political Subdivisions............................
Foreign Governments.............................................
Corporate Securities:
Bonds and Notes................................................
Collateralized Loan Obligations........................
Other Mortgage- and Asset-backed ...................
Total Fixed Maturities .................................................
$
401.1
$
299.4
4.9
1,326.0
439.2
0.2
$ 2,470.8
$
(7.6) $
(5.0)
(0.6)
(38.2)
(13.2)
—
(64.6) $
102.6
—
116.8
—
4.5
302.9
79.0
$
(7.4) $
(3.6)
—
480.1
$
402.0
4.9
1,442.8
439.2
(10.9)
—
(0.1)
4.7
(22.0) $ 2,773.7
$
$
(15.0)
(8.6)
(0.6)
(49.1)
(13.2)
(0.1)
(86.6)
Unrealized losses on fixed maturities, which the Company determined to be temporary at December 31, 2018, were $86.6
million, of which $22.0 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, 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 December 31,
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 $69.5 million and below-investment-
grade fixed maturity investments comprised $17.1 million of the unrealized losses on investments in fixed maturities at
December 31, 2018. For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss
amount, on average, was less than 5% of the amortized cost basis of the investment. At December 31, 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 recovery of its amortized cost basis, which may be at maturity. Based on the Company’s evaluation at
December 31, 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 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 impairments (“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.
DOLLARS IN MILLIONS
Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at
Beginning of Year...............................................................................................................
2019
2018
2017
$
1.1
$
1.6
$
Pre-tax Credit Losses on Fixed Maturities without Pre-tax Credit Losses Included in
Cumulative Balance at Beginning of Year .........................................................................
0.2
—
1.4
1.2
(0.7)
(0.3)
—
(0.1)
(0.5)
—
$
1.2
$
1.1
$
1.6
Reductions for Change in Impairment Status:
From Status of Credit Loss to Status of Intent-to-sell or Required-to-sell .......................
Reductions for Investments Sold During Year.......................................................................
Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at End of
Year.....................................................................................................................................
85
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS (Continued)
Equity Securities
Equity Securities at Fair Value
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 Consolidated Balance Sheets with
changes in fair value recorded as Income from Change in Fair Value of Equity and Convertible Securities in the Consolidated
Statements of Income. Net unrealized losses arising during the year-ended December 31, 2019 and recognized in earnings,
related to such investments still held as of December 31, 2019 were $126.0 million.
Equity Securities at Modified Cost
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 Consolidated Statements 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 recognized a decrease of
$0.5 million in the carrying value due to observable transactions for the year ended December 31, 2019. The Company
recognized an impairment of $0.1 million on Equity Securities at Modified Cost for the year ended December 31, 2019 as a
result of the Company’s qualitative impairment analysis. 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 $5.0
million of cumulative impairments on Equity Securities at Modified Cost held as of December 31, 2019.
Equity Method Limited Liability Investments
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. In 2019 and 2018, aggregate
investment income (losses) from Equity Method Limited Liability Investments exceeded 10% of the Company’s pretax
consolidated net income. Accordingly, the Company is disclosing aggregated summarized financial data for its Equity Method
Limited Liability Investments for all periods presented in the Consolidated Financial Statements. Such aggregated summarized
financial data does not represent the Company’s proportionate share of the Equity Method Limited Liability Investment assets
or earnings. Aggregate total assets of the Equity Method Limited Liability Investments in which the Company invested totaled
$2,368.1 million, $2,805.3 million and $2,393.7 million, as of December 31, 2019, 2018 and 2017, respectively. Aggregate total
liabilities of the Equity Method Limited Liability Investments in which the Company invested totaled $817.2 million, $1,030.7
million and $899.7 million, as of December 31, 2019, 2018 and 2017, respectively. Aggregate net income of the Equity Method
Limited Liability Investments in which the Company invested totaled $78.0 million, $130.4 million and $209.3 million for the
years ended December 31, 2019, 2018 and 2017, respectively. The aggregate summarized financial data is based on the most
recent and sufficiently-timely financial information available to the Company as of the respective reporting dates and periods.
The Company’s maximum exposure to loss at December 31, 2019 is limited to the total carrying value of $220.4 million. In
addition, the Company had outstanding commitments totaling approximately $97.2 million to fund Equity Method Limited
Liability Investments at December 31, 2019.
Other Investments
The carrying values of the Company’s Other Investments at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Loans to Policyholders at Unpaid Principal.............................................................................................. $
Real Estate at Depreciated Cost ................................................................................................................
Mortgage Loans at Amortized Cost ..........................................................................................................
Total........................................................................................................................................................... $
2019
305.6
111.4
27.5
444.5
2018
300.6
114.2
—
414.8
$
$
86
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Goodwill balances by business segment at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Specialty Property & Casualty Insurance..................................................................................................
Preferred Property & Casualty Insurance..................................................................................................
Life & Health Insurance ............................................................................................................................
Total ...........................................................................................................................................................
$
2019
845.0
49.6
219.4
$ 1,114.0
$
2018
843.4
49.6
219.4
$ 1,112.4
The Company tests goodwill for recoverability at the reporting unit level on an annual basis, or whenever events or
circumstances indicate the fair value of a reporting unit may have declined below its carrying value. The Company performed a
qualitative goodwill impairment assessment for all reporting units with goodwill as of October 1, 2019. The qualitative
assessment takes into consideration changes in macroeconomic conditions, industry and market considerations, cost factors,
overall financial performance, changes in management or key personnel, changes in strategy and changes in Kemper’s stock
price since the last quantitative assessment, which was performed on January 1, 2017. Based on its qualitative assessment, the
Company concluded that the associated goodwill was recoverable for each reporting unit tested.
Definite and indefinite life intangible assets at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Definite Life Intangible Assets:
Value of Business Acquired.................................................................................................................
Customer Relationships.......................................................................................................................
Agent Relationships.............................................................................................................................
Trade Names........................................................................................................................................
Internal-Use Software..........................................................................................................................
Total Definite Life Intangible Assets........................................................................................................
Indefinite Life Intangible Assets:
Trade Names........................................................................................................................................
Insurance Licenses...............................................................................................................................
Total Indefinite Life Intangible Assets .....................................................................................................
Total Intangible Assets .............................................................................................................................
2019
2018
$
$
24.1
4.3
62.5
—
189.7
280.6
5.2
42.6
47.8
328.4
$
$
30.2
6.7
68.0
7.0
149.1
261.0
5.2
42.6
47.8
308.8
The Company records intangible assets acquired in business combinations and certain costs incurred developing and
customizing internal-use software within Other Assets on the Consolidated Balance Sheets. Definite life intangible assets are
amortized over the estimated profit emergence period or estimated useful life of the asset. Indefinite life intangible assets are
not amortized, but rather tested annually for impairment. In 2019 and 2018, the Company recognized amortization expense on
definite life intangible assets of $37.8 million and $166.4 million, respectively.
87
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 5. GOODWILL AND INTANGIBLE ASSETS (Continued)
The amount of amortization expense expected to be recorded in the next five years for definite life intangible assets is as
follows:
DOLLARS IN MILLIONS
Definite Life Intangible Assets:
Value of Business Acquired
Customer Relationships
Agent Relationships
Internal-Use Software
Total
$
$
2020
2021
2022
2023
2024
4.0
0.9
5.0
24.1
34.0
$
$
3.1
0.8
5.0
19.1
28.0
$
$
2.7
0.6
5.0
17.9
26.2
$
$
2.5
0.5
5.0
16.5
24.5
$
$
2.4
0.4
5.0
14.0
21.8
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES
The Company’s Property and Casualty Insurance Reserves are reported using the Company’s estimate of its ultimate liability
for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. Such
estimates are based on individual case estimates for reported claims and estimates for IBNR losses, including expected
development on reported claims.
The determination of individual case reserves differs by line of business. For specialty personal automobile insurance and
commercial automobile insurance, case reserves are set primarily using statistical reserves that are based on studies of historical
average paid amounts by state, coverage and product. However, when such reserves exceed certain thresholds they are set
manually by adjusters. For preferred personal automobile insurance, homeowners insurance and other personal insurance, case
reserves are set by adjusters and are based on the adjusters’ estimates of the amount for which the claims will ultimately be
paid.
The Company’s actuaries generally estimate ultimate losses and LAE and, therefore, reserves at least quarterly for most product
lines and/or coverage levels using accident quarters or years spanning 10 or more years, depending on the size of the product
line and/or coverage level or emerging issues relating to them. The Company’s actuaries use a variety of generally accepted
actuarial loss reserving estimation methodologies to estimate the ultimate losses and LAE for the current accident quarter or
year and re-estimate the ultimate losses and LAE for previous accident quarters or years to determine if changes in the previous
estimates of the ultimate losses and LAE are indicated by the most recent data.
The key assumption in these estimation methodologies is that patterns observed in prior periods are indicative of how losses
and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses
and LAE. However, changes in the Company’s business processes, by their very nature, are likely to affect the development
patterns, which generally results in the historical development factors becoming less reliable over time in predicting how losses
and LAE will ultimately develop. The Company’s actuaries use professional judgment in determining how much weight to
place on the development patterns based on the older historical data and how much weight to place on the development patterns
based on more recent data. In some cases, the Company’s actuaries make adjustments to the loss reserving estimation
methodologies to estimate ultimate losses and LAE.
The Company’s actuaries’ quarterly or yearly selections are summed by product and/or coverage levels to create the actuarial
indication of the ultimate losses and LAE. Paid amounts are then subtracted from the ultimates to compute the reserves for
property and casualty insurance losses and LAE. These results are reviewed by the Company’s corporate actuary and corporate
management who apply their collective judgment and determine the appropriate estimated level of reserves to record.
Numerous factors are considered in this determination process, including, but not limited to, the assessed reliability of key loss
trends and assumptions that may be significantly influencing the current actuarial indications, changes in claim handling
practices or other changes that affect the timing of payment or development patterns, changes in the mix of business, the
maturity of the accident year, pertinent trends observed over the recent past, the level of volatility within a particular line of
business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the
amount of reserves related to third party pools for which the Company has limited access to the underlying data and,
accordingly, relies on calculations provided by such pools.
88
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
The Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover
all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and
LAE are fully developed. Changes in the Company’s estimates of these losses and LAE over time, also referred to as
“development,” will occur and may be material.
The following tables contain information about incurred and paid claims development as of and for the year ended
December 31, 2019, net of reinsurance and indemnification, as well as cumulative claim frequency and the total of IBNR
liabilities, including expected development on reported claims included within the net incurred losses and allocated LAE
amounts. The tables are grouped by major product line and, if relevant, coverage. The information about incurred and paid
claims development for the years ended December 31, 2015 through 2018 is presented as supplementary information and is
unaudited.
Specialty Personal Automobile Insurance—Liability1
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
855.1
Accident Year
2015 .............
965.1
2016 .......................................
969.4
2017.................................................................
997.7
2018...........................................................................................
1,128.1
2019.....................................................................................................................
Total.....................................................................................................................
1,021.6
1,027.2
965.1
972.3
999.9
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
2019
$
969.6
$
1,026.0
1,004.5
1,119.1
1,270.7
5,389.9
8.1
22.5
40.6
93.0
383.0
Cumulative
Number of
Reported
Claims
401,025
417,016
396,578
445,229
447,558
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
898.9
794.9
Accident Year
2015 .............
450.5
2016 .......................................
459.7
2017.................................................................
441.9
467.5
2018...........................................................................................
2019.....................................................................................................................
Total.....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
831.1
943.4
934.7
808.6
$
2015, Net of Reinsurance ..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance .....................................
2019
954.0
987.7
926.7
903.8
497.2
4,269.4
20.4
1,140.9
$
$
1 Table retrospectively includes Alliance United and Infinity’s historical incurred and paid accident year claim information for
all periods presented.
89
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Specialty Personal Automobile Insurance—Physical Damage1
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
Accident Year
406.5
406.7
407.1
2015 .............
403.8
456.9
456.9
2016 .......................................
462.2
465.6
475.6
2017.................................................................
2018...........................................................................................
504.9
2019.....................................................................................................................
Total.....................................................................................................................
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
$
0.9
(0.1)
—
(1.6)
47.5
Cumulative
Number of
Reported
Claims
231,007
246,183
251,872
269,782
276,797
$
2019
406.6
457.0
465.1
496.9
574.7
2,400.3
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
406.7
408.8
Accident Year
2015 .............
382.4
2016 .......................................
436.4
2017.................................................................
443.0
2018...........................................................................................
463.6
2019.....................................................................................................................
Total.....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
406.4
458.0
460.2
468.7
$
2015, Net of Reinsurance ..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance .....................................
2019
406.1
457.5
466.0
501.5
525.8
2,356.9
(1.2)
42.2
$
$
1 Table retrospectively includes Alliance United and Infinity’s historical incurred and paid accident year claim information for
all periods presented.
90
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Commercial Automobile Insurance—Liability1
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
Accident Year
112.3
112.9
106.9
2015.............
102.5
115.6
112.4
2016.......................................
120.5
120.0
120.5
2017................................................................
2018..........................................................................................
123.2
2019....................................................................................................................
Total....................................................................................................................
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2019
$
$
110.7
117.7
118.3
116.5
128.4
591.6
0.6
3.5
9.1
19.8
59.2
19,292
20,417
19,925
19,969
17,772
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
88.6
70.2
Accident Year
2015.............
34.8
2016.......................................
36.2
2017 ................................................................
36.3
2018 ..........................................................................................
36.8
2019 ....................................................................................................................
Total....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
100.3
71.6
89.7
72.3
$
2015, Net of Reinsurance..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance ....................................
2019
107.6
102.3
90.7
68.8
32.4
401.8
1.4
191.2
$
$
1 Table retrospectively includes Infinity’s historical incurred and paid accident year claim information for all periods
presented.
91
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Commercial Automobile Insurance—Physical Damage1
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
Accident Year
21.7
21.7
21.6
2015.............
21.5
24.1
24.2
2016.......................................
24.2
23.5
24.2
2017................................................................
2018..........................................................................................
23.6
2019....................................................................................................................
Total....................................................................................................................
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2019
$
$
21.7
24.2
23.5
23.5
26.0
118.9
—
—
0.2
0.3
3.5
9,643
10,560
9,788
9,558
8,803
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
21.7
21.6
Accident Year
2015.............
20.2
2016.......................................
22.4
2017 ................................................................
22.2
2018 ..........................................................................................
21.7
2019 ....................................................................................................................
Total....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
24.2
24.1
21.7
23.5
$
2015, Net of Reinsurance..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance ....................................
2019
21.7
24.2
23.4
23.6
23.0
115.9
—
3.0
$
$
1 Table retrospectively includes Infinity’s historical incurred and paid accident year claim information for all periods
presented.
92
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Preferred Personal Automobile Insurance—Liability
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
Accident Year
177.6
176.5
171.8
2015 .............
168.3
179.1
174.5
2016 .......................................
162.1
157.8
164.4
2017.................................................................
2018...........................................................................................
157.6
2019 ....................................................................................................................
Total ....................................................................................................................
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2019
$
$
177.1
176.8
155.8
156.3
172.2
838.2
0.9
2.1
4.5
15.6
51.3
38,961
36,721
33,663
32,020
32,848
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
122.4
147.5
Accident Year
2015 .............
73.1
2016 .......................................
61.2
2017.................................................................
59.2
2018...........................................................................................
55.5
2019 ....................................................................................................................
Total ....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
108.9
114.6
145.6
163.1
$
2015, Net of Reinsurance ..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance.....................................
2019
169.3
161.1
134.1
107.6
62.7
634.8
9.5
212.9
$
$
93
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Preferred Personal Automobile Insurance—Physical Damage
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
Accident Year
100.6
100.6
100.7
2015 .............
101.2
106.3
106.6
2016 .......................................
106.6
105.8
109.2
2017.................................................................
2018...........................................................................................
113.9
2019 ....................................................................................................................
Total ....................................................................................................................
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2019
$
$
100.6
106.2
105.2
111.0
126.4
549.4
—
(0.1)
(0.1)
(0.5)
(0.9)
68,409
65,348
62,553
60,749
60,548
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
101.0
100.7
Accident Year
2015 .............
100.1
2016 .......................................
105.2
2017.................................................................
104.4
2018...........................................................................................
107.2
2019 ....................................................................................................................
Total ....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
106.3
106.1
106.9
100.6
$
2015, Net of Reinsurance ..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance.....................................
2019
100.6
106.3
105.2
111.4
120.7
544.2
(0.1)
5.1
$
$
94
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Homeowners Insurance
DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS
As of December 31, 2019
Incurred Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
Accident Year
164.3
163.2
164.9
2015 .............
178.9
204.2
201.7
2016 .......................................
200.3
259.5
261.2
2017.................................................................
2018...........................................................................................
185.9
2019 ....................................................................................................................
Total ....................................................................................................................
$
$
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2019
$
$
164.4
202.2
245.2
183.0
162.9
957.7
0.5
1.4
0.9
1.2
19.2
19,731
20,380
20,982
17,122
13,931
Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
For the Years Ended December 31,
2018
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
$
$
$
158.0
154.4
Accident Year
2015 .............
116.9
2016 .......................................
141.2
2017.................................................................
165.8
2018...........................................................................................
127.4
2019 ....................................................................................................................
Total ....................................................................................................................
Outstanding Loss and Allocated LAE Reserves on Accident Years before
195.8
190.1
242.5
161.3
$
$
2015, Net of Reinsurance ..............................................................................
Loss and Allocated LAE Reserves, Net of Reinsurance..................................... $
2019
162.7
198.9
235.7
180.2
111.1
888.6
3.2
72.3
The claim counts in the preceding tables are cumulative reported claim counts as of December 31, 2019 and are equal to the
sum of cumulative open and cumulative closed claims, including claims closed without payment. Certain product lines,
particularly the Company’s specialty personal automobile insurance, tend to have a higher percentage of claims closed without
payment.
The Company's claims associated with automobile insurance are counted at the feature level. As such, each claimant and each
coverage is counted separately. For example, if for one occurrence, the Company's policyholder is at fault for damage to his/her
own vehicle, another party's vehicle and three injured parties, there may be five features—three for bodily injury liability, one
for property damage liability and one for first-party collision coverage. There may also be another feature for first-party
medical payments.
95
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
The following table reconciles the net incurred and paid claims development tables presented above to the Company's liability
for Property and Casualty Insurance Reserves included in the Consolidated Balance Sheet at December 31, 2019.
DOLLARS IN MILLIONS
Property and Casualty Insurance Reserves, Net of Reinsurance:
Specialty Personal Automobile Insurance—Liability..............................................................................................
Specialty Personal Automobile Insurance—Physical Damage................................................................................
Commercial Automobile Insurance—Liability........................................................................................................
Commercial Automobile Insurance—Physical Damage..........................................................................................
Preferred Personal Automobile Insurance—Liability..............................................................................................
Preferred Personal Automobile Insurance—Physical Damage................................................................................
Homeowners Insurance ............................................................................................................................................
Other.........................................................................................................................................................................
Total...............................................................................................................................................................................
Reinsurance Recoverables on Unpaid Losses and Allocated LAE:
2019
1,140.9
42.2
191.2
3.0
212.9
5.1
72.3
57.5
1,725.1
Specialty Personal Automobile Insurance—Liability..............................................................................................
Commercial Automobile Insurance—Liability........................................................................................................
Preferred Personal Automobile Insurance—Liability..............................................................................................
Homeowners Insurance ............................................................................................................................................
Other.........................................................................................................................................................................
Total...............................................................................................................................................................................
Unallocated LAE...........................................................................................................................................................
Property and Casualty Insurance Reserves, Gross of Reinsurance...............................................................................
8.7
9.4
25.2
15.5
6.8
65.6
179.1
$ 1,969.8
The following is supplementary information about average historical claims duration as of December 31, 2019.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited)
Years
Specialty Personal Automobile Insurance—Liability..................................
Specialty Personal Automobile Insurance—Physical Damage....................
Commercial Automobile Insurance—Liability............................................
Commercial Automobile Insurance—Physical Damage .............................
Preferred Personal Automobile Insurance—Liability..................................
Preferred Personal Automobile Insurance—Physical Damage....................
Homeowners Insurance................................................................................
1
2
3
4
5
43.2% 81.1% 92.3% 96.3% 98.4%
93.9% 100.7% 100.1% 100.0% 99.9%
29.9% 61.1% 77.6% 88.8% 97.2%
92.2% 100.0% 99.7% 100.0% 100.0%
37.2% 68.2% 83.9% 91.6% 95.6%
98.0% 100.6% 100.1% 100.0% 100.0%
69.3% 96.3% 96.4% 98.2% 99.0%
96
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Property and Casualty Insurance Reserve activity for the years ended December 31, 2019, 2018 and 2017 was:
DOLLARS IN MILLIONS
Beginning Property and Casualty Insurance Reserves:
Gross of Reinsurance at Beginning of Year ......................................................................
Less Reinsurance Recoverables at Beginning of Year......................................................
Property and Casualty Insurance Reserves, Net of Reinsurance at Beginning of Year.........
Property and Casualty Insurance Reserves Acquired, Net of Reinsurance ...........................
Incurred Losses and LAE related to:
Current Year ......................................................................................................................
Prior Years.........................................................................................................................
Total Incurred Losses and LAE .............................................................................................
Paid Losses and LAE related to:
Current Year: .....................................................................................................................
Prior Years .........................................................................................................................
Total Paid Losses and LAE....................................................................................................
Property and Casualty Insurance Reserves, Net of Reinsurance at End of Year ...................
Plus Reinsurance Recoverables at End of Year .....................................................................
Property and Casualty Insurance Reserves, Gross of Reinsurance at End of Year................
2019
2018
2017
$
$ 1,874.9
101.9
1,773.0
3.6
$ 1,016.8
53.1
963.7
695.1
931.4
50.2
881.2
—
2,879.5
(71.1)
2,808.4
2,093.4
(7.4)
2,086.0
1,454.1
18.9
1,473.0
1,682.1
998.7
2,680.8
1,904.2
65.6
$ 1,969.8
1,300.8
671.0
1,971.8
1,773.0
101.9
$ 1,874.9
868.1
522.4
1,390.5
963.7
53.1
$ 1,016.8
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 Consolidated Statements of Income in
the period of change.
In 2019, the Company decreased its property and casualty insurance reserves by $71.1 million to recognize favorable
development of loss and LAE reserves from prior accident years. Specialty Personal Automobile insurance loss and LAE
reserves developed favorably by $23.8 million due primarily to the emergence of more favorable loss patterns than expected for
both liability and physical damage insurance for the 2018 accident year. Commercial lines insurance loss and LAE reserves
included favorable development of $12.9 million due primarily to the emergence of more favorable loss patterns than expected
for commercial automobile liability insurance for 2018 and 2017 accident years. Preferred Personal Automobile insurance loss
and LAE reserves developed favorably by $8.2 million due primarily to the emergence of more favorable loss patterns than
expected for liability insurance for several prior accident years and for physical damage insurance for 2018 accident year.
Homeowners insurance loss and LAE reserves developed favorably by $19.7 million due primarily to the net reinsurance
impact from the sale of subrogation rights related to the 2017 and 2018 California Wildfires. Other personal lines loss and LAE
reserves developed favorably by $6.5 million due primarily to the emergence of more favorable loss patterns than expected for
prior accident years.
In 2018, the Company decreased its property and casualty insurance reserves by $7.4 million to recognize favorable
development of loss and LAE reserves from prior accident years. Specialty Personal Automobile insurance loss and LAE
reserves developed adversely by $5.5 million due primarily to the emergence of loss patterns that were worse than expected for
both physical damage and liability insurance for the 2017 accident year, partially offset by the emergence of loss patterns that
were better than expected for 2016 and prior accident years. Commercial lines insurance loss and LAE reserves developed
favorably by $6.1 million. Preferred Personal Automobile insurance loss and LAE reserves developed favorably by $5.8 million
due primarily to the emergence of loss patterns that were better than expected for both physical damage and liability insurance
for the 2017 accident year and, to a lesser extent, for liability insurance for the 2015 and prior accident years, partially offset by
the emergence of loss patterns that was worse than expected for the 2016 accident year. Homeowners insurance loss and LAE
reserves developed adversely by $3.2 million due primarily to 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 $4.3 million due
primarily to the emergence of more favorable loss patterns than expected for prior accident years.
97
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
In 2017, the Company increased its property and casualty insurance reserves by $18.9 million to recognize adverse
development of loss and LAE reserves from prior accident years. Specialty Personal automobile insurance loss and LAE
reserves developed adversely by $2.9 million. Commercial lines insurance loss and LAE reserves included favorable
development of $0.6 million. Preferred Personal automobile insurance loss and LAE reserves developed adversely by $19.3
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 and, to a lesser extent, for liability insurance for the 2015 and 2014 accident years,
partially offset by the emergence of more favorable loss patterns than expected for the 2013 and prior accident years.
Homeowners insurance loss and LAE reserves developed adversely by $1.0 million due primarily to the emergence of non-
catastrophe loss patterns that were worse than expected for the 2016 accident year, and to a lesser extent, the 2013 and prior
accident years, partially offset by $3.7 million of favorable development on catastrophes primarily for the 2016 accident year
and, to a lesser extent, the 2015 accident year. Other personal lines loss and LAE reserves developed favorably by $3.7 million
due primarily to the emergence of more favorable loss patterns than expected for the 2015, 2014, 2013 and prior accident years
partially offset by the emergence of loss patterns that were worse than expected for the 2016 accident year.
The Company cannot predict whether loss and LAE reserves will develop favorably or unfavorably from the amounts reported
in the Consolidated Financial Statements. The Company believes that any such development will not have a material effect on
the Company’s consolidated financial position, but could have a material effect on the Company’s consolidated financial results
for a given period.
Reinsurance recoverables on property and casualty insurance reserves were $65.6 million and $101.9 million at December 31,
2019 and 2018, respectively. These recoverables are concentrated with several reinsurers, the vast majority of which are highly
rated by one or more of the principal investor and/or insurance company rating agencies. While most of these recoverables were
unsecured at December 31, 2019 and 2018, the agreements with the reinsurers generally provide for some form of
collateralization upon the occurrence of certain events.
NOTE 7. POLICYHOLDER CONTRACT LIABILITIES
Policyholder Contract Liabilities at December 31, 2019 and 2018 were as follows:
DOLLARS IN MILLIONS
FHLB Funding Agreements......................................................................................................... $
Other ............................................................................................................................................
Total .............................................................................................................................................
$
December 31,
2019
2018
243.4
66.4
309.8
$
$
10.0
66.8
76.8
United Insurance has entered into funding agreements with the FHLB of Chicago in exchange for cash, which it uses for spread
lending purposes. United Insurance received advances of $614.5 million from the FHLB of Chicago and made repayments of
$381.1 million under the spread lending program in 2019. United Insurance received advances of $10.0 million from the FHLB
of Chicago in 2018 under the spread lending program.
When a funding agreement is issued, United Insurance is then required to post collateral in the form of eligible securities
including mortgage-backed, government, and agency debt instruments for each of the advances that are entered. 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. Upon any event of default by
United Insurance, the FHLB’s recovery on the collateral is limited to the amount of United Insurance’s liability under the
funding agreements to the FHLB of Chicago.
98
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 7. POLICYHOLDER CONTRACT LIABILITIES (Continued)
United Insurance’s liability under the funding agreements with the FHLB of Chicago, the amount of collateral pledged under
such agreements and FHLB of Chicago common stock owned by United Insurance at December 31, 2019 and 2018 is presented
below.
DOLLARS IN MILLIONS
Liability under Funding Agreements.........................................................................................................
Fair Value of Collateral Pledged................................................................................................................
FHLB of Chicago Common Stock Owned at Cost ...................................................................................
$
$
$
2019
243.4
287.8
4.9
2018
10.0
15.7
0.8
$
$
$
NOTE 8. 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 included a delayed-draw feature with borrowing capacity
of $250.0 million and a maturity date two years from the borrowing date (see discussion below under heading, “Term Loan Due
2020,” for additional information). On June 4, 2019, the Company utilized the accordion feature under the credit agreement to
increase its credit borrowing capacity by $100.0 million, resulting in the available credit commitments increasing from $300.0
million to $400.0 million. The Company incurred $0.1 million in additional debt issuance costs in connection with the
utilization of the accordion feature which, in addition to the $1.1 million of remaining unamortized costs under the credit
agreement, will be amortized under the remaining term of the credit agreement. There were no outstanding borrowings under
the credit agreement at either December 31, 2019 or December 31, 2018.
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 December 31,
2019 and 2018 was:
DOLLARS IN MILLIONS
Term Loan due June 29, 2020 ...................................................................................................................
Term Loan due July 5, 2023 ......................................................................................................................
5.0% Senior Notes due September 19, 2022 .............................................................................................
4.35% Senior Notes due February 15, 2025..............................................................................................
7.375% Subordinated Debentures due February 27, 2054 ........................................................................
Total Long-term Debt Outstanding............................................................................................................
2019
2018
$
— $
49.9
279.9
448.6
—
778.4
$
34.9
—
281.5
448.4
144.2
$
909.0
Term Loan Due 2020
On June 29, 2018, the Company borrowed $250.0 million under its delayed-draw term loan facility dated June 8, 2018, 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. On December 28, 2018, the Company repaid $215.0 million of the outstanding term loan. On May 31, 2019,
remaining outstanding balance of $35.0 million was repaid.
Term Loan Due 2023
On June 4, 2019, the Company entered into a delayed-draw term loan facility with a borrowing capacity of $50.0 million and a
maturity date four years from the borrowing date (the “2023 Term Loan”). On July 5, 2019, the Company borrowed $49.9
million, net of debt issuance costs, under the 2023 Term Loan, with a final maturity date of July 5, 2023. The agreement
includes a mutual option to extend the maturity date by one year.
99
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 8. DEBT (Continued)
5.0% Senior Notes Due 2022
Infinity’s liabilities at the acquisition date included $275.0 million principal amount, 5.0% Senior Notes due September 19,
2022 (“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%. On November 30, 2018, Kemper executed a guarantee to fully and unconditionally guarantee the
payment and performance obligations of the 2022 Senior Notes.
4.35% Senior Notes Due 2025
Kemper has $450.0 million aggregate principal of 4.35% senior notes due February 15, 2025 (the “2025 Senior Notes”)
outstanding as of December 31, 2019. Kemper initially issued $250.0 million of the notes in February of 2015 and issued an
additional $200.0 million of the notes in June of 2017. The additional notes are fungible with the initial notes issued in 2015,
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.
Redemption of 7.375% Subordinated Debentures Due 2054
On June 7, 2019, Kemper issued a notice of redemption for the entire $150.0 million aggregate principal outstanding of its
7.375% Subordinated Debentures due 2054 (the “7.375% Subordinated Debentures”) at a redemption price equal to 100% of
their principal, plus accrued and unpaid interest on the redemption date. On July 8, 2019, Kemper completed the redemption,
and the 7.375% Subordinated Debentures were repaid in full. The Company recognized a loss on early extinguishment of debt
of $5.8 million in its December 31, 2019 Consolidated Statement of Income.
The Company used the proceeds received from Kemper’s common stock offering on June 7, 2019, as well as a portion of the
proceeds from its July 5, 2019 borrowing under the 2023 Term Loan, to repay the 7.375% Subordinated Debentures. See Note
10, “Shareholders’ Equity,” for additional information regarding the common stock offering.
Interest Expense and Interest Paid
Interest Expense, including facility fees, accretion of discount, amortization of premium and amortization of issuance costs, was
$42.5 million, $43.3 million and $34.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. Interest
paid, including facility fees, was $44.0 million, $37.9 million and $34.7 million for the years ended December 31, 2019, 2018
and 2017, respectively.
NOTE 9. LEASES
The Company leases certain office space under non-cancelable operating leases, with initial terms typically ranging from one to
fifteen years, along with options that permit renewals for additional periods. The Company also leases certain equipment under
non-cancelable operating leases, with initial terms typically ranging from one to five years. Minimum rent is expensed on a
straight-line basis over the term of the lease. See Note 2, “Summary of Accounting Policies and Accounting Changes” under
sub-caption “Adoption of New Accounting of New Accounting Guidance - Guidance Adopted in 2019” for additional
information regarding the accounting for leases.
The following table presents operating lease ROU assets and lease liabilities.
DOLLARS IN MILLIONS
Operating Lease Right-of-Use Assets...............................................................................................................
Operating Lease Liabilities...............................................................................................................................
$
2019
75.6
93.2
100
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 9. LEASES (Continued)
Lease expenses are primarily included in insurance expenses in the Consolidated Statements of Income. Additional information
regarding the Company’s operating leases is presented below.
DOLLARS IN MILLIONS
Lease Cost:
Amortization of Right-of-Use Assets - Finance Leases.................................................................................
Operating Lease Cost.....................................................................................................................................
Short-Term Lease Cost (1).............................................................................................................................
Total Expense.....................................................................................................................................................
Less: Sublease Income (2) .................................................................................................................................
Total Lease Cost................................................................................................................................................. $
$
2019
0.7
20.7
0.1
21.5
0.1
21.4
(1) - Leases with an initial term of twelve months of less are not recorded on the balance sheet.
(2) - Sublease income consists of rent from third parties of office space and is recognized as part of other income in the
Consolidated Statements of Income.
Other Information on Operating Leases
Supplemental cash flow information related to the Company’s operating leases for the year-ended December 31, 2019 is as
follows:
DOLLARS IN MILLIONS
Operating Cash Flows from Operating Leases (Fixed Payments).....................................................................
Operating Cash Flows from Operating Leases (Liability Reduction) ...............................................................
Financing Cash Flows from Finance Leases .....................................................................................................
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities............................................
2019
$
20.0
17.6
0.7
25.9
Significant judgments and assumptions for determining lease asset and liability as December 31, 2019 are presented below.
Weighted-average Remaining Lease Term - Finance Leases........................................................................................
Weighted-average Remaining Lease Term - Operating Leases ....................................................................................
Weighted-average Discount Rate - Finance Leases......................................................................................................
Weighted-average Discount Rate - Operating Leases...................................................................................................
1.7 years
7.0 years
4.0%
3.9%
Most of the Company’s leases do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate
based on the information available at the commencement date in determining the present value of its lease payments.
Future minimum lease payments under finance and operating leases at December 31, 2019 were:
DOLLARS IN MILLIONS
2020........................................................................................................................................................... $
2021...........................................................................................................................................................
2022...........................................................................................................................................................
2023...........................................................................................................................................................
2024...........................................................................................................................................................
2025 and Thereafter ..................................................................................................................................
Total Future Payments............................................................................................................................... $
Less Discount ............................................................................................................................................
Present Value of Minimum Lease Payments.............................................................................................
$
Finance
Leases
Operating
Leases
0.3
0.2
—
—
—
—
0.5
—
0.5
$
$
$
20.5
19.3
17.0
14.7
8.3
28.1
107.9
14.7
93.2
101
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 9. LEASES (Continued)
Future minimum lease payments under finance and operating leases at December 31, 2018 were:
DOLLARS IN MILLIONS
2019...........................................................................................................................................................
2020...........................................................................................................................................................
2021...........................................................................................................................................................
2022...........................................................................................................................................................
2023...........................................................................................................................................................
2024 and Thereafter ..................................................................................................................................
Total Future Payments...............................................................................................................................
Less Imputed Interest ................................................................................................................................
Present Value of Minimum Lease Payments.............................................................................................
$
$
$
Finance
Leases
Operating
Leases
$
$
20.5
18.4
16.9
15.0
12.5
27.1
110.4
0.7
0.7
0.3
0.2
—
—
1.9
—
1.9
The total of minimum rentals to be received in the future under non-cancelable subleases was $0.8 million and $0.0 million at
December 31, 2019 and 2018, respectively.
NOTE 10. SHAREHOLDERS’ EQUITY
Common Stock Issuance
Kemper is authorized to issue 20 million shares of $0.10 par value preferred stock and 100 million shares of $0.10 par value
common stock. No preferred shares were issued or outstanding at December 31, 2019 and 2018. There were 66,665,888 shares
and 64,756,833 shares of common stock outstanding at December 31, 2019 and 2018, respectively.
On June 7, 2019, the Company completed a public offering of its common stock and issued 1,552,500 shares of common stock,
at $83.00 per share. Gross proceeds from the offering were $128.9 million. Transaction costs, including the underwriting
discount, were $1.7 million, of which $0.1 million was accrued for and included in Accrued Expenses and Other Liabilities on
the Company’s Consolidated Balance Sheet at December 31, 2019. In July 2019, the Company used the net proceeds of $127.2
million from the offering, together with a portion of the proceeds from the 2023 Term Loan (see Note 8, “Debt”) to redeem all
$150.0 million in aggregate outstanding principal of its 7.375% Subordinated Debentures due 2054.
In conjunction with the closing of the Infinity acquisition, Kemper issued 13,184,107 shares of common stock on July 2, 2018,
at $74.53 per share. See Note 3, “Acquisition of Business,” to the Consolidated Financial Statements for additional information.
Kemper did not repurchase any of its common stock in open market transactions in 2019, 2018 or 2017.
Employee Stock Purchase Plan
During the second quarter of 2019, the Company’s stockholders approved the adoption of the Kemper Employee Stock
Purchase Plan (“ESPP”) and the reservation of 1,300,000 shares for issuance under the ESPP. The purpose of the ESPP is to
provide eligible employees of the Company and its subsidiaries with the opportunity to purchase shares of common stock at a
discounted price through payroll deductions with the goal of enhancing employees’ sense of participation in the Company and
further align employee interests with those of the Company’s shareholders.
Under the ESPP, eligible employees may purchase shares of Company common stock through payroll deductions of between
1% and 10% of after-tax compensation each pay period, with a maximum participation of $25,000 annually. The shares are
purchased at the end of each three-month offering period at a 15% discount from the closing market price as reported on the
New York Stock Exchange on the last trading day of the offering period. The Company issued 24,080 shares under the plan in
2019 at an average discounted price of $66.08 per share. Compensation costs charged against income were $0.3 million for the
year ended December 31, 2019.
Dividends
Various state insurance laws restrict the amount that an insurance subsidiary may pay in the form of dividends, loans or
advances without the prior approval of regulatory authorities. Also, that portion of an insurance subsidiary’s net equity which
results from differences between statutory insurance accounting practices and GAAP would not be available for cash dividends,
loans or advances. Kemper’s insurance subsidiaries paid dividends of $239.0 million to Kemper in 2019. In 2020, Kemper’s
102
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 10. SHAREHOLDERS’ EQUITY (Continued)
insurance subsidiaries would be able to pay $435.4 million in dividends to Kemper without prior regulatory approval. Kemper’s
insurance subsidiaries had net assets of $3.9 billion, determined in accordance with GAAP, that were restricted from payment to
Kemper without prior regulatory approval at December 31, 2019.
Kemper’s insurance subsidiaries are required to file financial statements prepared on the basis of statutory insurance accounting
practices, a comprehensive basis of accounting other than GAAP. Statutory capital and surplus for the Company’s life and
health insurance subsidiaries was $408.0 million and $454.7 million at December 31, 2019 and 2018, respectively. Statutory net
income for the Company’s life and health insurance subsidiaries was $90.4 million, $143.9 million and $84.1 million for the
years ended December 31, 2019, 2018 and 2017, respectively. Statutory capital and surplus for the Company’s property and
casualty insurance subsidiaries was $1.6 billion and $1.4 billion at December 31, 2019 and 2018, respectively. Statutory net
income for the Company’s property and casualty insurance subsidiaries was $347.6 million, $236.4 million and $56.9 million
for the years ended December 31, 2019, 2018 and 2017, respectively. Statutory capital and surplus and statutory net income
exclude parent company operations.
Kemper’s insurance subsidiaries are also required to hold minimum levels of statutory capital and surplus to satisfy regulatory
requirements. The minimum statutory capital and surplus, or company action level risk-based capital (“RBC”), necessary to
satisfy regulatory requirements for the Company’s life and health insurance subsidiaries collectively was $122.0 million at
December 31, 2019. The minimum statutory capital and surplus necessary to satisfy regulatory requirements for the Company’s
property and casualty insurance subsidiaries collectively was $641.9 million at December 31, 2019. Company action level RBC
is the level at which a company is required to file a corrective action plan with its regulators and is equal to 200% of the
authorized control level RBC.
In 2019, Kemper paid dividends of $67.8 million to its shareholders. Except for certain financial covenants under Kemper’s
credit agreement or during any period in which Kemper elects to defer interest payments, there are no restrictions on Kemper’s
ability to pay dividends to its shareholders. Certain financial covenants, namely minimum net worth and a maximum debt to
total capitalization ratio, under Kemper’s credit agreement could limit the amount of dividends that Kemper may pay to
shareholders at December 31, 2019. Kemper had the ability to pay without restrictions $1.3 billion in dividends to its
shareholders and still be in compliance with all financial covenants under its credit agreement at December 31, 2019.
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION
On May 4, 2011, Kemper’s shareholders approved the 2011 Omnibus Equity Plan (“2011 Omnibus Plan”). The 2011 Omnibus
Plan replaced the Company’s previous employee stock option plans, director stock option plan and restricted stock plan
(collectively, the “Prior Plans”). Awards previously granted under the Prior Plans remain outstanding in accordance with their
original terms, but no new equity-based compensation awards can be granted under the Prior Plans. A maximum number of
10,000,000 shares of Kemper common stock may be issued under the 2011 Omnibus Plan (the “Share Authorization”). As of
December 31, 2019, there were 3,254,822 common shares available for future grants under the 2011 Omnibus Plan, of which
1,082,460 shares were reserved for future grants based on the performance results under the terms of outstanding performance
share units (“PSUs”).
The design of the 2011 Omnibus Plan provides for fungible use of shares to determine the number of shares available for future
grants, with a fungible conversion factor of three to one, such that the Share Authorization will be reduced at two different rates,
depending on the type of award granted. Each share of Kemper common stock issuable upon the exercise of stock options or
stock appreciation rights will reduce the number of shares available for future grant under the Share Authorization by one share,
while each share of Kemper common stock issued pursuant to “full value awards” will reduce the number of shares available
for future grant under the Share Authorization by three shares. “Full value awards” are awards, other than stock options or stock
appreciation rights, that are settled by the issuance of shares of Kemper common stock and include time-based restricted stock
units (collectively “RSUs”), PSUs and deferred stock units (“DSUs”).
Outstanding equity-based compensation awards at December 31, 2019 consisted of tandem stock option and stock appreciation
rights (“Tandem Awards”), RSUs, PSUs and DSUs. RSUs, PSUs and DSUs give the recipient the right to receive one share of
Kemper common stock for each RSU, PSU or DSU issued. Recipients of DSUs receive full dividend equivalents on the same
basis as all other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued.
For grants beginning in November 2017, recipients of RSUs and PSUs receive dividend equivalents on the same basis as all
other outstanding shares of Kemper common stock only if, to the extent, and at the time that they vest and on subsequent
dividend payment dates after they vest until the awards are settled, and do not receive voting rights until such shares are issued.
103
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
For grants prior to November 2017, recipients of RSUs and PSUs receive full dividend equivalents on the same basis as all
other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued. Except as
described below for certain equity-based compensation awards granted to each member of the Board of Directors who is not
employed by the Company (“Non-employee Directors”), all outstanding awards are subject to forfeiture until certain
restrictions have lapsed.
For awards subject to a performance condition, the Company recognizes compensation expense based upon the probable
outcome of the performance condition, which on the grant date reflects an estimate of attaining 100% of the performance units
granted. The estimate is revised if the actual number of PSUs expected to vest is likely to differ from the previous estimate.
Compensation expense for awards is recognized on a straight-line basis over the requisite service period. For equity-based
compensation awards with a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis
over the requisite service period for each separately-vesting portion of the awards as if each award were, in substance, multiple
awards. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of
grant based on the Company’s historical experience and future expectations. Equity-based compensation expense was $25.3
million, $18.6 million and $9.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. Total unamortized
compensation expense related to unvested awards at December 31, 2019 was $20.4 million, which is expected to be recognized
over the next three years ending December 31, 2020, 2021 and 2022.
The Compensation Committee of the Board of Directors, or the Board’s authorized designee, has sole discretion to determine
the persons to whom awards under the 2011 Omnibus Plan are granted, and the material terms of the awards. For Tandem
Awards, material terms include the number of shares covered by such awards and the exercise price, vesting and expiration
dates of such awards. Tandem Awards are non-transferable. The exercise price of Tandem Awards is the fair value of Kemper’s
common stock on the date of grant. Tandem Awards and RSU awards granted to employees generally vest in three equal annual
installments over a period of three years, with the Tandem Awards expiring ten years from the date of grant. Employee PSU
awards generally vest over a period of three years, subject to performance results and other restrictions.
Under the Non-employee Director compensation program in effect for 2019, each non-employee director received an annual
RSU award with an aggregate grant date fair value of $130,000 (“Director RSUs”) at the conclusion of the 2019 annual
shareholder meeting. The Director RSUs vest over a period of one year, enable the award holder to make an election to defer
the conversion to shares of common stock in accordance with applicable deferral rules, and include the right to receive dividend
equivalents on the same basis as all other outstanding shares of Kemper common stock only if, to the extent, and at the time that
they vest and on subsequent dividend payment dates after they vest until the awards are settled. Under the Non-employee
Director compensation program in effect for 2018 and 2017, each non-employee director received an annual DSU award with
an aggregate grant date fair value of $110,000 at the conclusion of each annual shareholder meeting. The DSUs granted to Non-
employee Directors are fully vested on the date of grant and include the right to receive full dividend equivalents on the same
basis as all other outstanding shares of Kemper common stock. Conversion of the DSUs into shares of Kemper’s common stock
is deferred until the date a director’s board service terminates.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each Tandem Award on the date of
grant. The expected terms of Tandem Awards are developed by considering the Company’s historical Tandem Award exercise
experience, demographic profiles, historical share retention practices of employees and assumptions about their propensity for
early exercise in the future. Expected volatility is estimated using weekly historical volatility. The Company believes that
historical volatility is currently the best estimate of expected volatility. The dividend yield in 2019, 2018 and 2017 was
calculated by taking the natural logarithm of the annualized yield divided by the Kemper common stock price on the date of
grant. The risk-free interest rate was the yield on the grant date of U.S. Treasury zero coupon issues with a maturity comparable
to the expected term of the option.
104
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
The assumptions used in the Black-Scholes pricing model for Tandem Awards granted during the years ended December 31,
2019, 2018 and 2017 are presented below.
2019
2018
2017
RANGE OF VALUATION ASSUMPTIONS
Expected Volatility .....................................................
Risk-free Interest Rate................................................
Expected Dividend Yield............................................
WEIGHTED-AVERAGE EXPECTED LIFE IN YEARS
Employee Grants ........................................................
28.97% -
-
1.35
-
1.05
33.78% 27.31% -
2.60
-
1.38
-
2.44
1.16
32.15% 26.17% -
-
3.00
-
1.72
1.59
1.39
30.39%
2.25
2.43
4 - 6
4 - 6
4 - 6.5
Tandem Award activity for the year ended December 31, 2019 is presented below.
Outstanding at Beginning of the Year........................................
Granted.......................................................................................
Exercised....................................................................................
Forfeited or Expired...................................................................
Outstanding at December 31, 2019............................................
Vested and Expected to Vest at December 31, 2019..................
Exercisable at December 31, 2019.............................................
Shares
Subject to
Awards
1,434,273
578,375
(159,630)
(44,203)
1,808,815
Weighted-
average
Exercise Price
Per Share ($)
46.48
$
76.96
36.92
68.43
56.53
1,718,559
803,769
$
$
56.03
42.15
Weighted-
average
Remaining
Contractual
Life (in Years)
Aggregate
Intrinsic
Value
($ In Millions)
7.65
7.61
6.50
$
$
$
38.3
37.2
28.4
The weighted-average grant-date fair values of Tandem Awards granted during 2019, 2018 and 2017 were $20.99, $15.14 and
$8.89, respectively. Total intrinsic value of Tandem Awards exercised was $7.7 million, $3.9 million and $4.9 million for the
years ended December 31, 2019, 2018 and 2017, respectively. Cash received from exercises of Tandem Awards was $2.4
million, $0.9 million and $4.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Total tax benefit
realized for tax deductions from exercises of Tandem Awards was $1.6 million, $0.8 million and $1.7 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
Information pertaining to Tandem Awards outstanding at December 31, 2019 is presented below.
$
Range of Exercise Prices ($)
-
-
-
-
-
-
-
-
20.01
30.01
40.01
50.01
60.01
70.01
80.01
20.01
30.00
40.00
50.00
60.00
70.00
80.00
90.00
90.00
Outstanding
Weighted-
average
Exercise Price
Per Share ($)
27.77
$
34.83
42.56
59.90
67.04
76.27
85.44
56.53
Weighted-
average
Remaining
Contractual
Life (in Years)
5.63
5.36
6.79
8.07
8.14
9.09
9.30
7.65
Shares
Subject to
Awards
150,627
173,895
401,385
461,459
57,395
518,820
45,234
1,808,815
Exercisable
Shares
Subject to
Awards
150,627
165,086
313,459
147,944
22,289
3,435
929
803,769
Weighted-
average
Exercise Price
Per Share ($)
27.77
$
34.58
42.41
59.89
66.85
77.76
82.10
42.15
The grant-date fair values of RSUs are determined using the closing price of Kemper common stock on the date of grant.
105
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
Activity related to nonvested RSUs for the year ended December 31, 2019 is presented below.
Nonvested Balance at Beginning of the Year........................................................................................
Granted ..................................................................................................................................................
Vested ....................................................................................................................................................
Forfeited ................................................................................................................................................
Nonvested Balance at December 31, 2019............................................................................................
Time-based Restricted Stock
Unit Awards
Number of
Restricted
Stock Units
316,241
23,383
(135,909)
(21,527)
182,188
Weighted-
average
Grant-date
Fair Value
Per Unit
$
$
65.36
82.56
61.59
69.48
71.12
The initial number of PSUs awarded to each participant represents the number of Kemper common shares that would vest and
be issued if the performance level attained were to be at the “target” performance level. For performance above the target level,
each participant would receive a grant of additional shares of stock up to a maximum of 100% of the initial number of PSUs
awarded to the participant. The final payout of these awards, and any forfeitures of PSUs for performance below the “target”
performance level, will be determined based on the Company’s performance. If, at the end of the applicable performance
period, the Company’s performance:
•
•
•
exceeds the “target” performance level, all of the PSUs will vest and additional shares of stock will be issued to the
award recipient;
is below the “target” performance level, but at or above a “minimum” performance level, only a portion of the PSUs
originally issued to the award recipient will vest; or
is below a “minimum” performance level, none of the PSUs originally issued to the award recipient will vest.
Activity related to nonvested PSU awards for the year ended December 31, 2019 is presented below.
Nonvested Balance at Beginning of the Year........................................................................................
Granted ..................................................................................................................................................
Vested ....................................................................................................................................................
Forfeited ................................................................................................................................................
Nonvested Balance at December 31, 2019............................................................................................
PSU Awards
Weighted-
average
Grant-date
Fair Value
Per PSU
$
$
47.14
61.22
29.20
65.55
66.42
Number of
PSUs
327,300
254,535
(204,542)
(16,473)
360,820
The number of additional shares that would be granted if the Company were to meet or exceed the maximum performance
levels related to the outstanding PSU awards for the 2019, 2018 and 2017 three-year performance periods was 146,134
common shares, 137,343 common shares and 77,343 common shares, respectively, (as “full value awards,” the equivalent of
438,402 shares, 412,029 shares, and 232,029 shares, respectively, under the Share Authorization) at December 31, 2019.
The grant date fair values of the PSU awards with a market performance condition are determined using the Monte Carlo
simulation method. The Monte Carlo simulation model produces a risk-neutral simulation of the daily returns on the common
stock of Kemper and each of the other companies included in the peer group. Returns generated by the simulation depend on
the risk-free interest rate used and the volatilities of, and the correlation between, these stocks. The model simulates stock prices
and dividend payouts to the end of the three-year performance period. Total shareholder returns are generated for each of these
stocks based on the simulated prices and dividend payouts. The total shareholder returns are then ranked, and Kemper’s
simulated ranking is converted to a payout percentage based on the terms of the PSU awards. The payout percentage is applied
to the simulated stock price at the end of the performance period, reinvested dividends are added back, and the total is
106
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 11. LONG-TERM EQUITY-BASED COMPENSATION (Continued)
discounted to the valuation date at the risk-free rate. This process is repeated approximately ten thousand times, and the grant
date fair value is equal to the average of the results from these trials.
Fifty percent of the PSU awards granted to employees and officers in 2019, 2018 and 2017 are measured using a market
performance condition. Fair value for these awards was estimated using the Monte Carlo simulation method described above.
Final payout for these awards, and any forfeitures of units for performance below the “target” performance level, will be based
on Kemper’s total shareholder return, relative to a peer group comprised of all the companies in the S&P Supercomposite
Insurance Index, over a three-year performance period. The three-year performance periods for the 2019, 2018 and 2017 awards
end on January 31, 2022, January 31, 2021 and January 31, 2020, respectively. Compensation cost for these awards is
recognized ratably over the requisite service period. In the event that the market performance condition is not satisfied,
previously recognized compensation cost would not reverse, but it would reverse if the requisite service period is not met.
Fifty percent of the PSU awards granted to employees and officers in 2019, 2018 and 2017 are measured solely using a
Company-specific metric. Final payout for these awards, and any forfeitures of shares for performance below the “target”
performance level, will be determined based on Kemper’s adjusted return on equity over a three-year performance period. The
three-year performance periods for the 2019, 2018 and 2017 awards end on December 31, 2021, December 31, 2020 and
December 31, 2019, respectively. Fair value for these awards was determined using the closing price of Kemper common stock
on the date of grant. Accruals of compensation cost for these awards are estimated based on the probable outcome of the
performance condition.
The total fair value of RSUs and PSUs that vested during the year ended December 31, 2019 was $24.8 million. The tax
benefits for tax deductions realized from such awards was $5.2 million. The total fair value of RSUs and PSUs that vested
during the year ended December 31, 2018 was $8.7 million. The tax benefits for tax deductions realized from such awards was
$1.8 million. The total fair value of RSUs and PSUs that vested during the year ended December 31, 2017 was $3.2 million.
The tax benefits for tax deductions realized from such awards was $1.1 million.
The grant-date fair values of DSU awards granted to Non-employee Directors are determined using the closing price of Kemper
common stock on the date of grant. The total fair value of DSUs that vested during the years ended December 31, 2018 and
2017 was $1.0 million and $0.9 million, respectively.
Activity related to DSU awards for the year ended December 31, 2019 is presented below.
Vested Balance at Beginning of the Year.............................................................................................
Reduction for Shares Issued on Conversion ........................................................................................
Vested Balance at December 31, 2019.................................................................................................
Weighted-
average
Grant-date
Fair Value
Per DSU
$
$
44.89
45.44
44.74
Number of
DSUs
57,340
(12,520)
44,820
107
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 12. INCOME FROM CONTINUING OPERATIONS PER UNRESTRICTED SHARE
The Company’s awards of deferred stock units contain rights to receive non-forfeitable dividend equivalents and participate in
the undistributed earnings with common shareholders, as did the Company’s awards of restricted stock units and performance
share units prior to 2018. 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 years ended
December 31, 2019, 2018 and 2017 is presented below.
2019
2018
2017
DOLLARS IN MILLIONS
Income from Continuing Operations .....................................................................................
Less Income from Continuing Operations Attributed to Participating Awards .....................
Income from Continuing Operations Attributed to Unrestricted Shares ...............................
Dilutive Effect on Income of Equity-based Compensation Equivalent Shares .....................
Diluted Income from Continuing Operations Attributed to Unrestricted Shares ..................
$
531.1
$
1.7
529.4
—
529.4
$
$
188.4
1.0
187.4
—
119.9
0.8
119.1
—
$
187.4
$
119.1
SHARES IN THOUSANDS
Weighted-average Unrestricted Shares Outstanding..............................................................
Equity-based Compensation Equivalent Shares ....................................................................
Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming
Dilution...............................................................................................................................
65,880.9
58,149.4
51,345.6
667.2
602.5
232.3
66,548.1
58,751.9
51,577.9
PER UNRESTRICTED SHARE IN WHOLE DOLLARS
Basic Income from Continuing Operations Per Unrestricted Share ......................................
Diluted Income from Continuing Operations Per Unrestricted Share ...................................
$
$
8.04
7.96
$
$
3.22
3.19
$
$
2.32
2.31
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
years ended December 31, 2019, 2018 and 2017, because the effect of inclusion would be anti-dilutive, is presented below.
SHARES IN THOUSANDS
Equity-based Compensation Equivalent Shares ....................................................................
Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming
Dilution...............................................................................................................................
2019
556.4
2018
231.3
2017
346.6
556.4
231.3
346.6
108
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE
INCOME
The components of Other Comprehensive Income (Loss) Before Income Taxes for the years ended December 31, 2019, 2018
and 2017 were:
2019
2018
2017
$
433.4
(28.1)
405.3
$ (214.2) $
(21.9)
(236.1)
119.1
(35.3)
83.8
—
—
—
(4.8)
(3.0)
(3.0)
(7.8)
—
0.4
0.4
—
0.3
0.3
(8.0)
1.1
1.1
(6.9)
0.9
0.3
1.2
$
397.9
$ (241.5) $
1.7
—
1.7
3.9
(0.6)
(0.6)
3.3
(8.0)
1.3
(6.7)
82.1
DOLLARS IN MILLIONS
Other Comprehensive Income (Loss) Before Income Taxes:
Unrealized Holding Gains (Losses) Arising During the Year Before Reclassification
Adjustment ....................................................................................................................
Reclassification Adjustment for Amounts Included in Net Income .................................
Unrealized Holding Gains (Losses)..................................................................................
Foreign Currency Translation Adjustments Arising During the Year Before
Reclassification Adjustment..........................................................................................
Reclassification Adjustment for Amounts Included in Net Income .................................
Foreign Currency Translation Adjustments......................................................................
Net Unrecognized Postretirement Benefit Costs Arising During the Year.......................
Reclassification Adjustments for Amounts Included in Net Income:
Amortization of Net Unrecognized Postretirement Benefit Costs...............................
Total Reclassification Adjustments for Amounts Included in Net Income.......................
Net Unrecognized Postretirement Benefit Costs ..............................................................
Gains (Losses) on Cash Flow Hedges During the Year Before Reclassification
Adjustment ....................................................................................................................
Reclassification Adjustment for Amounts Included in Net Income .................................
Gains (Losses) on Cash Flow Hedges ..............................................................................
Other Comprehensive Income (Loss) Before Income Taxes.................................................
109
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (Continued)
The components of Other Comprehensive Income Tax Benefit (Expense) for the years ended December 31, 2019, 2018 and
2017 were:
DOLLARS IN MILLIONS
Income Tax Benefit (Expense):
Unrealized Holding Gains (Losses) Arising During the Year Before Reclassification
Adjustment ....................................................................................................................
Reclassification Adjustment for Amounts Included in Net Income..................................
Unrealized Holding Gains (Losses) ..................................................................................
Foreign Currency Translation Adjustments Arising During the Year Before
Reclassification Adjustment ..........................................................................................
Reclassification Adjustment for Amounts Included in Net Income..................................
Foreign Currency Translation Adjustment........................................................................
Net Unrecognized Postretirement Benefit Costs Arising During the Year .......................
Reclassification Adjustments for Amounts Included in Net Income:
Amortization of Net Unrecognized Postretirement Benefit Costs ...............................
Total Reclassification Adjustments for Amounts Included in Net Income.......................
Net Unrecognized Postretirement Benefit Costs ..............................................................
Gains (Losses) on Cash Flow Hedges During the Year Before Reclassification
Adjustment ....................................................................................................................
Reclassification Adjustment for Amounts Included in Net Income..................................
Gains (Losses) on Cash Flow Hedges...............................................................................
Other Comprehensive Income Tax Benefit (Expense) ..........................................................
The components of AOCI at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Net Unrealized Gains on Investments, Net of Income Taxes:
2019
2018
2017
$
(91.0) $
5.8
(85.2)
—
—
—
1.0
0.7
0.7
1.7
—
(0.1)
(0.1)
(83.6) $
$
45.0
4.6
49.6
—
(0.1)
(0.1)
1.7
(0.2)
(0.2)
1.5
(0.2)
(0.1)
(0.3)
50.7
$
(38.2)
12.3
(25.9)
(0.6)
—
(0.6)
(0.8)
0.2
0.2
(0.6)
2.8
(0.4)
2.4
(24.7)
$
2019
2018
Other Net Unrealized Gains on Investments........................................................................................
Net Unrecognized Postretirement Benefit Costs, Net of Income Taxes ...................................................
Losses on Cash Flow Hedges, Net of Income Taxes ................................................................................
Accumulated Other Comprehensive Income ............................................................................................ $
$
439.4
(100.6)
(2.7)
336.1
$
$
119.3
(94.5)
(3.0)
21.8
110
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (Continued)
Components of AOCI were reclassified to the following lines of the Consolidated Statements of Income for the years ended
December 31, 2019, 2018 and 2017:
DOLLARS IN MILLIONS
Reclassification of AOCI from Net Unrealized Gains and Losses on Investments to:
2019
2018
2017
Net Realized Gains on Sales of Investments................................................................
Net Impairment Losses Recognized in Earnings .........................................................
Total Before Income Taxes...........................................................................................
Income Tax Expense ....................................................................................................
Reclassification from AOCI, Net of Income Taxes......................................................
$
$
41.9
(13.8)
28.1
(5.8)
22.3
Reclassification of AOCI from Unrecognized Postretirement Benefit Costs to:
Interest and Other Expenses (Income) .........................................................................
Income Tax Benefit (Expense).....................................................................................
Reclassification from AOCI, Net of Income Taxes......................................................
Reclassification of AOCI from Loss on Cash Flow Hedges to:
Interest and Other Expenses.........................................................................................
Income Tax Benefit ......................................................................................................
Reclassification from AOCI, Net of Income Taxes......................................................
Total Reclassification from AOCI to Net Income..................................................................
$
3.0
(0.7)
2.3
(0.4)
0.1
(0.3)
24.3
$
26.4
(4.5)
21.9
(4.6)
17.3
(1.1)
0.2
(0.9)
(0.3)
0.1
(0.2)
16.2
$
$
49.6
(14.3)
35.3
(12.3)
23.0
0.6
(0.2)
0.4
(1.3)
0.4
(0.9)
22.5
NOTE 14. INCOME FROM INVESTMENTS
Net Investment Income for the years ended December 31, 2019, 2018 and 2017 was:
DOLLARS IN MILLIONS
Investment Income:
Interest on Fixed Income Securities ...............................................................................
Dividends on Equity Securities Excluding Alternative Investments .............................
Alternative Investments:
Equity Method Limited Liability Investments ..........................................................
Fair Value Option Investments ..................................................................................
Limited Liability Investments Included in Equity Securities....................................
Total Alternative Investments.........................................................................................
Short-term Investments ..................................................................................................
Loans to Policyholders ...................................................................................................
Real Estate......................................................................................................................
Other...............................................................................................................................
Total Investment Income .......................................................................................................
Investment Expenses:
Real Estate......................................................................................................................
Other Investment Expenses ............................................................................................
Total Investment Expenses ....................................................................................................
Net Investment Income.......................................................................................................... $
111
2019
2018
2017
$
$
299.4
22.9
$
268.9
13.6
246.6
9.3
1.0
—
18.0
19.0
8.2
22.6
9.8
1.5
383.4
9.6
9.5
19.1
364.3
$
11.0
—
26.4
37.4
7.0
22.5
9.6
0.9
359.9
9.7
9.3
19.0
340.9
$
24.8
1.3
28.6
54.7
1.6
21.6
10.7
0.5
345.0
10.5
7.3
17.8
327.2
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 14. INCOME FROM INVESTMENTS (Continued)
Other Receivables includes accrued investment income of $78.7 million and $77.9 million at December 31, 2019 and 2018,
respectively.
The components of Net Realized Gains on Sales of Investments for the years ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Fixed Maturities:
2019
2018
2017
Gains on Sales...................................................................................................................
Losses on Sales .................................................................................................................
$
$
41.1
(4.8)
$
25.3
(11.1)
8.4
(0.9)
Equity Securities:
Gains on Sales...................................................................................................................
Losses on Sales .................................................................................................................
5.8
(0.2)
12.3
—
42.0
—
Real Estate:
Gains on Sales...................................................................................................................
—
—
6.4
Other Investments:
Gains on Other Sales ........................................................................................................
Losses on Sales .................................................................................................................
Net Gains on Trading Securities .......................................................................................
Net Realized Gains on Sales of Investments.........................................................................
Gross Gains on Sales .............................................................................................................
Gross Losses on Sales ...........................................................................................................
Net Gains on Trading Securities............................................................................................
Net Realized Gains on Sales of Investments.........................................................................
—
—
—
41.9
46.9
(5.0)
—
41.9
$
$
$
—
(0.1)
—
26.4
37.6
(11.2)
—
26.4
$
$
$
0.1
(0.1)
0.6
56.5
56.9
(1.0)
0.6
56.5
$
$
$
The components of Net Impairment Losses Recognized in Earnings reported in the Consolidated Statements of Income for the
years ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Fixed Maturities.....................................................................................................................
Equity Securities....................................................................................................................
Net Impairment Losses Recognized in Earnings...................................................................
NOTE 15. INSURANCE EXPENSES
Insurance Expenses for the years ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Commissions .........................................................................................................................
General Expenses ..................................................................................................................
Premium Tax Expense...........................................................................................................
Total Costs Incurred ..............................................................................................................
Policy Acquisition Costs:
$
$
$
Deferred ............................................................................................................................
Amortized .........................................................................................................................
Net Policy Acquisition Costs Amortized...............................................................................
Amortization of VOBA .........................................................................................................
Insurance Expenses ...............................................................................................................
(475.2)
408.3
(66.9)
6.3
$ 1,019.7
Commissions for servicing policies are expensed as incurred, rather than deferred and amortized.
112
2019
2018
2017
(13.3) $
(0.5)
(13.8) $
(2.0) $
(2.5)
(4.5) $
(12.1)
(2.2)
(14.3)
2019
708.8
278.0
93.5
1,080.3
2018
558.7
231.9
71.0
861.6
(481.5)
377.1
(104.4)
143.3
900.5
$
$
2017
425.6
196.2
50.7
672.5
(351.6)
318.3
(33.3)
5.1
644.3
$
$
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 16. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions of the Company’s Net Deferred Income Tax Assets
and Deferred Income Tax Liabilities at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Deferred Income Tax Assets:
2019
2018
Insurance Reserves ...............................................................................................................................
Unearned Premium Reserves ...............................................................................................................
Tax Capitalization of Policy Acquisition Costs....................................................................................
Payroll and Employee Benefit Accruals...............................................................................................
Net Operating Loss Carryforwards ......................................................................................................
Other.....................................................................................................................................................
Total Deferred Income Tax Assets ............................................................................................................
Deferred Income Tax Liabilities:
Investments...........................................................................................................................................
Deferred Policy Acquisition Costs .......................................................................................................
Life VIF and P&C Customer Relationships.........................................................................................
Goodwill and Other Intangible Assets Acquired..................................................................................
Depreciable Assets ...............................................................................................................................
Other.....................................................................................................................................................
Total Deferred Income Tax Liabilities ......................................................................................................
Net Deferred Income Tax Liabilities.........................................................................................................
$
$
16.2
64.5
44.6
35.0
3.3
12.5
176.1
155.6
112.9
5.3
39.3
37.6
3.6
354.3
178.2
$
$
17.0
59.1
44.0
49.6
5.5
11.2
186.4
33.2
98.7
6.0
45.2
27.1
2.4
212.6
26.2
The expiration of federal net operating loss (“NOL”) carryforwards and their related deferred income tax assets at
December 31, 2019 is presented below by year of expiration.
DOLLARS IN MILLIONS
Expiring in:
NOL
Carry-
forwards
Deferred
Tax Asset
2027 ......................................................................................................................................................
2028 ......................................................................................................................................................
Total All Years ...........................................................................................................................................
$
11.2
4.4
15.6
$
2.4
0.9
3.3
The NOL carryforwards were acquired in connection with business acquisitions made in prior years and are subject to annual
usage limitations under the Internal Revenue Code. The Company expects to fully utilize these federal NOL carryforwards.
A reconciliation of the beginning and ending amount of Unrecognized Tax Benefits for the years ended December 31, 2019,
2018 and 2017 is presented below.
DOLLARS IN MILLIONS
Liabilities for Unrecognized Tax Benefits at Beginning of Year .......................................... $
Additions for Tax Positions of Current Year .........................................................................
Reductions for Tax Positions of Prior Years..........................................................................
Reduction for Expiration of Federal Statute of Limitations..................................................
Liabilities for Unrecognized Tax Benefits at End of Year..................................................... $
2019
2018
2017
$
4.4
—
(4.4)
—
— $
8.1
0.7
(4.4)
—
4.4
$
$
5.1
3.1
—
(0.1)
8.1
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 2011. As a result of the Company filing amended federal income tax returns resulting from an
election to update interest rates used to compute the tax basis of reserves on life insurance contracts issued prior to 2018, tax
years 2012 and 2013 are under limited examination with respect to carryback adjustments associated with the amended returns.
The statute of limitations related to tax years 2014 and 2015 has been extended to June 30, 2020.
113
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 16. INCOME TAXES (Continued)
The expiration of the statute of limitations related to the various state income tax returns that Kemper and its subsidiaries file
varies by state.
There were no Unrecognized Tax Benefits at December 31, 2019. Unrecognized Tax Benefits at December 31, 2018 and 2017
include $3.7 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. The liability
for Unrecognized Tax Benefits included accrued interest of $0.7 million and $0.5 million at December 31, 2018 and 2017,
respectively. Net interest related to unrecognized tax benefits for the years ended December 31, 2018 and 2017 were
insignificant.
The components of Income Tax Expense from Continuing Operations for the years ended December 31, 2019, 2018 and 2017
were:
DOLLARS IN MILLIONS
Current Income Tax Benefit (Expense)................................................................................. $
Deferred Income Tax Expense ..............................................................................................
(Increase) Decrease Unrecognized Tax Benefits...................................................................
Income Tax Expense..............................................................................................................
(66.4) $
(68.5)
4.4
$ (130.5) $
$
32.2
(46.5)
3.6
(10.7) $
(23.1)
(15.1)
(3.0)
(41.2)
2019
2018
2017
Income taxes paid, net of income tax refunds received, were $68.1 million, $0.2 million, and $13.0 million in 2019, 2018, and
2017, respectively.
A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Company’s Effective Income Tax Expense and
Rate from Continuing Operations for the years ended December 31, 2019, 2018 and 2017 is presented below.
2019
2018
2017
DOLLARS IN MILLIONS
Statutory Federal Income Tax Expense ...................... $ (138.9)
Tax-exempt Income and Dividends Received
Amount
Deduction ................................................................
Stock-Based Compensation ........................................
Nondeductible Executive Compensation....................
Tax Reform .................................................................
Other, Net
Effective Income Tax Benefit (Expense) from
Continuing Operations ............................................
Rate
21.0% $
Amount
(41.8)
Rate
21.0% $
Amount
(56.4)
Rate
35.0%
(0.7)
(0.7)
0.4
—
(0.3)
4.8
1.4
(1.4)
26.4
(0.1)
(2.4)
(0.7)
0.7
(13.3)
0.1
9.8
0.4
—
7.4
(2.4)
(6.0)
(0.2)
—
(4.6)
1.4
4.3
4.4
(2.5)
—
2.2
$ (130.5)
19.7% $
(10.7)
5.4% $
(41.2)
25.6%
Comprehensive Income Tax (Expense) Benefit included in the Consolidated Financial Statements for the years ended
December 31, 2019, 2018 and 2017 was:
DOLLARS IN MILLIONS
Income Tax Benefit (Expense):
2019
2018
2017
Continuing Operations......................................................................................................
Discontinued Operations ..................................................................................................
Unrealized Depreciation (Appreciation) on Securities..........................................................
Foreign Currency Translation Adjustments on Investments .................................................
Tax Effects from Postretirement Benefit Plans .....................................................................
Tax Effects from Cash Flow Hedge ......................................................................................
Comprehensive Income Tax (Expense) Benefit .................................................................... $ (214.1) $
—
(85.2)
—
1.7
(0.1)
$ (130.5) $
(10.7) $
(0.6)
49.6
(0.1)
1.5
(0.3)
39.4
$
(41.2)
(0.5)
(25.9)
(0.6)
(0.6)
2.4
(66.4)
114
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 17. PENSION BENEFITS
Kemper sponsors a qualified defined benefit pension plan (the “Pension Plan”). The Pension Plan covers approximately 8,650
participants and beneficiaries, of which 1,250 are active employees. Effective January 1, 2006 the Pension Plan was closed to
new hires, and effective June 30, 2016, benefit accruals were frozen for substantially all of the participants under the Pension
Plan. The Pension Plan is generally non-contributory, but participation requires or required some employees to contribute 3% of
pay, as defined, per year. Benefits for participants who are or were required to contribute to the Pension Plan are based on
compensation during plan participation and the number of years of participation. Benefits for the vast majority of participants
who are not required to contribute to the Pension Plan are based on years of service and final average pay, as defined. The
Company funds the Pension Plan in accordance with the requirements of ERISA.
Changes in Fair Value of Plan Assets and Changes in Projected Benefit Obligation for the Pension Plan for the years ended
December 31, 2019 and 2018 is presented below.
DOLLARS IN MILLIONS
Fair Value of Plan Assets at Beginning of Year ........................................................................................
Actual Return on Plan Assets....................................................................................................................
Employer Contributions ............................................................................................................................
Benefits Paid .............................................................................................................................................
Fair Value of Plan Assets at End of Year...................................................................................................
Projected Benefit Obligation at Beginning of Year...................................................................................
Interest Cost ..............................................................................................................................................
Benefits Paid .............................................................................................................................................
Actuarial (Gains) Losses ...........................................................................................................................
Projected Benefit Obligation at End of Year.............................................................................................
Funded Status—Plan Assets in Excess (Deficit) of Projected Benefit Obligation ...................................
2019
525.3
113.2
55.3
(29.2)
664.6
580.5
22.3
(29.2)
86.9
660.5
4.1
$
$
2018
579.8
(32.1)
5.1
(27.5)
525.3
637.2
20.3
(27.5)
(49.5)
580.5
(55.2)
$
$
Unamortized Amount Reported in AOCI at End of Year..........................................................................
$ (145.7) $ (144.4)
Accumulated Benefit Obligation at End of Year.......................................................................................
$
660.4
$
580.3
The measurement dates of the assets and liabilities at end of year presented in the preceding table under the headings, “2019”
and “2018” were December 31, 2019 and December 31, 2018, respectively.
The weighted-average discount rate and rate of increase in future compensation levels used to estimate the components of the
Projected Benefit Obligation for the Pension Plan at December 31, 2019 and 2018 were:
Discount Rate ............................................................................................................................................
Rate of Increase in Future Compensation Levels .....................................................................................
2019
3.21%
3.40
2018
4.28%
3.40
Asset allocations for the Pension Plan at December 31, 2019 and 2018 by asset category were:
ASSET CATEGORY
Cash and Short-term Investments .............................................................................................................
Corporate Bonds and Notes ......................................................................................................................
Common and Preferred Stocks .................................................................................................................
Bond Exchange Traded Funds ..................................................................................................................
Other Assets ..............................................................................................................................................
Total...........................................................................................................................................................
2019
2018
2%
40
35
14
9
100%
1%
41
37
6
15
100%
The investment objective of the Pension Plan is to produce current income and long-term capital growth through a combination
of equity and fixed income investments which, together with appropriate employer contributions and any required employee
contributions, is adequate to provide for the payment of the benefit obligations of the Pension Plan. The assets of the Pension
Plan may be invested in fixed income and equity investments or any other investment vehicle or financial instrument deemed
115
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 17. PENSION BENEFITS (Continued)
appropriate. Fixed income investments may include cash and short-term instruments, U.S. Government securities, corporate
bonds, mortgages and other fixed income investments. Equity investments may include various types of stock, such as large-
cap, mid-cap and small-cap stocks, and may also include investments in investment companies, collective investment funds and
Kemper common stock (subject to Section 407 and other requirements of ERISA). The Pension Plan has not invested in
Kemper common stock.
The trust investment committee for the Pension Plan, along with its third party fiduciary advisor, periodically reviews the
performance of the Pension Plan’s investments and asset allocation. Several external investment managers, one of which is
Fayez Sarofim & Co. (see Note 24, “Related Parties,” to the Consolidated Financial Statements), manage the equity
investments of the trust for the Pension Plan. Each manager is allowed to exercise investment discretion, subject to limitations,
if any, established by the trust investment committee for the Pension Plan. All other investment decisions are made by the
Company, subject to general guidelines as set by the trust investment committee for the Pension Plan.
The Company determines its Expected Long Term Rate of Return on Plan Assets based primarily on the Company’s
expectations of future returns, with consideration to historical returns, for the Pension Plan’s investments, based on target
allocations of the Pension Plan’s investments.
The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair
values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 22, “Fair Value
Measurements,” to the Consolidated Financial Statements. Fair value measurements for the Pension Plan’s assets at
December 31, 2019 are summarized below.
DOLLARS IN MILLIONS
Fixed Maturities:
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Measured at
Net Asset Value
Fair Value
U.S. Government and Government
Agencies and Authorities ...................
States and Political Subdivisions ...........
Corporate Bonds and Notes ...................
$
$
158.4
—
—
— $
0.1
107.3
Equity Securities:
Common Stocks:
Other Industries.................................
140.0
21.5
Other Equity Interests:
Collective Investment Funds.............
Bond Exchange Traded Funds ..........
Limited Liability Companies and
Limited Partnerships......................
Short-term Investments...............................
Receivables and Other ................................
Total ............................................................ $
—
92.8
—
10.0
(1.0)
400.2
$
—
—
—
—
—
128.9
$
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
71.8
—
63.7
—
—
135.5
$
158.4
0.1
107.3
161.5
71.8
92.8
63.7
10.0
(1.0)
664.6
116
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 17. PENSION BENEFITS (Continued)
Fair value measurements for the Pension Plan’s assets at December 31, 2018 are summarized below.
DOLLARS IN MILLIONS
Fixed Maturities:
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Measured at
Net Asset Value
Fair Value
U.S. Government and Government
Agencies and Authorities ..................
States and Political Subdivisions ..........
Corporate Bonds and Notes ..................
$
$
110.9
—
—
— $
2.1
103.4
Equity Securities:
Preferred Stocks:
Finance, Insurance and Real Estate .
Common Stocks:
Manufacturing..................................
Other Industries................................
Other Equity Interests:
Collective Investment Funds............
Bond Exchange Traded Funds .........
Limited Liability Companies and
Limited Partnerships ....................
Short-term Investments .............................
Receivables and Other...............................
Total ........................................................... $
—
—
106.0
—
34.1
—
4.4
1.0
—
—
17.4
—
—
—
—
—
256.4
$
122.9
$
—
—
—
—
—
—
—
—
—
—
0.3
0.3
— $
—
—
—
—
—
68.6
—
77.1
—
—
110.9
2.1
103.4
—
—
123.4
68.6
34.1
77.1
4.4
1.3
$
145.7
$
525.3
Additional information pertaining to the changes in the fair value of the Pension Plan’s assets classified as Level 3 in the two
preceding tables for the years ended December 31, 2019 and 2018 is presented below.
DOLLARS IN MILLIONS
Balance at Beginning of Year..........................................................................................................
Purchases, Sales and Settlements, Net ............................................................................................
Balance at End of Year ....................................................................................................................
2019
2018
$
$
$
0.3
(0.3)
— $
0.3
—
0.3
The components of Comprehensive Pension Expense (Income) for the Pension Plan for the years ended December 31, 2019,
2018 and 2017 were:
DOLLARS IN MILLIONS
Service Cost Earned During the Year....................................................................................
Interest Cost on Projected Benefit Obligation.......................................................................
Expected Return on Plan Assets............................................................................................
Amortization of Actuarial Loss .............................................................................................
Pension Income Recognized in Consolidated Statements of Income ...................................
Unrecognized Pension Gain (Loss) Arising During the Year................................................
Amortization of Accumulated Unrecognized Pension Loss..................................................
Comprehensive Pension Expense (Income) ..........................................................................
2019
2018
2017
$
— $
— $
22.3
(30.6)
2.9
(5.4)
4.2
(2.9)
(4.1) $
20.3
(28.9)
4.3
(4.3)
11.5
(4.3)
2.9
$
$
—
20.6
(30.9)
2.6
(7.7)
(4.9)
(2.6)
(15.2)
117
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 17. PENSION BENEFITS (Continued)
The actuarial loss included in AOCI at December 31, 2019 is being amortized over approximately 22 years, the remaining
average estimated life expectancy of participants. The Company estimates that Pension Income for the Pension Plan for the year
ended December 31, 2020 will include expense of $5.9 million resulting from the amortization of the related accumulated
actuarial loss included in AOCI at December 31, 2019.
The weighted-average discount rate, service cost discount rate, interest cost discount rate, rate of increase in future
compensation levels and expected long-term rate of return on plan assets used to develop the components of Pension Expense
for the Pension Plan for the years ended December 31, 2019, 2018 and 2017 were:
Weighted-average Discount Rate................................................................................
Service Cost Discount Rate.........................................................................................
Interest Cost Discount Rate.........................................................................................
Rate of Increase in Future Compensation Levels .......................................................
Expected Long Term Rate of Return on Plan Assets ..................................................
2019
2018
2017
4.28%
4.26
3.91
3.40
5.70
3.63%
3.61
3.26
3.40
5.35
4.19%
4.15
3.52
2.56
5.80
On August 22, 2019, the Company made a voluntary cash contribution of $55.3 million to the Pension Plan. On July 13, 2018,
the Company made a voluntary cash contribution of $5.1 million to the Pension Plan. The Company did not contribute to the
Pension Plan in 2017. The Company does not expect that it will be required to contribute to the Pension Plan in 2020, but could
make a voluntary contribution pursuant to the maximum funding limits under ERISA.
The following benefit payments (net of participant contributions), which consider expected future service of certain participants
that remain eligible for a benefit accrual, as appropriate, are expected to be paid from the Pension Plan:
DOLLARS IN MILLIONS
Estimated Pension Benefit Payments .........................
2020
2021
2022
2023
2024
$
31.4
$
32.1
$
33.2
$
34.0
$
34.7
2025-2029
179.1
$
Years Ending December 31,
The Company also sponsors a non-qualified supplemental defined benefit pension plan (the “Supplemental Plan”). Benefit
accruals for all participants in the Supplemental Plan were frozen effective June 30, 2016. The unfunded liability related to the
Supplemental Plan was $28.9 million and $24.2 million at December 31, 2019 and 2018, respectively. Pension expense for the
Supplemental Plan was $1.0 million, $0.8 million, and $0.8 million for the years ended December 31, 2019, 2018 and 2017,
respectively. An actuarial loss of $5.6 million before taxes, an actuarial gain of $1.3 million before taxes and an actuarial loss of
$1.6 million before taxes are included in Other Comprehensive Income (Loss) for the years ended December 31, 2019, 2018
and 2017, respectively.
The Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made
contributions to those plans of $26.0 million, $15.1 million and $10.6 million in 2019, 2018 and 2017, respectively.
NOTE 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Kemper and Infinity sponsor other than pension postretirement employee benefit plans (“OPEB”) that together provide
medical, dental and/or life insurance benefits to approximately 650 retired and 525 active employees.
Kemper has historically self-insured the benefits under the Kemper OPEB Plan. The Kemper medical plan generally provides
for a limited number of years of medical insurance benefits at retirement based on the participant’s attained age at retirement
and number of years of service until specified dates and generally has required participant contributions, with most
contributions adjusted annually. On December 30, 2016, Kemper amended the Kemper OPEB Plan and, effective December 31,
2016, will no longer offer coverage to post-65 Medicare-eligible retirees and Medicare-eligible spouses under the self-insured
portion of its coverage. Rather, beginning on January 1, 2017, the Kemper OPEB Plan offers access to a private, third-party
Medicare exchange and provides varying levels of a Company-determined subsidy via health reimbursement accounts to certain
Medicare-eligible retirees and spouses in order to help fund a portion of the participants’ cost. Further, the amendment
eliminates the requirement for such participants to contribute to the Kemper OPEB Plan. In conjunction with the amendment,
118
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
the Company recorded a pre-tax reduction to its Accumulated Postretirement Benefit Obligation of $11.0 million through Other
Comprehensive Income. This prior service credit is being amortized into income over the remaining average life of the Kemper
OPEB Plan’s participants.
Changes in Fair Value of Plans’ Assets and Changes in Accumulated Postretirement Benefit Obligation for the years ended
December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Fair Value of Plans’ Assets at Beginning of Year......................................................................................
Employer Contributions ............................................................................................................................
Plan Participants’ Contributions................................................................................................................
Benefits Paid .............................................................................................................................................
Fair Value of Plan Assets at End of Year...................................................................................................
Accumulated Postretirement Benefit Obligation at Beginning of Year....................................................
Obligation from Acquisition of Infinity ....................................................................................................
Service Cost ..............................................................................................................................................
Interest Cost ..............................................................................................................................................
Plan Participants’ Contributions................................................................................................................
Benefits Paid .............................................................................................................................................
Medicare Part D Subsidy Received ..........................................................................................................
Actuarial Gain ...........................................................................................................................................
Accumulated Postretirement Benefit Obligation at End of Year ..............................................................
Funded Status—Accumulated Postretirement Benefit Obligation in Excess of Plans’ Assets .................
$
$
2019
2018
— $
1.1
0.3
(1.4)
—
15.0
—
0.2
0.4
0.3
(1.4)
—
(1.7)
12.8
(12.8) $
—
1.1
0.3
(1.4)
—
14.4
3.9
0.2
0.4
0.3
(1.4)
0.2
(3.0)
15.0
(15.0)
Unamortized Actuarial Gain Reported in AOCI at End of Year ...............................................................
$
23.8
$
24.9
The measurement dates of the assets and liabilities at end of year in the preceding table under the headings “2019” and “2018”
were December 31, 2019 and December 31, 2018, respectively.
The weighted-average discount rate and rate of increase in future compensation levels used to develop the components of the
Accumulated Postretirement Benefit Obligation at December 31, 2019 and 2018 were:
Discount Rate ............................................................................................................................................
Rate of Increase in Future Compensation Levels .....................................................................................
2019
2.91%
2.20
2018
4.02%
2.20
The assumed health care cost trend rate used in measuring the Accumulated Postretirement Benefit Obligation at December 31,
2019 was 7.50% for 2020, gradually declining to 4.8% in the year 2025 and remaining at that level thereafter for medical
benefits and 10.00% for 2020, gradually declining to 4.8% in the year 2026 and remaining at that level thereafter for
prescription drug benefits. The assumed health care cost trend rate used in measuring the Accumulated Postretirement Benefit
Obligation at December 31, 2018 was 7.5% for 2019, gradually declining to 4.8% in the year 2025 and remaining at that level
thereafter for medical benefits and 10.0% for 2019, gradually declining to 4.8% in the year 2026 and remaining at that level
thereafter for prescription drug benefits.
A one-percentage point increase in the assumed health care cost trend rate for each year would have increased the Accumulated
Postretirement Benefit Obligation at December 31, 2019 by $0.6 million and 2019 OPEB expense by an insignificant amount. A
one-percentage point increase in the assumed health care cost trend rate for each year would have increased the Accumulated
Postretirement Benefit Obligation at December 31, 2018 by $0.8 million and 2018 OPEB expense by an insignificant amount.
119
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
The components of Comprehensive OPEB Expense (Income) for the years ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Service Cost Earned During the Year....................................................................................
Interest Cost on Accumulated Postretirement Benefit Obligation ........................................
Amortization of Prior Service Credit ....................................................................................
Amortization of Accumulated Unrecognized OPEB Gain....................................................
OPEB Income Recognized in Consolidated Statements of Income......................................
Unrecognized OPEB Gain Arising During the Year .............................................................
Prior Service Credit Arising During the Year from Plan Amendments.................................
Amortization of Prior Service Credit ....................................................................................
Amortization of Accumulated Unrecognized OPEB Gain....................................................
Comprehensive OPEB Income.............................................................................................. $
$
2019
2018
2017
$
0.2
0.4
(1.3)
(2.4)
(3.1)
(1.7)
—
1.3
2.4
(1.1) $
$
0.2
0.4
(1.3)
(1.8)
(2.5)
(3.0)
—
1.3
1.8
(2.4) $
0.1
0.4
—
(1.8)
(1.3)
(0.5)
(1.3)
—
1.8
(1.3)
The Company estimates that OPEB Expense for the year ended December 31, 2020 will include income of $3.3 million
resulting from the amortization of the related accumulated actuarial gain and prior service credit included in AOCI at
December 31, 2019.
The weighted-average discount rate and rate of increase in future compensation levels used to develop OPEB Expense for the
years ended December 31, 2019, 2018 and 2017 were:
Weighted-average Discount Rate ..........................................................................................
Service Cost Discount Rate ...................................................................................................
Interest Cost Discount Rate ...................................................................................................
Rate of Increase in Future Compensation Levels..................................................................
2019
4.08%
4.16
3.69
2.20
2018
3.36%
3.52
2.96
2.20
2017
3.61%
3.79
2.92
2.60
The Company expects to contribute $1.3 million, net of the expected Medicare Part D subsidy, to its OPEB Plan to fund benefit
payments in 2020.
The following benefit payments (net of participant contributions), which consider expected future service, as appropriate, are
expected to be paid:
DOLLARS IN MILLIONS
Estimated Benefit Payments:
2020
2021
2022
2023
2024
2025-2029
Years Ending December 31,
Excluding Medicare Part D Subsidy......................
Expected Medicare Part D Subsidy .......................
Net Estimated Benefit Payments ................................
$
$
1.3
—
1.3
$
$
1.3
—
1.3
$
$
1.3
—
1.3
$
$
1.2
—
1.2
$
$
1.2
—
1.2
$
$
4.5
—
4.5
NOTE 19. BUSINESS SEGMENTS
The Company is engaged, through its subsidiaries, in the property and casualty insurance and life and health insurance
businesses. The Company conducts its operations through three operating segments: Specialty Property & Casualty Insurance,
Preferred Property & Casualty Insurance and Life & Health Insurance.
The Specialty Property & Casualty Insurance segment’s principal products are specialty automobile insurance and commercial
automobile insurance. The Preferred Property & Casualty Insurance segment’s principal products are preferred automobile
insurance, homeowners insurance, and other personal insurance. These products are distributed primarily through independent
agents and brokers.The Life & Health Insurance segment’s principal products are individual life, accident, health and property
insurance. These products are distributed by career agents employed by the Company and independent agents and brokers.
The Company’s earned premiums are derived in the United States. The accounting policies of the segments are the same as
those described in Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial
Statements. Capital expenditures for long-lived assets by operating segment are immaterial.
120
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 19. BUSINESS SEGMENTS (Continued)
It is the Company’s management practice to allocate certain corporate expenses, primarily compensation costs for corporate
employees and related facility costs, included in Interest and Other Expenses in the Consolidated Statements of Income to its
insurance operations. The amount of such allocated corporate expenses was $103.9 million, $68.0 million and $50.8 million for
the years ended December 31, 2019, 2018 and 2017, respectively. The Company does not allocate Income from Change in Fair
Value of Equity and Convertible Securities, Net Realized Gains on Sales of Investments, Net Impairment Losses Recognized in
Earnings, Acquisition Related Transaction, Integration and Other Costs, Loss from Early Extinguishment of Debt, interest
expense on debt or postretirement benefit plans, and actuarial gains and losses on its postretirement benefit plans to its
operating segments. Additionally, the Company did not allocate the 2018 and 2017 impacts of the Tax Act or the gains
recognized in 2019 and 2018 on the partial satisfaction of a final judgment against Computer Sciences Corporation (“CSC”) to
its operating segments.
Segment Assets at December 31, 2019 and 2018 were:
DOLLARS IN MILLIONS
Specialty Property & Casualty Insurance..............................................................................................
Preferred Property & Casualty Insurance..............................................................................................
Life & Health Insurance ........................................................................................................................
Corporate and Other, Net.......................................................................................................................
Total Assets............................................................................................................................................
2019
$ 4,435.2
1,549.8
5,847.9
1,156.2
$ 12,989.1
2018
$ 3,541.0
1,567.7
5,117.2
1,319.0
$ 11,544.9
Earned Premiums by product line for the years ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Specialty Property & Casualty Insurance:
2019
2018
2017
Specialty Automobile.......................................................................................................... $ 2,825.6
252.8
Commercial Automobile .....................................................................................................
$ 1,889.5
137.9
$
954.3
51.4
Preferred Property & Casualty Insurance:
Preferred Automobile
Homeowners
Other Personal Lines
Life & Health Insurance:
470.2
241.3
38.8
440.2
250.1
40.4
422.8
264.8
42.7
Life ......................................................................................................................................
Accident & Health ..............................................................................................................
Property ...............................................................................................................................
384.6
190.9
68.2
Total Earned Premiums ......................................................................................................... $ 4,472.4
378.4
177.5
70.4
$ 3,384.4
379.7
161.7
72.6
$ 2,350.0
121
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 19. BUSINESS SEGMENTS (Continued)
Segment Revenues, including a reconciliation to Total Revenues, for the years ended December 31, 2019, 2018 and 2017 were:
DOLLARS IN MILLIONS
Segment Revenues:
Specialty Property & Casualty Insurance:
2019
2018
2017
Earned Premiums..............................................................................................................
Net Investment Income.....................................................................................................
Other Income ....................................................................................................................
Total Specialty Property & Casualty Insurance ..................................................................
Preferred Property & Casualty Insurance:
$ 3,078.4
107.5
7.0
3,192.9
$ 2,027.4
63.4
2.4
2,093.2
$ 1,005.7
39.2
1.1
1,046.0
Earned Premiums
Net Investment Income
Total Preferred Property & Casualty Insurance
Life & Health Insurance:
750.3
44.1
794.4
730.7
61.8
792.5
730.3
58.9
789.2
Earned Premiums..............................................................................................................
Net Investment Income.....................................................................................................
Other Income ....................................................................................................................
Total Life & Health Insurance.............................................................................................
Total Segment Revenues .......................................................................................................
Income (Loss) from Change in Fair Value of Equity and Convertible Securities.................
Net Realized Gains on the Sales of Investments ...................................................................
Net Impairment Losses Recognized in Earnings...................................................................
Other ......................................................................................................................................
Total Revenues ......................................................................................................................
643.7
206.4
8.5
858.6
4,845.9
138.9
41.9
(13.8)
26.3
$ 5,039.2
626.3
210.9
4.0
841.2
3,726.9
(64.3)
26.4
(4.5)
40.6
$ 3,725.1
614.0
223.2
2.6
839.8
2,675.0
—
56.5
(14.3)
6.2
$ 2,723.4
Segment Operating Profit, including a reconciliation to Income from Continuing Operations before Income Taxes, for the years
ended December 31, 2019, 2018 and 2017 was:
DOLLARS IN MILLIONS
Segment Operating Profit (Loss):
2019
2018
2017
Specialty Property & Casualty Insurance ........................................................................... $
Preferred Property & Casualty Insurance ...........................................................................
Life & Health Insurance......................................................................................................
Total Segment Operating Profit.............................................................................................
Corporate and Other Operating Profit (Loss) From: .............................................................
Partial Satisfaction of Judgment .......................................................................................
Other .................................................................................................................................
Corporate and Other Operating Profit (Loss)........................................................................
Adjusted Consolidated Operating Profit (Loss) ....................................................................
Income (Loss) from Change in Fair Value of Equity and Convertible Securities.................
Net Realized Gains on Sales of Investments.........................................................................
Net Impairment Gains (Losses) Recognized in Earnings......................................................
Acquisition Related Transaction, Integration and Other Costs .............................................
Loss from Early Extinguishment of Debt..............................................................................
Income from Continuing Operations before Income Taxes .................................................. $
355.9
52.3
121.9
530.1
20.1
(31.4)
(11.3)
518.8
138.9
41.9
(13.8)
(18.4)
(5.8)
661.6
$
$
145.6
28.6
115.9
290.1
35.7
(39.6)
(3.9)
286.2
(64.3)
26.4
(4.5)
(44.7)
—
199.1
$
$
80.5
(78.1)
140.2
142.6
—
(23.7)
(23.7)
118.9
—
56.5
(14.3)
—
—
161.1
122
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 19. BUSINESS SEGMENTS (Continued)
Segment Net Operating Income, including a reconciliation to Income from Continuing Operations, for the years ended
December 31, 2019, 2018 and 2017 was:
DOLLARS IN MILLIONS
Segment Net Operating Income (Loss):
2019
2018
2017
Specialty Property & Casualty Insurance ........................................................................... $
Preferred Property & Casualty Insurance ...........................................................................
Life & Health Insurance......................................................................................................
Total Segment Net Operating Income (Loss)........................................................................
Corporate and Other Net Operating Income (Loss) From: ...................................................
Effects of Tax Law Changes ...............................................................................................
Partial Satisfaction of Judgment .........................................................................................
Other....................................................................................................................................
Total Corporate and Other Net Operating Income (Loss) .....................................................
Adjusted Consolidated Net Operating Income......................................................................
Net Income (Loss) From:
Change in Fair Value of Equity and Convertible Securities ...............................................
Net Realized Gains on Sales of Investments ......................................................................
Net Impairment Losses Recognized in Earnings ................................................................
Acquisition Related Transaction, Integration and Other Costs...........................................
Loss from Early Extinguishment of Debt ...........................................................................
Income from Continuing Operations.....................................................................................
$
283.1
41.9
98.7
423.7
—
15.9
(21.3)
(5.4)
418.3
109.7
33.1
(10.9)
(14.5)
(4.6)
531.1
$
$
115.8
25.7
91.5
233.0
26.4
28.2
(29.2)
25.4
258.4
(50.8)
20.9
(3.6)
(36.5)
—
188.4
$
$
56.3
(45.4)
91.9
102.8
7.4
—
(17.7)
(10.3)
92.5
—
36.7
(9.3)
—
—
119.9
Amortization of Deferred Policy Acquisition Costs by Operating Segment for the years ended December 31, 2019, 2018 and
2017 was:
DOLLARS IN MILLIONS
Specialty Property & Casualty Insurance.............................................................................. $
Preferred Property & Casualty Insurance..............................................................................
Life & Health Insurance ........................................................................................................
Total Amortization................................................................................................................. $
2019
224.9
120.1
63.3
408.3
2018
202.0
117.2
57.9
377.1
$
$
2017
150.2
114.6
53.5
318.3
$
$
NOTE 20. CATASTROPHE REINSURANCE
Catastrophes and natural disasters are inherent risks of the property and casualty insurance business. These catastrophic events
and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and
winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations
and financial position of the Company’s property and casualty insurance companies. Further, because the level of these insured
losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year
fluctuations in the results of operations and financial position of these companies. Specific types of catastrophic events are more
likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty
insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events
promulgated by the Insurance Services Office (“ISO”) to track and report losses related to catastrophes. ISO classifies a disaster
as a catastrophe when the event causes $25.0 million or more in direct insured losses to property and affects a significant
number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout
the insurance industry. The discussions that follow utilize ISO’s definition of catastrophes.
The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical
diversification, restrictions on the amount and location of new business production in certain regions, and reinsurance. To limit
its exposures to catastrophic events, the Company maintains a catastrophe reinsurance program for the property and casualty
insurance companies. Coverage for the catastrophe reinsurance program is provided in various layers through multiple excess
of loss reinsurance contracts and in 2019 and 2018 an annual aggregate excess property catastrophe reinsurance contract.
123
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 20. CATASTROPHE REINSURANCE (Continued)
Coverage on individual catastrophes provided under the excess of loss reinsurance contracts effective January 1, 2019 to
December 31, 2019 is provided in various layers as presented below.
DOLLARS IN MILLIONS
Retained...........................................................................................................................
1st Layer of Coverage .....................................................................................................
2nd Layer of Coverage ....................................................................................................
3rd Layer of Coverage.....................................................................................................
Catastrophe Losses and
LAE
In Excess of
$
— $
50.0
150.0
250.0
Up to
50.0
150.0
250.0
275.0
Percentage
of Coverage
—%
95.0
95.0
95.0
Coverage on individual catastrophes provided under the excess of loss reinsurance contracts effective January 1, 2018 to
December 31, 2018 is provided in various layers as presented below.
DOLLARS IN MILLIONS
Retained...........................................................................................................................
1st Layer of Coverage .....................................................................................................
2nd Layer of Coverage (Tranche A)................................................................................
2nd Layer of Coverage (Tranche B)................................................................................
Catastrophe Losses and
LAE
In Excess of
$
— $
50.0
150.0
150.0
Up to
50.0
150.0
250.0
350.0
Percentage
of Coverage
—%
95.0
63.3
31.7
Coverage on individual catastrophes provided under the excess of loss reinsurance contracts effective January 1, 2017 to
December 31, 2017 is provided in various layers as presented below.
DOLLARS IN MILLIONS
Retained...........................................................................................................................
1st Layer of Coverage .....................................................................................................
2nd Layer of Coverage (Tranche A)................................................................................
2nd Layer of Coverage (Tranche B)................................................................................
Catastrophe Losses and
LAE
In Excess of
$
— $
50.0
150.0
150.0
Up to
50.0
150.0
250.0
350.0
Percentage
of Coverage
—%
95.0
31.7
63.3
In the event that the incurred catastrophe losses and LAE covered by the catastrophe reinsurance programs presented in the
three preceding tables exceed the retention for that particular layer, each of the programs allow for one reinstatement of such
coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers to reinstate the full
amount of reinsurance available under such layer.
Coverage provided under the 2019 aggregate property catastrophe reinsurance contract is summarized below.
DOLLARS IN MILLIONS
Retained..................................................................................................................................................
Coverage.................................................................................................................................................
Aggregate Catastrophe
Losses and LAE
In Excess of
$
— $
60.0
Up to
60.0
110.0
Coverage provided under the 2018 aggregate property catastrophe reinsurance contract is summarized below.
DOLLARS IN MILLIONS
Retained..................................................................................................................................................
Coverage.................................................................................................................................................
Aggregate Catastrophe
Losses and LAE
In Excess of
$
— $
60.0
Up to
60.0
110.0
124
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 20. CATASTROPHE REINSURANCE (Continued)
The catastrophe reinsurance in 2019, 2018 and 2017 for the property and casualty insurance companies also included
reinsurance coverage from the Florida Hurricane Catastrophe Fund (the “FHCF”) for hurricane losses in Florida at retentions
lower than those described above. The Life & Health Insurance segment also purchases reinsurance from the FHCF for
hurricane losses in Florida. Except for the coverage provided by the FHCF, the Life & Health Insurance segment does not carry
any other catastrophe reinsurance coverage in 2019, 2018 and 2017.
Reinsurance premiums for the Company’s catastrophe reinsurance programs and the FHCF Program reduced earned premiums
for the years ended December 31, 2019, 2018 and 2017 by the following:
DOLLARS IN MILLIONS
Specialty Property & Casualty Insurance.............................................................................. $
Preferred Property & Casualty Insurance..............................................................................
Life & Health Insurance ........................................................................................................
Total Ceded Catastrophe Reinsurance Premiums..................................................................
$
2019
2018
2017
0.2
20.2
0.1
20.5
$
$
2.6
17.8
0.1
20.5
$
$
0.1
10.8
0.1
11.0
In 2019, 2018 and 2017 the Company paid $0.0 million, $0.4 million and $0.8 million respectively, in reinstatement premium.
In 2019, the Company received a $0.9 million refund of reinstatement premiums related to the 2017 and 2018 wildfires.
Catastrophe losses and LAE (including reserve development), net of reinsurance recoveries, for the years ended December 31,
2019, 2018 and 2017 by business segment are presented below.
DOLLARS IN MILLIONS
Specialty Property & Casualty Insurance.............................................................................. $
Preferred Property & Casualty Insurance..............................................................................
Life & Health Insurance ........................................................................................................
Total Catastrophe Losses and LAE ....................................................................................... $
2019
2018
2017
11.6
44.6
3.9
60.1
$
$
4.4
79.1
4.1
87.6
$
$
5.2
168.8
6.4
180.4
In 2019, 2018 and 2017 Kemper’s property and casualty subsidiaries had catastrophe reinsurance recoveries of $15.5 million,
$31.8 million and $11.9 million under the catastrophe reinsurance program. The property and casualty insurance companies did
not have any recoveries from the FHCF. The Life & Health Insurance segment had reinsurance recoveries of $1.6 million, $1.6
million and $0.2 million from the FHCF in 2019, 2018, and 2017, respectively.
Total catastrophe loss and LAE reserves, net of reinsurance recoverables, developed favorably by $17.1 million, $8.4 million
and $4.5 million in 2019, 2018 and 2017, respectively. The Specialty Property & Casualty Insurance segment reported adverse
catastrophe reserve development of $0.5 million in 2019 and favorable catastrophe reserve development of $0.3 million and
$0.3 million in 2018 and 2017, respectively. The Preferred Property & Casualty Insurance segment reported favorable
catastrophe reserve development of $18.4 million, $8.2 million and $4.7 million in 2019, 2018 and 2017, respectively. The Life
& Health Insurance segment reported adverse catastrophe reserve development of $0.8 million, $0.1 million, and $0.5 million
in 2019, 2018 and 2017, respectively.
The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of
a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Company’s
estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development
experience for areas that have not been inspected or for claims that have not yet been reported. The Company’s estimates of
direct catastrophe losses are based on the coverages provided by its insurance policies. The Company’s homeowners and
dwelling insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical
damage caused by wind or wind-driven rain. Accordingly, the Company’s estimates of direct losses for homeowners and
dwelling insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage
for losses caused by flood. Estimates of the number and severity of claims ultimately reported are influenced by many
variables, including, but not limited to, repair or reconstruction costs and determination of cause of loss that are difficult to
quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability
of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these
factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Company’s estimates of indirect
125
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 20. CATASTROPHE REINSURANCE (Continued)
losses from wind pools and joint underwriting associations are based on a variety of factors, including, but not limited to, actual
or estimated assessments provided by or received from such entities, insurance industry estimates of losses, and estimates of the
Company’s market share in the assessable states. Actual assessments may differ materially from these estimated amounts.
NOTE 21. OTHER REINSURANCE
In addition to the reinsurance programs described in Note 20, “Catastrophe Reinsurance,” to the Consolidated Financial
Statements, Kemper’s insurance subsidiaries utilize other reinsurance arrangements to limit their maximum loss, provide
greater diversification of risk and to minimize exposures on larger risks. The ceding of insurance does not discharge the primary
liability of the original insurer. Accordingly, insurance reserve liabilities are reported gross of any estimated recovery from
reinsurers in the Consolidated Balance Sheets. Amounts recoverable from reinsurers are estimated in a manner consistent with
the insurance reserve liability and are included in Other Receivables in the Consolidated Balance Sheets.
Earned Premiums ceded on long-duration and short-duration policies were $27.4 million, $31.6 million and $18.2 million for
the years ended December 31, 2019, 2018 and 2017, respectively, of which $20.5 million, $20.5 million and $11.0 million,
respectively, was related to catastrophe reinsurance. See Note 20, “Catastrophe Reinsurance,” to the Consolidated Financial
Statements for additional information regarding the Company’s catastrophe reinsurance programs. Certain insurance
subsidiaries assume business from other insurance companies and involuntary pools. Earned Premiums assumed on long-
duration and short-duration policies were $92.3 million, $85.2 million and $72.9 million for the years ended December 31,
2019, 2018 and 2017, respectively.
Trinity and Capitol County Mutual Fire Insurance Company (“Capitol”) are parties to a quota share reinsurance agreement
whereby Trinity assumes 100% of the business written by Capitol, subject to a cap, for ceded losses for dwelling coverage.
Earned Premiums assumed by Trinity from Capitol were $19.4 million, $20.0 million and $20.7 million for the years ended
December 31, 2019, 2018 and 2017, respectively. Capitol is a mutual insurance company and, accordingly, is owned by its
policyholders. Trinity and Old Reliable Casualty Company (“ORCC”), a subsidiary of Capitol, are parties to a quota share
reinsurance agreement whereby Trinity assumes 100% of the business written by ORCC, subject to a cap, for ceded losses for
dwelling coverage. Earned Premiums assumed by Trinity from ORCC were $5.2 million, $5.6 million and $5.9 million for the
years ended December 31, 2019, 2018 and 2017, respectively.
Five employees of the Company serve as directors of Capitol’s five member board of directors. Nine employees of the
Company also serve as directors of ORCC’s nine member board of directors. Kemper’s subsidiary, United Insurance, provides
claims and administrative services to Capitol and ORCC. In addition, agents appointed by Kemper’s subsidiary, The Reliable
Life Insurance Company, and who are employed by United Insurance, are also appointed by Capitol and ORCC to sell property
insurance products for the Company’s Life & Health Insurance segment. The Company also provides certain investment
services to Capitol and ORCC.
NOTE 22. FAIR VALUE MEASUREMENTS
The Company classifies its investments in Fixed Maturities as available for sale and reports these investments at fair value. The
Company reports equity investments with readily determinable fair values as Equity Securities at Fair Value. Certain
investments that are measured at fair value using the net asset value practical expedient are not required to be classified using
the fair value hierarchy, but are presented in the following two tables to permit reconciliation of the fair value hierarchy to the
amounts presented in the Consolidated Balance Sheet.
126
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2019 is
summarized below. The Company has no material liabilities that are measured and reported at fair value.
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Fair Value Measurements
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Measured at Net
Asset Value
Total
Fair Value
DOLLARS IN MILLIONS
Fixed Maturities:
— $
—
—
815.9
1,515.8
16.8
—
—
—
—
—
—
—
—
—
—
248.1
248.1
—
248.1
$
3,859.7
6.7
618.2
89.0
6,922.1
44.5
14.7
12.8
0.4
586.8
248.1
907.3
37.3
7,866.7
U.S. Government and Government
Agencies and Authorities ...............
$
States and Political Subdivisions.......
Foreign Governments ........................
Corporate Securities:
Bonds and Notes ...........................
Redeemable Preferred Stocks .......
Collateralized Loan Obligations ...
Other Mortgage- and Asset-
backed .......................................
Total Investments in Fixed Maturities....
Equity Securities at Fair Value:
Preferred Stocks:
Finance, Insurance and Real
Estate .........................................
Other Industries ............................
Common Stocks:
Finance, Insurance and Real
Estate .........................................
Other Industries ............................
Other Equity Interests:
Exchange Traded Funds................
Limited Liability Companies and
Limited Partnerships .................
Total Investments in Equity Securities
at Fair Value ......................................
Convertible Securities at Fair Value
Total........................................................ $
—
—
—
—
144.3
—
0.9
12.8
0.2
586.8
—
600.7
—
745.0
$
144.3
—
—
$
671.6
1,515.8
16.8
—
—
—
409.1
6.7
618.2
10.2
1,044.2
—
—
—
—
—
—
3,450.6
—
—
78.8
5,733.6
44.5
13.8
—
0.2
—
—
58.5
37.3
5,829.4
$
—
—
1,044.2
$
$
127
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
At December 31, 2019, the Company had unfunded commitments to invest an additional $248.1 million in certain limited
liability investment companies and limited partnerships that will be included in Other Equity Interests when funded.
The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2018 is
summarized below.
Fair Value Measurements
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Measured at Net
Asset Value
Total
Fair Value
DOLLARS IN MILLIONS
Fixed Maturities:
U.S. Government and Government
Agencies and Authorities...............
States and Political Subdivisions ......
$
Foreign Governments........................
Corporate Securities:
Bonds and Notes...........................
Collateralized Loan Obligations...
Other Mortgage- and Asset-
backed .......................................
$
156.5
—
—
—
—
—
Total Investments in Fixed Maturities ...
156.5
Equity Securities at Fair Value:
Preferred Stocks:
Finance, Insurance and Real
Estate.........................................
Other Industries ............................
Common Stocks:
Finance, Insurance and Real
Estate.........................................
Other Industries ............................
Other Equity Interests:
Exchange Traded Funds ...............
Limited Liability Companies and
Limited Partnerships.................
Total Investments in Equity Securities
at Fair Value......................................
Convertible Securities at Fair Value ......
Total ....................................................... $
—
—
10.2
0.2
427.3
—
437.7
—
594.2
$
709.2
1,619.1
5.9
— $
—
—
3,011.2
19.1
5.8
5,370.3
41.2
13.0
—
0.5
—
—
382.6
504.9
9.9
897.4
—
—
—
—
—
—
54.7
31.5
5,456.5
$
$
—
—
897.4
$
— $
—
865.7
1,619.1
—
—
—
—
—
—
—
—
—
—
192.0
192.0
—
192.0
5.9
3,393.8
524.0
15.7
6,424.2
41.2
13.0
10.2
0.7
427.3
192.0
684.4
31.5
7,140.1
$
The Company’s investments in Fixed Maturities that are classified as Level 1 in the two preceding tables primarily consist of
U.S. Treasury Bonds and Notes. The Company’s investments in Equity Securities at Fair Value that are classified as Level 1 in
the two preceding tables consist of either investments in publicly-traded common stocks or exchange traded funds. The
Company’s investments in Fixed Maturities that are classified as Level 2 in the two preceding tables primarily consist of
investments in corporate bonds, obligations of states and political subdivisions, and bonds and mortgage-backed securities of
U.S. government agencies. The Company’s investments in Equity Securities at Fair Value that are classified as Level 2 in the
two preceding tables primarily consist of investments in preferred stocks. The Company uses a leading, nationally recognized
provider of market data and analytics to price the vast majority of the Company’s Level 2 measurements. The provider utilizes
evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because
many fixed maturity securities do not trade on a daily basis, the provider’s evaluated pricing applications apply available
128
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing
to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The
pricing provider’s models and processes also take into account market convention. For each asset class, teams of its evaluators
gather information from market sources and integrate relevant credit information, perceived market movements and sector news
into the evaluated pricing applications and models. The Company generally validates the measurements obtained from its
primary pricing provider by comparing them with measurements obtained from one additional pricing provider that provides
either prices from recent market transactions, quotes in inactive markets or evaluations based on its own proprietary models.
The Company investigates significant differences related to the values provided. On completion of its investigation,
management exercises judgment to determine the price selected and whether adjustments, if any, to the price obtained from the
Company’s primary pricing provider would warrant classification of the price as Level 3. In instances where a measurement
cannot be obtained from either pricing provider, the Company generally will evaluate bid prices from one or more binding
quotes obtained from market makers to value investments in inactive markets and classified by the Company as Level 2. The
Company generally classifies securities when it receives non-binding quotes or indications as Level 3 securities unless the
Company can validate the quote or indication against recent transactions in the market.
The Company’s Investments in Fixed Maturities that are classified as Level 3 in the two preceding tables are priced primarily
using a market yield approach and primarily consist of collateralized loan obligations that are rated by a Nationally Recognized
Statistical Rating Organization (“NRSRO”) and privately placed securities that are not rated by a NRSRO. A market yield
approach uses a risk-free rate plus a credit spread depending on the underlying credit profile of the security. The Company uses
a leading, nationally recognized provider of market data and analytics to price the vast majority of its collateralized loan
obligations. Some of the significant inputs used by such provider are unobservable. Accordingly, the Company classifies these
investments as Level 3. For floating rate securities, the risk-free rate used in the market yield is the contractual floating rate of
the security. For each other individual security, the Company or the Company’s third party appraiser gathers information from
market sources, relevant credit information, perceived market movements and sector news and determines an appropriate
market yield for each security. The market yield selected is then used to discount the estimated future cash flows of the security
to determine the fair value. The Company separately evaluates market yields based upon asset class to assess the reasonableness
of the recorded fair value. For non-investment-grade Investments in Fixed Maturities that are classified as Level 3, the two
primary asset classes are senior debt and junior debt. Senior debt includes those securities that receive first priority in a
liquidation and junior debt includes any fixed maturity security with other than first priority in a liquidation.
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in
determining fair values for fixed maturity investments in corporate securities classified as Level 3 at December 31, 2019.
DOLLARS IN MILLIONS
Investment-grade ........................................................................ Market Yield
Non-investment-grade:
Unobservable
Input
Total
Fair Value
204.2
$
Range of Unobservable
Inputs
Weighted-
average
Yield
2.4% -
8.5%
4.1%
Senior Debt ............................................................................ Market Yield
Junior Debt............................................................................. Market Yield
Collateralized Loan Obligations (investment-grade and non-
investment-grade) ....................................................................... Market Yield
Other ........................................................................................... Various
Total Level 3 Fixed Maturity Investments in Corporate
Securities.....................................................................................
123.7
81.3
613.5
21.5
$ 1,044.2
2.4
9.6
3.2
-
-
-
21.5
18.0
12.5
9.1
13.1
5.1
129
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in
determining fair values for fixed maturity investments in corporate securities classified as Level 3 at December 31, 2018.
DOLLARS IN MILLIONS
Investment-grade ........................................................................ Market Yield
Non-investment-grade:
Unobservable
Input
Senior Debt ............................................................................ Market Yield
Junior Debt............................................................................. Market Yield
Collateralized Loan Obligations (investment-grade and non-
investment-grade).................................................................... Market Yield
Other ........................................................................................... Various
Total Level 3 Fixed Maturity Investments in Corporate
Securities ...............................................................................
Total
Fair Value
146.7
$
Range of Unobservable
Inputs
Weighted-
average
Yield
3.7% -
10.9%
5.2%
4.8
11.0
4.1
-
-
-
30.0
28.5
13.4
11.5
14.2
6.1
142.3
87.6
504.9
15.9
$
897.4
For an investment in a fixed maturity security, an increase in the yield used to determine the fair value of the security will
decrease the fair value of the security. A decrease in the yield used to determine fair value will increase the fair value of the
security, but the fair value increase is generally limited to par, unless callable at a premium, if the security is currently callable.
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for
the year ended December 31, 2019 is presented below.
Fixed Maturities
DOLLARS IN MILLIONS
Balance at Beginning of Year.........................................................
Total Gains (Losses):
Included in Consolidated Statement of Income ........................
Included in Other Comprehensive Income (Loss) ....................
Purchases........................................................................................
Settlements.....................................................................................
Sales ...............................................................................................
Transfers into Level 3 ....................................................................
Transfers out of Level 3 .................................................................
Balance at End of Year...................................................................
Corporate
Bonds
and
Notes
$ 382.6
(6.8)
10.6
307.0
(72.9)
(211.4)
—
—
$ 409.1
$
Redeemable
Preferred
Stocks
$
— $
Collateralized
Loan
Obligations
504.9
Other
Mortgage-
and Asset-
backed
$
9.9
Total
$ 897.4
—
(0.1)
6.8
—
—
—
—
6.7
$
0.6
5.3
119.2
(28.0)
(2.9)
19.1
—
618.2
—
1.0
—
(0.7)
—
—
(6.2)
16.8
433.0
(101.6)
(214.3)
19.1
—
10.2
—
$ 1,044.2
$
The Company’s policy is to recognize transfers between levels as of the end of the reporting period. There were no transfers
between Levels 1 and 2 for the year ended December 31, 2019. Transfers into Level 3 of $19.1 million for the year ended
December 31, 2019 were due to changes in the availability of market observable inputs. There were no transfers out of Level 3
for the year ended December 31, 2019.
130
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for
the year ended December 31, 2018 is presented below.
Fixed Maturities
Equity Securities
Corporate
Bonds and
Notes
States and
Political
Sub-
divisions
Redeemable
Preferred
Stocks
Collateralized
Loan
Obligations
Other
Mortgage-
and Asset-
backed
Preferred
and
Common
Stocks
Other
Equity
Interests
Total
$
401.5
$
— $
0.1
$
93.2
$
— $
27.4
$
34.4
$ 556.6
DOLLARS IN MILLIONS
Balance at Beginning of
Year.................................
Total Gains (Losses):
Included in Consolidated
Statement of Income ....
(0.1)
2.7
—
—
—
7.0
Included in Other
Comprehensive Income
(Loss)...............................
Purchases ..............................
Settlements ...........................
Sales .....................................
Transfers into Level 3...........
Transfers out of Level 3 .......
Balance at End of Year ......... $
4.4
(2.2)
201.8
(108.1)
(109.5)
2.4
(7.7)
—
—
1.8
—
—
—
(1.8)
—
—
—
—
—
—
(16.3)
449.7
(58.3)
—
33.9
—
0.1
10.0
(0.2)
—
—
—
9.9
—
—
—
—
—
—
(18.4)
663.3
(166.6)
(109.5)
36.3
(71.3)
$ — $ — $ 897.4
—
(34.4)
—
(27.4)
—
—
382.6
$
— $
— $
504.9
$
There were no transfers between Levels 1 and 2 for the year ended December 31, 2018. Transfers into Level 3 for the year
ended December 31, 2018 relate to transfers from Level 2 due to to changes in the availability of market observable inputs.
Transfers out of Level 3 were $71.3 million for the year ended December 31, 2018, of which $61.8 million was transferred into
Equity Securities at Modified Cost due to the adoption of ASU 2016-01 and $9.5 million was transferred into Level 2 due to
changes in the availability of market observable inputs.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
(Dollars in Millions)
Financial Assets:
December 31, 2019
December 31, 2018
Carrying
Value
Fair Value
Carrying
Value
Fair Value
Loans to Policyholders .........................................................................
Short-term Investments ........................................................................
Mortgage Loans....................................................................................
$
Financial Liabilities:
Debt ......................................................................................................
Policyholder Contract Liabilities .........................................................
$
305.6
470.9
27.5
778.4
243.4
$
612.4
470.9
27.5
820.2
243.4
$
300.6
286.1
—
909.0
10.0
542.6
286.1
—
911.2
10.0
The fair value measurement for loans to policyholders are categorized as Level 3 within the fair value hierarchy. The fair value
measurement of Short-term Investments is estimated using inputs that are considered either Level 1 or Level 2 measurements.
The fair value measurement of Mortgage Loans is estimated using inputs that are considered Level 2 measurements.The fair
value of Debt is estimated using quoted prices for similar liabilities in markets that are not active. The inputs used in the
valuation are considered Level 2 measurements. Policyholder Contract Liabilities consist of advances from the FHLB of
Chicago, and the inputs used in the valuation are considered Level 2 measurements.
131
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 23. CONTINGENCIES
In the ordinary course of its businesses, the Company is involved in legal proceedings, including lawsuits, arbitrations,
regulatory examinations, audits and inquiries. Except with regard to the matters discussed below, based on currently available
information, the Company does not believe that it is reasonably possible that any of its pending legal proceedings will have a
material effect on the Company’s consolidated financial statements.
Over the last decade there have been an array of initiatives that intend, in various ways, to impose new duties on life insurance
companies to proactively search for information related to the deaths of their insureds. These initiatives, which can include
legislation, audits, regulatory examinations and related litigation, seek to alter the terms of life insurance contracts by imposing
requirements that did not exist and were not contemplated at the time the issuing companies entered into such contracts.
In 2016, the Company voluntarily began implementing a comprehensive process to compare the life insurance records of its life
insurance subsidiaries against one or more death verification databases to determine if any of its insureds may be deceased. The
initial implementation of the process is continuing.
Attempts to estimate the ultimate outcomes of the aforementioned initiatives entail uncertainties including but not limited to (i)
the scope and interpretation of pertinent statutes, including the matching criteria and methodologies to be used in comparing
policy records against a death verification database, (ii) the universe of policies affected, (iii) the results of audits, examinations
and other actions by regulators and (iv) related litigation.
Gain Contingency
In 2015, Kemper’s subsidiary, Kemper Corporate Services, Inc. (“KCSI”), filed a demand for arbitration with the American
Arbitration Association (“AAA”), claiming that CSC had breached the terms of a master software license and services
agreement and related agreements (collectively, the “Agreements”) by failing, among other things, to timely produce and
deliver certain software to KCSI. CSC denied KCSI’s claims and filed a counterclaim. In April 2017, CSC merged with a spin-
off of the Enterprise Services business of Hewlett Packard Enterprise Company and is now known as DXC Technology
Company (“DXC”). DXC stock is publicly traded on the New York Stock Exchange.
In April 2017, the parties participated in an evidentiary hearing in Texas before a AAA-appointed arbitrator. Subsequently, in
October 2017, the arbitrator issued a Partial Final Award finding that CSC had breached the Agreements and awarded KCSI
direct damages plus pre-judgment interest. KCSI then submitted to the arbitrator a supplemental petition providing pre-
judgment interest calculations and seeking an award for certain costs and expenses. In November 2017, the arbitrator issued a
Final Award awarding KCSI direct damages against CSC of $84.3 million, prejudgment interest at the annual rate of 9% and
costs and expenses in the amount of $7.2 million.
KCSI pursued confirmation and enforcement of the Final Award in U.S. District Court in Texas. In September 2018, the Texas
district court issued an Amended Final Judgment that (i) confirmed the Arbitration Award in favor of KCSI, (ii) denied CSC’s
motion to vacate, and (iii) entered judgment against CSC in the total amount of $141.7 million.
CSC appealed the district court’s ruling to the U.S. Court of Appeals for the Fifth Circuit, but in the meantime paid Kemper
$35.7 million in September 2018 and an additional $20.1 million in April 2019 in partial satisfaction of the final judgment. The
Company recognized such payments in Other Income in its Consolidated Statement of Income for the years ended December
31, 2018 and December 31, 2019, respectively. On January 10, 2020, the Court of Appeals for the Fifth Circuit issued a
unanimous opinion affirming the ruling of the district court. On January 24, 2020, CSC filed a petition with the Fifth Circuit
requesting a rehearing en banc.
The Company cannot make any assurance as to the additional amounts of the final judgment that will actually be collected or
when they may be received. The unpaid balance of the final judgment is treated as a gain contingency for accounting purposes
and accordingly, is not recognized in these Consolidated Financial Statements.
132
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 24. RELATED PARTIES
Mr. Christopher B. Sarofim, a director of Kemper, is Vice Chairman and a member of the board of directors of Fayez
Sarofim & Co. (“FS&C”), a registered investment advisory firm. The Company’s defined benefit pension plan had $149.3
million, $124.5 million and $171.8 million in assets managed by FS&C at December 31, 2019, 2018 and 2017, respectively,
under an agreement with FS&C whereby FS&C provides investment management services with respect to certain funds of the
plan. Investment Expenses incurred in connection with such agreement were $0.9 million for each year ended December 31,
2019, 2018 and 2017. The Company believes that the services described above have been provided on terms no less favorable
to the Company than could have been negotiated with non-affiliated third parties.
As described in Note 21, “Other Reinsurance,” to the Consolidated Financial Statements, the Company also has certain
relationships with Capitol, a mutual insurance company that is owned by its policyholders, and its subsidiary, ORCC.
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Revenues:
Earned Premiums.........................................................................
Net Investment Income................................................................
Other Income ...............................................................................
Income (Loss) from Changes in Fair Value of Equity and
Convertible Securities ............................................................
Net Realized Gains on Sales of Investments...............................
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses.....................
Portion of Losses Recognized in Other Comprehensive
Income.................................................................................
Net Impairment Losses Recognized in Earnings.........................
Total Revenues .................................................................................
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss
Adjustment Expenses...............................................................
Insurance Expenses .....................................................................
Loss from Early Extinguishment of Debt....................................
Interest and Other Expenses ........................................................
Total Expenses..................................................................................
Income from Continuing Operations before Income Taxes .............
Income Tax Expense ........................................................................
Net Income .......................................................................................
Net Income (Loss) Per Unrestricted Share:
Basic ............................................................................................
Diluted .........................................................................................
Dividends Paid to Shareholders Per Share .......................................
Three Months Ended (Unaudited)
Mar 31,
2019
Jun 30,
2019
Sep 30,
2019
Dec 31,
2019
Year
Ended
Dec 31,
2019
$ 1,074.8
82.7
$ 1,116.6
96.0
$ 1,135.2
91.7
$ 1,145.8
93.9
$ 4,472.4
364.3
1.9
64.4
16.1
22.7
25.5
21.3
7.2
9.8
1.7
3.7
35.5
39.2
2.8
138.9
41.9
(3.5)
(6.7)
(1.8)
(1.7)
(13.7)
(0.1)
(3.6)
1,236.3
—
(6.7)
1,275.4
—
(1.8)
1,243.8
—
(1.7)
1,283.7
(0.1)
(13.8)
5,039.2
765.4
234.8
—
41.4
1,041.6
194.7
(39.4)
155.3
2.38
2.35
0.25
$
$
$
$
825.4
263.5
—
38.0
1,126.9
148.5
(26.4)
122.1
1.87
1.84
0.25
$
$
$
$
782.6
256.0
5.8
37.9
1,082.3
161.5
(32.5)
129.0
1.93
1.91
0.25
$
$
$
$
814.9
265.4
—
46.5
1,126.8
156.9
(32.2)
124.7
1.87
1.85
0.28
$
$
$
$
3,188.3
1,019.7
5.8
163.8
4,377.6
661.6
(130.5)
531.1
8.04
7.96
1.03
$
$
$
$
The sum of quarterly per share amounts may not equal per share amounts for the year due to differences in weighted-average shares and/or equivalent shares
outstanding for each of the periods presented.
133
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited) (Continued)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Revenues:
Earned Premiums .........................................................................
Net Investment Income ................................................................
Other Income ...............................................................................
Income (Loss) from Changes in Fair Value of Equity and
Convertible Securities ............................................................
Net Realized Gains on Sales of Investments ...............................
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses .....................
Portion of Losses Recognized in Other Comprehensive
Income .................................................................................
Net Impairment Losses Recognized in Earnings .........................
Total Revenues..................................................................................
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss
Adjustment Expenses ...............................................................
Insurance Expenses......................................................................
Interest and Other Expenses.........................................................
Total Expenses..................................................................................
Income (Loss) from Continuing Operations before Income Taxes ..
Income Tax Benefit (Expense) .........................................................
Income from Continuing Operations ................................................
Income (Loss) from Discontinued Operations .................................
Net Income........................................................................................
Income from Continuing Operations Per Unrestricted Share:
Basic.............................................................................................
Diluted..........................................................................................
Net Income Per Unrestricted Share:
Basic.............................................................................................
Diluted..........................................................................................
Dividends Paid to Shareholders Per Share .......................................
Three Months Ended (Unaudited)
Mar 31,
2018
Jun 30,
2018
Sep 30,
2018
Dec 31,
2018
Year
Ended
Dec 31,
2018
$
609.8
79.2
$
658.1
78.4
$ 1,052.9
92.0
$ 1,063.6
91.3
$ 3,384.4
340.9
1.2
0.7
2.6
(0.5)
—
(0.5)
693.0
436.9
160.1
29.0
626.0
67.0
(13.4)
53.6
0.2
1.2
0.4
3.8
—
—
—
741.9
499.5
171.2
25.7
696.4
45.5
(8.0)
37.5
0.1
$
$
$
$
$
$
53.8
$
37.6
$
1.03
1.02
1.03
1.02
0.24
$
$
$
$
$
0.73
0.73
0.73
0.73
0.24
$
$
$
$
$
37.8
11.0
3.6
2.0
42.2
(76.4)
16.4
(64.3)
26.4
(1.8)
(2.2)
(4.5)
—
(1.8)
1,195.5
—
(2.2)
1,094.7
—
(4.5)
3,725.1
757.3
296.0
61.7
772.8
273.2
42.6
2,466.5
900.5
159.0
1,115.0
1,088.6
3,526.0
80.5
11.8
92.3
(0.1)
92.2
1.42
1.40
1.42
1.40
0.24
$
$
$
$
$
$
6.1
(1.1)
5.0
1.5
6.5
199.1
(10.7)
188.4
1.7
$
190.1
0.08
0.08
0.10
0.10
0.24
$
$
$
$
$
3.22
3.19
3.25
3.22
0.96
The sum of quarterly per share amounts may not equal per share amounts for the year due to differences in weighted-average shares and/or equivalent shares
outstanding for each of the periods presented.
134
Report of Independent Registered
Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Kemper Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kemper Corporation and subsidiaries (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income (loss), shareholders'
equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the
schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the
Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by
COSO.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for recognition and
measurement of equity securities in 2018.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
135
Report of Independent Registered
Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on
the accounts or disclosures to which they relate.
Property and Casualty Insurance Reserves - Refer to Notes 2 and 6 to the consolidated financial statements
Critical Audit Matter Description
The estimation of property and casualty insurance reserves for losses and loss adjustment expenses (“property and casualty
insurance reserves”), including those claims that are incurred but not reported, requires significant judgment. Estimating
property and casualty insurance reserves is inherently uncertain as estimates are generally derived using a variety of actuarial
estimation techniques that are dependent on assumptions and expectations about future events, many of which are difficult to
quantify. The estimation process, particularly for claims with longer-tailed exposures that may not be discovered or reported
immediately, is an inherently subjective exercise and modest changes in judgments and assumptions can materially impact the
valuation of these reserves.
Given the significant judgments made by management in estimating property and casualty insurance reserves, auditing property
and casualty insurance reserves required a high degree of auditor judgment and an increased extent of effort, including the
involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to property and casualty insurance reserves included the following, among others:
• We tested the effectiveness of controls related to property and casualty insurance reserves, including those controls
related to the estimation of and management’s review of the property and casualty insurance reserves.
• We tested the underlying data, including historical claims, that served as the basis for the actuarial analyses to test that
the inputs to the actuarial estimates were accurate and complete.
• With the assistance of our actuarial specialists:
We developed a range of independent estimates of the property and casualty insurance reserves and compared
our estimates to the recorded reserves.
We compared our prior year estimates of expected incurred losses to actual experience during the most recent
year to identify potential bias in the Company’s determination of property and casualty insurance reserves.
Fixed Maturities at Fair Value - Refer to Notes 2, 4 and 22 to the consolidated financial statements
Critical Audit Matter Description
Investments in fixed maturity securities classified as available-for-sale are reported at fair value in the financial statements.
Fixed maturity securities without readily determinable market values are valued using significant unobservable inputs, such as
credit profile, credit spread and resulting market yield, which involve considerable judgment by management.
Given management uses significant unobservable inputs to estimate the fair value of fixed maturity securities without readily
determinable market values, performing audit procedures to evaluate these inputs required a high degree of auditor judgment
and an increased extent of effort, including the need to involve our fair value specialists.
136
Report of Independent Registered
Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the unobservable inputs used by management to estimate the fair value of fixed maturity
securities without readily determinable market values included the following, among others:
• We tested the effectiveness of controls related to fixed maturity securities, including those controls related to the
determination of fair value.
• We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates
to recent or subsequent transactions, taking into account changes in market conditions.
• We evaluated the reasonableness of the models, methodologies, and unobservable inputs used by management to
estimate fair value.
• With the assistance of our fair value specialists, we compared management’s unobservable inputs to external sources,
and for a sample of the investments, developed independent estimates of the fair value and compared our estimates to
the Company’s estimates.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 14, 2020
We have served as the Company’s auditor since 2002.
137
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s management, with participation of Kemper’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period
covered by this report. Based on such evaluation, Kemper’s Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that
information required to be disclosed by Kemper in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and accumulated and
communicated to the Company’s management, including Kemper’s Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
We, as management of the Company, are responsible for establishing and maintaining adequate internal control over financial
reporting. Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or
under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar
functions, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the company’s assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2019, based on
the control criteria established in a report entitled Internal Control—Integrated Framework, issued in 2013 by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that the Company’s
internal control over financial reporting is effective as of December 31, 2019.
The independent registered public accounting firm of Deloitte & Touche LLP, as auditors of the consolidated financial
statements of Kemper and its subsidiaries, has issued an attestation report on the effectiveness of management’s internal control
over financial reporting based on criteria established in Internal Control—Integrated Framework, issued in 2013 by the
Committee of Sponsoring Organizations of the Treadway Commission.
/S/ JOSEPH P. LACHER, JR.
Joseph P. Lacher, Jr.
President and Chief Executive Officer
Kemper Corporation
February 14, 2020
/S/ JAMES J. MCKINNEY
James J. McKinney
Senior Vice President and Chief Financial Officer
Kemper Corporation
138
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The attestation report of the independent registered public accounting firm, Deloitte & Touche LLP, on the Company’s internal
control over financial reporting is included in Item 8 under the heading “Report of Independent Registered Public Accounting
Firm,” and is incorporated herein by reference.
Item 9B. Other Information.
None
139
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item is incorporated herein by reference to the sections captioned “Meetings and Committees
of the Board of Directors,” “Business Experience of Nominees,” “Executive Officers,” “Ownership of Kemper Common Stock”
and “Corporate Governance” in the Proxy Statement for Kemper’s 2020 Annual Meeting of Shareholders. Kemper plans to file
such proxy statement within 120 days after December 31, 2019, the end of Kemper’s fiscal year.
Kemper’s code of ethics applicable to its chief executive officer, chief financial officer and principal accounting officer (“Code
of Ethics for Senior Financial Executives”) is posted in the “Governance” section of Kemper’s website, kemper.com. Kemper
also intends to disclose any future amendments to, and any waivers from (though none are anticipated), the Code of Ethics for
Senior Financial Executives in the “Governance” section of its website.
Item 11.
Executive Compensation.
The information required by this Item is incorporated herein by reference to the sections captioned “Executive Officer
Compensation and Benefits,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and
“Compensation Committee Report” in the Proxy Statement for Kemper’s 2020 Annual Meeting of Shareholders. The
Compensation Committee Report to be included in such Proxy Statement shall be deemed to be furnished in this report and
shall not be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act as a result of such
furnishing in this Item 11.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is set forth in the table below and incorporated herein by reference to the section
captioned “Ownership of Kemper Common Stock” in the Proxy Statement for Kemper’s 2020 Annual Meeting of Shareholders.
Equity Compensation Plan Information
Plan Category
Equity Compensation Plans Approved by
Security Holders
Equity Compensation Plans Not Approved by
Security Holders
Total
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
or Programs (1)
1,808,815
$
—
1,808,815
$
56.53
—
56.53
3,254,822
—
3,254,822
(1) Includes 1,082,460 shares reserved for future grants based on performance results under the terms of outstanding PSU
awards.
Kemper’s 2011 Omnibus Plan permits various stock-based awards including, but not limited to, stock options, stock
appreciation rights, DSUs, RSUs, and PSUs.
The design of the 2011 Omnibus Plan provides for fungible use of shares to determine the number of shares available for future
grants, with a fungible conversion factor of three to one, such that the Share Authorization will be reduced at two different rates,
depending on the type of award granted. Each share of Kemper common stock issuable upon the exercise of stock options or
stock appreciation rights will reduce the number of shares available for future grant under the Share Authorization by one share,
while each share of Kemper common stock issued pursuant to “full value awards” will reduce the number of shares available
for future grant under the Share Authorization by three shares. “Full value awards” are awards, other than stock options or stock
appreciation rights, that are settled by the issuance of shares of Kemper common stock and include RSUs, PSUs and DSUs, if
settled with stock.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to the sections captioned “Related Person
Transactions” and “Director Independence” in the Proxy Statement for Kemper’s 2020 Annual Meeting of Shareholders.
140
Kemper Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
Item 14.
Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the section captioned “Independent Registered Public
Accountant” in the Proxy Statement for Kemper’s 2020 Annual Meeting of Shareholders.
141
Item 15.
Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this Report
PART IV
1. Financial Statements. The consolidated balance sheets of Kemper and subsidiaries as of December 31, 2019 and 2018, and
the consolidated statements of income, comprehensive income (loss), cash flows and shareholders’ equity for the years
ended December 31, 2019, 2018 and 2017, together with the notes thereto and the report of Deloitte & Touche LLP thereon
appearing in Item 8 are included in this 2019 Annual Report.
2. Financial Statement Schedules. The following four financial statement schedules are included on the pages immediately
following the signature pages hereof. Schedules not listed here have been omitted because they are not applicable or not
material or the required information is included in the Consolidated Financial Statements.
Schedule I Investments Other Than Investments in Related Parties
Schedule II Parent Company Financial Statements
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance Schedule
The Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP, with regards to the Financial
Statement Schedules listed above, is incorporated by reference to the Report of Independent Registered Public Accountant
included in Item 8.
3. Exhibits. An Exhibit Index has been filed as part of this report on pages 144 through 147.
(b) Exhibits. Included in Item 15(a)3 above
(c) Financial Statement Schedules. Included in Item 15(a)2 above
Item 16. Form 10-K Summary
None
142
The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers followed by an
asterisk (*) indicate exhibits that are management contracts or compensatory plans or arrangements.
Exhibit Index
Exhibit
Number
3.1
Exhibit Description
Restated Certificate of Incorporation
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
Amended and Restated Bylaws of Kemper
Corporation
Indenture, dated as of February 27, 2014, by and
between Kemper Corporation and The Bank of
New York Mellon Trust Company, N.A., as
Trustee
Second Supplemental Indenture, dated as of
February 24, 2015, to the Indenture, dated as of
February 27, 2014, between Kemper
Corporation and The Bank of New York Mellon
Trust Company, N.A., as Trustee (including the
form of 4.350% Senior Notes due 2025)
Form of Senior Indenture, dated as of August 6,
2010, by and between Infinity Property and
Casualty Corporation and U.S. Bank National
Association, as Trustee
First Supplemental Indenture, dated as of
September 17, 2012, by and between Infinity
Property and Casualty Corporation and U.S.
Bank National Association, as Trustee
Guarantee by Kemper Corporation of the
5.000% Senior Notes due 2022 of Infinity
Property and Casualty Corporation
Form of Certificate Representing Shares of
Kemper Corporation Common Stock
Description of Capital Stock
Second Amended and Restated Credit
Agreement, by and among Kemper Corporation,
the lenders party thereto, JP Morgan Chase
Bank, N.A., as administrative agent and
syndication agent, and Bank of America, N.A.
and Wells Fargo Bank, National Association as
syndication agents
Advances and Security Agreement and
Addendum to Advances and Security
Agreement, effective as of December 31, 2013,
between Trinity Universal Insurance Company
and the Federal Home Loan Bank of Dallas
Advances, Collateral Pledge, and Security
Agreement, dated as of March 18, 2014,
between United Insurance Company of America
and the Federal Home Loan Bank of Chicago
Incorporated by Reference
Form
8-K
8-K
File Number
001-18298
Exhibit
Filing Date
3.2 August 8, 2014
001-18298
3.1 August 8, 2019
8-K
001-18298
4.1 February 27, 2014
Filed or
Furnished
Herewith
8-K
001-18298
4.2 February 24, 2015
S-3
333-168605
4.4 August 6, 2010
8-K
000-50167
4.1 September 17, 2012
8-K
001-18298
4.1 December 3, 2018
10-K
001-18298
4.7 February 20, 2019
8-K
001-18298
10.1
June 12, 2018
X
10-K
001-18298
10.2 February 14, 2014
8-K
001-18298
10.1 March 21, 2014
143
Exhibit
Number
10.4
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
Exhibit Description
Term Loan Credit Agreement, dated as of June
4, 2019, among Kemper Corporation, the
lenders party thereto, PNC Bank, National
Association, as Administrative Agent, PNC
Capital Markets LLC, as Sole Bookrunner and
Joint Lead Arranger, and BMO Capital Markets
Corp., as Joint Lead Arranger
Kemper Pension Equalization Plan, as amended
and restated effective August 25, 2011, as
amended by Amendment No. 2 effective
September 16, 2013
Kemper Supplemental Retirement Plan, as
amended and restated effective September 22,
2016
Kemper Non-Qualified Deferred Compensation
Plan, as amended and restated effective March
16, 2016
Kemper 1995 Non-employee Director Stock
Option Plan, as amended and restated effective
February 3, 2009
Form of Stock Option Agreement, as of
February 1, 2006, under the Kemper 1995 Non-
employee Director Stock Option Plan
Form of Stock Option Agreement, as of
February 3, 2009, under the Kemper 1995 Non-
employee Director Stock Option Plan
Kemper 2011 Omnibus Equity Plan, as amended
and restated effective October 30, 2013
Kemper 2011 Omnibus Equity Plan, as amended
and restated effective February 8, 2017
Form of Stock Option and SAR Agreement for
Non-employee Directors, as of August 25, 2011,
under the Kemper 2011 Omnibus Equity Plan
Form of Stock Option and SAR Agreement for
Non-employee Directors, as of May 1, 2013,
under the Kemper 2011 Omnibus Equity Plan
Form of Deferred Stock Unit Agreement for
Non-employee Directors, as of May 1, 2013,
under the Kemper 2011 Omnibus Equity Plan
Form of Stock Option and SAR Agreement -
Installment-Vesting Form, as of February 4,
2014, under the Kemper 2011 Omnibus Equity
Plan
Form of Stock Option and SAR Agreement -
Cliff-Vesting Form, as of February 4, 2014,
under the Kemper 2011 Omnibus Equity Plan
Form of Time-Vested Restricted Stock Unit
Award Agreement - Installment-Vesting Form,
as of February 4, 2014, under the Kemper 2011
Omnibus Equity Plan
Form of Performance-Based Restricted Stock
Unit Award Agreement (Relative TSR), as of
February 7, 2017, under the Kemper 2011
Omnibus Equity Plan
Incorporated by Reference
Form
8-K
File Number
001-18298
Exhibit
10.1
Filing Date
June 7, 2019
Filed or
Furnished
Herewith
10-K
001-18298
10.3 February 14, 2014
10-K
001-18298
10.5 February 13, 2017
10-Q
001-18298
10.3 May 5, 2016
10-K
001-18298
10.2 February 4, 2009
10-Q
001-18298
10.6 May 4, 2011
10-K
001-18298
10.7 February 4, 2009
10-Q
001-18298
10.1 October 31, 2013
10-K
001-18298
10.17 February 13, 2017
10-K
001-18298
10.13 February 17, 2012
10-Q
001-18298
10.1 May 2, 2013
10-Q
001-18298
10.2 May 2, 2013
10-K
001-18298
10.24 February 14, 2014
10-K
001-18298
10.25 February 14, 2014
10-K
001-18298
10.26 February 14, 2014
10-K
001-18298
10.29 February 13, 2017
144
Exhibit
Number
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
Exhibit Description
Form of Performance-Based Restricted Stock
Unit Award Agreement (Adjusted ROE), as of
February 7, 2017, under the Kemper 2011
Omnibus Equity Plan
Form of Stock Option and SAR Agreement -
Installment-Vesting Form, as of February 7,
2017, under the Kemper 2011 Omnibus Equity
Plan
Form of Time-Vested Restricted Stock Unit
Award Agreement - Installment-Vesting Form,
as of February 7, 2017, under the Kemper 2011
Omnibus Equity Plan
Form of Performance Share Unit Award
Agreement (Adjusted ROE), as of February 6,
2018, under the Kemper 2011 Omnibus Equity
Plan
Form of Performance Share Unit Award
Agreement (Relative TSR), as of February 6,
2018, under the Kemper 2011 Omnibus Equity
Plan
Form of Restricted Stock Unit Award
Agreement (Cliff Vesting), as of February 6,
2018, under the Kemper 2011 Omnibus Equity
Plan
Form of Restricted Stock Unit Award
Agreement (Installment Vesting), as of February
6, 2018, under the Kemper 2011 Omnibus
Equity Plan
Form of Non-Qualified Stock Option and SAR
Award Agreement (Cliff Vesting), as of
February 6, 2018, under the Kemper 2011
Omnibus Equity Plan
Form of Non-Qualified Stock Option and SAR
Award Agreement (Installment Vesting), as of
February 6, 2018, under the Kemper 2011
Omnibus Equity Plan
Kemper Executive Performance Plan, amended
and restated as of May 1, 2018
Form of Non-Employee Director Restricted
Stock Unit Award Agreement, as of April 30,
2019, under the Kemper 2011 Omnibus Equity
Plan
Form of individual Indemnification Agreements
between Kemper and its directors and executive
officers
Form of individual change in control severance
agreements between Kemper and its executive
officers
Each of the agreements is identical except that
the multipliers for benefits related to bonus,
severance, life insurance and health insurance
are 150%, 3 years, 3 years and 36 months,
respectively, for the Chief Executive Officer and
110%, 2 years, 2 years and 24 months,
respectively, for the other officers.
Incorporated by Reference
Form
10-K
File Number
001-18298
Exhibit
10.30 February 13, 2017
Filing Date
Filed or
Furnished
Herewith
10-K
001-18298
10.31 February 13, 2017
10-K
001-18298
10.33 February 13, 2017
10-K
001-18298
10.34 February 13, 2018
10-K
001-18298
10.35 February 13, 2018
10-K
001-18298
10.36 February 13, 2018
10-K
001-18298
10.37 February 13, 2018
10-K
001-18298
10.38 February 13, 2018
10-K
001-18298
10.39 February 13, 2018
10-Q
001-18298
10.2
July 30, 2018
8-K
001-18298
10.1 May 1, 2019
8-K
001-18298
10.1 February 11, 2020
10-K
001-18298
10.42 February 13, 2017
145
Incorporated by Reference
Exhibit Description
Form
File Number
Exhibit
Filing Date
Subsidiaries of Kemper Corporation
Consent of Deloitte & Touche LLP
Power of Attorney (included on the signature
page hereof)
Certification of Chief Executive Officer
Pursuant to SEC Rule 13a-14(a)
Certification of Chief Financial Officer Pursuant
to SEC Rule 13a-14(a)
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (furnished pursuant to Item 601(b)
(32) of Regulation S-K)
Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K)
XBRL Instance
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation
Linkbase Document
XBRL Taxonomy Extension Label Linkbase
Document
XBRL Taxonomy Extension Presentation
Linkbase Document
XBRL Taxonomy Extension Definition
Linkbase Document
Exhibit
Number
21
23
24
31.1
31.2
32.1
32.2
101.1
101.2
101.3
101.4
101.5
101.6
Filed or
Furnished
Herewith
X
X
X
X
X
X
X
X
X
X
X
X
X
146
POWER OF ATTORNEY
Each person whose signature appears below on the following page hereby appoints each of Joseph P. Lacher, Jr., President and
Chief Executive Officer, James J. McKinney, Senior Vice President and Chief Financial Officer, Anastasios Omiridis, Senior
Vice President and Deputy Chief Financial Officer, and Richard Roeske, Vice President and Chief Accounting Officer, so long
as such individual remains an executive officer of Kemper Corporation, his true and lawful attorney-in-fact with authority
together or individually to execute in the name of each such signatory, and with authority to file with the SEC, any and all
amendments to this 2019 Annual Report of Kemper Corporation, together with any and all exhibits thereto and other documents
therewith, necessary or advisable to enable Kemper Corporation to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations, and requirements of the SEC in respect thereof, which amendments may make such other
changes in the 2019 Annual Report as the aforesaid attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Kemper Corporation has duly caused this
2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019 to be signed on its behalf by the undersigned,
thereunto duly authorized, on February 14, 2020.
KEMPER CORPORATION
(Registrant)
By:
/S/ JOSEPH P. LACHER, JR.
Joseph P. Lacher, Jr.
President, Chief Executive Officer and Director
147
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of Kemper Corporation in the capacities indicated on February 14, 2020.
Signature
/S/ ROBERT J. JOYCE
Robert J. Joyce
/S/ JOSEPH P. LACHER, JR.
Joseph P. Lacher, Jr.
/S/ JAMES J. MCKINNEY
James J. McKinney
/S/ ANASTASIOS OMIRIDIS
Anastasios Omiridis
/S/ TERESA A. CANIDA
Teresa A. Canida
/S/ GEORGE N. COCHRAN
George N. Cochran
/S/ KATHLEEN M. CRONIN
Kathleen M. Cronin
/S/ LACY M. JOHNSON
Lacy M. Johnson
/S/ CHRISTOPHER B. SAROFIM
Christopher B. Sarofim
/S/ DAVID P. STORCH
David P. Storch
/S/ SUSAN D. WHITING
Susan D. Whiting
Chairman of the Board and Director
Title
President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Deputy Chief Financial Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
148
KEMPER CORPORATION AND SUBSIDIARIES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2019
(Dollars in Millions)
SCHEDULE I
Amortized
Cost
Fair Value
Amount
Carried in
Balance Sheet
Fixed Maturities:
Bonds and Notes:
United States Government and Government Agencies and Authorities .............. $
States and Political Subdivisions .........................................................................
Foreign Governments
Corporate Securities:
784.7
1,386.4
17.2
$
815.9
1,515.8
16.8
$
815.9
1,515.8
16.8
Other Bonds and Notes ...................................................................................
Redeemable Preferred Stocks .........................................................................
Collateralized Loan Obligations .....................................................................
Other Mortgage- and Asset-backed.................................................................
Total Investments in Fixed Maturities...........................................................................
Equity Securities at Fair Value:
Preferred Stocks........................................................................................................
Common Stocks........................................................................................................
Other Equity Interests ...............................................................................................
Total Investments in Equity Securities ..........................................................................
Equity Securities at Modified Cost................................................................................
3,465.0
6.8
624.6
88.0
6,372.7
59.2
13.2
834.9
907.3
41.9
Equity Method Limited Liability Investments at Cost Plus Cumulative
Undistributed Earnings ..............................................................................................
Convertible Securities at Fair Value..............................................................................
Loans, Real Estate and Other Investments ....................................................................
Short-term Investments .................................................................................................
Total Investments...........................................................................................................
220.4
37.3
444.5
470.9
$ 8,495.0
3,859.7
6.7
618.2
89.0
6,922.1
59.2
13.2
834.9
907.3
XXX.X
XXX.X
37.3
XXX.X
XXX.X
$
3,859.7
6.7
618.2
89.0
6,922.1
59.2
13.2
834.9
907.3
41.9
220.4
37.3
444.5
470.9
9,044.4
See Accompanying Report of Independent Registered Public Accounting Firm.
SCH I-1
KEMPER CORPORATION
PARENT COMPANY BALANCE SHEETS
(Dollars in Millions)
ASSETS
Investments in Subsidiaries .......................................................................................................................
Fixed Maturities at Fair Value (Amortized Cost: 2018 – $12.6)...............................................................
Equity Securities at Fair Value ..................................................................................................................
Short-term Investments .............................................................................................................................
Cash ...........................................................................................................................................................
Other Receivables......................................................................................................................................
Other Assets...............................................................................................................................................
Right-of-Use Assets...................................................................................................................................
Total Assets................................................................................................................................................
LIABILITIES AND SHAREHOLDERS’ EQUITY
Term Loan due June 29, 2020 (Fair Value: 2018 – $35.0) ........................................................................
Term Loan due July 5, 2023 (Fair Value: 2019 – $50.0)...........................................................................
Senior Notes Payable, 4.35% due 2025 (Fair Value: 2019 – $478.6; 2018 – $444.2) ..............................
Subordinated Debentures due 2054 (Fair Value: 2018 – $151.1)..............................................................
Current Income Tax Liability ....................................................................................................................
Deferred Income Tax Liability ..................................................................................................................
Liabilities for Benefit Plans.......................................................................................................................
Right-of-Use Liabilities.............................................................................................................................
Accrued Expenses and Other Liabilities ...................................................................................................
Total Liabilities..........................................................................................................................................
Shareholders’ Equity:
SCHEDULE II
December 31,
2019
2018
$ 4,383.7
—
55.7
89.3
61.8
21.9
21.9
18.6
$ 4,652.9
$ 3,736.0
12.6
20.4
64.6
2.9
5.7
14.4
—
$ 3,856.6
—
49.9
448.6
—
55.3
32.2
44.3
31.3
19.0
680.6
34.9
—
448.4
144.2
40.5
20.2
98.2
—
20.1
806.5
6.7
Common Stock .....................................................................................................................................
1,819.2
Additional Paid-in Capital ....................................................................................................................
1,810.3
Retained Earnings.................................................................................................................................
336.1
Accumulated Other Comprehensive Income........................................................................................
3,972.3
Total Shareholders’ Equity ........................................................................................................................
Total Liabilities and Shareholders’ Equity ................................................................................................ $ 4,652.9
6.5
1,666.3
1,355.5
21.8
3,050.1
$ 3,856.6
See Accompanying Report of Independent Registered Public Accounting Firm.
SCH II-1
KEMPER CORPORATION
PARENT COMPANY STATEMENTS OF INCOME
(Dollars in Millions)
For the Year Ended December 31,
2019
2018
2017
Net Investment Income.......................................................................................................... $
Income from Change in Fair Value of Equity Securities.......................................................
Net Realized Gains (Losses) on Sales of Investments ..........................................................
Total Revenues ......................................................................................................................
Interest Expense.....................................................................................................................
Loss from Early Extinguishment of Debt..............................................................................
Other Operating (Benefits) Expenses....................................................................................
Total Operating Expenses......................................................................................................
Loss before Income Taxes and Equity in Net Income of Subsidiaries..................................
Income Tax Benefit ...............................................................................................................
Loss before Equity in Net Income of Subsidiaries................................................................
Equity in Net Income of Subsidiaries....................................................................................
Net Income ............................................................................................................................ $
2.1
1.6
0.3
4.0
28.5
5.8
4.0
38.3
(34.3)
9.4
(24.9)
556.0
531.1
$
$
2.5
1.4
(0.7)
3.2
37.6
—
26.3
63.9
(60.7)
12.2
(48.5)
238.6
190.1
$
$
3.0
—
0.6
3.6
36.6
—
(5.1)
31.5
(27.9)
21.2
(6.7)
127.6
120.9
See Accompanying Report of Independent Registered Public Accounting Firm.
SCH II-2
KEMPER CORPORATION
PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions)
Net Income ............................................................................................................................ $
Other Comprehensive Income (Loss):
Unrealized Holding Gains (Losses) Arising During the Year:
Securities Held by Subsidiaries ...................................................................................
Securities Held by Parent.............................................................................................
Reclassification Adjustment for Amounts Included in Net Income:
Securities Held by Subsidiaries ...................................................................................
Securities Held by Parent.............................................................................................
Unrealized Holding Gains (Losses)..................................................................................
Unrecognized Postretirement Benefit Costs Arising During the Year:
Securities Held by Subsidiaries ...................................................................................
Securities Held by Parent.............................................................................................
Reclassification Adjustments for Amounts Included in Net Income:
Amortization of Unrecognized Postretirement Benefits (Costs) .................................
Total Reclassification Adjustments for Amounts Included in Net Income.......................
Net Unrecognized Postretirement Benefit Costs ..............................................................
Foreign Currency Translation Adjustments on Investments Held by Subsidiaries ..........
Gains (Losses) on Cash Flow Hedge................................................................................
Other Comprehensive Income (Loss) before Income Taxes .................................................
Income Tax Benefit (Expense):
Unrealized Holding Gains and Losses Arising During the Year:
Securities Held by Subsidiaries ...................................................................................
Securities Held by Parent.............................................................................................
Reclassification Adjustment for Amounts Included in Net Income:
Securities Held by Subsidiaries ...................................................................................
Unrealized Holding Gains and Losses..............................................................................
Unrecognized Postretirement Benefit Costs Arising During the Year..............................
Reclassification Adjustments for Amounts Included in Net Income:
Amortization of Unrecognized Postretirement Benefit Costs .....................................
Total Reclassification Adjustments for Amounts Included in Net Income.......................
Net Unrecognized Postretirement Benefit Costs ..............................................................
Foreign Currency Translation Adjustments on Investments Held by Subsidiaries ..........
Gains (Losses) on Cash Flow Hedge................................................................................
Income Tax Benefit (Expense) ..............................................................................................
Other Comprehensive Income (Loss)....................................................................................
Total Comprehensive Income (Loss)..................................................................................... $
For the Year Ended December 31,
2019
531.1
2018
190.1
$
2017
120.9
$
433.2
0.2
(27.9)
(0.2)
405.3
(0.6)
(4.2)
(3.0)
(3.0)
(7.8)
—
0.4
397.9
(91.0)
—
5.8
(85.2)
1.0
0.7
0.7
1.7
—
(0.1)
(83.6)
314.3
845.4
(214.1)
(0.1)
(21.9)
—
(236.1)
—
(8.0)
1.1
1.1
(6.9)
0.3
1.2
(241.5)
45.0
—
4.6
49.6
1.7
(0.2)
(0.2)
1.5
(0.1)
(0.3)
50.7
(190.8)
$
(0.7) $
119.5
(0.4)
(35.3)
—
83.8
—
3.9
(0.6)
(0.6)
3.3
1.7
(6.7)
82.1
(38.3)
0.1
12.3
(25.9)
(0.8)
0.2
0.2
(0.6)
(0.6)
2.4
(24.7)
57.4
178.3
See Accompanying Report of Independent Registered Public Accounting Firm.
SCH II-3
KEMPER CORPORATION
PARENT COMPANY STATEMENTS OF CASH FLOWS
(Dollars in Millions)
For the Year Ended December 31,
2019
2018
2017
Operating Activities:
Net Income........................................................................................................................ $
Adjustment Required to Reconcile Net Income to Net Cash Provided by Operations:
531.1
$
190.1
$
120.9
Equity in Net Income of Subsidiaries ..........................................................................
Cash Dividends from Subsidiaries...............................................................................
Cash Contribution to Defined Benefit Plan .................................................................
Increase in Value of Equity Securities at Fair Value....................................................
Net Realized (Gains) Losses on Sales of Investments.................................................
Loss from Early Extinguishment of Debt ....................................................................
Other, Net.....................................................................................................................
Net Cash Provided by Operating Activities...........................................................................
Investing Activities:
Capital Contributed to Subsidiaries ..................................................................................
Capital Distribution from Subsidiary................................................................................
Sales, Paydowns and Maturities of Fixed Maturities .......................................................
Purchases of Equity Securities..........................................................................................
Sales of Equity Securities .................................................................................................
Sales of Fair Value Option Investments............................................................................
Purchases of Fair Value Option Investments....................................................................
Acquisition of Business ....................................................................................................
Change in Short-term Investments ...................................................................................
Net Cash Provided (Used) by Investing Activities................................................................
Financing Activities:
Notes Payable Proceeds:
Net Proceeds from Issuance of Debt ................................................................................
Repayments of Debt .........................................................................................................
Proceeds from Issuance of Common Stock, Net of Transaction Costs ............................
Cash Dividends Paid.........................................................................................................
Proceeds from Shares Issued under Employee Stock Purchase Plan ...............................
Cash Exercise of Stock Options .......................................................................................
Net Cash Used by Financing Activities.................................................................................
Increase (Decrease) in Cash ..................................................................................................
Cash, Beginning of Year........................................................................................................
Cash, End of Year ..................................................................................................................
$
(556.0)
239.0
(55.3)
(1.6)
(0.3)
5.8
9.8
172.5
(83.0)
85.0
12.7
(48.9)
15.3
—
—
—
(23.3)
(42.2)
49.9
(185.0)
127.5
(67.8)
1.6
2.4
(71.4)
58.9
2.9
61.8
$
(238.6)
130.4
(5.0)
(1.4)
0.7
—
29.6
105.8
(20.0)
176.0
(0.2)
(2.3)
67.5
—
—
(564.6)
253.4
(90.2)
249.4
(215.0)
—
(56.4)
—
0.9
(21.1)
(5.5)
8.4
2.9
$
(127.6)
108.1
—
—
(0.6)
—
0.7
101.5
—
—
45.7
—
—
42.2
(7.0)
—
15.6
96.5
200.2
(360.0)
—
(49.5)
—
4.0
(205.3)
(7.3)
15.7
8.4
See Accompanying Report of Independent Registered Public Accounting Firm.
SCH II-4
KEMPER CORPORATION
Schedule II (Continued) - Financial Information of Kemper Corporation
Notes to Financial Information
(Dollars in Millions)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information of Kemper Corporation (“Kemper” or the “Parent Company”) should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K. Kemper’s subsidiaries are
accounted for using the equity method of accounting. Equity in net income of these subsidiaries is presented on the Statements
of Operations as Equity in Net Income of Subsidiaries.
NOTE 2. GUARANTEES
On November 30, 2018 Kemper executed a guarantee to fully and unconditionally guarantee the payment and performance
obligations of the 5.0% Senior Notes due September 19, 2022 of Infinity Property and Casualty Corporation, a wholly owned
subsidiary of Kemper.
NOTE 3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Kemper did not receive any non-cash dividends from subsidiaries nor make any non-cash capital contributions in 2019.
Kemper received non-cash dividends from subsidiaries, in the form of invested assets, of $574 million in 2018. Kemper made
non-cash capital contributions, in the form of invested assets, of $350 million in 2018.
NOTE 4. LEASES
Kemper leases certain office space for its current and former corporate headquarters under non-cancelable operating leases.
The following table presents operating lease ROU assets and lease liabilities at December 31, 2019.
DOLLARS IN MILLIONS
Operating Lease Right-of-Use Assets...............................................................................................................
Operating Lease Liabilities...............................................................................................................................
$
2019
18.6
31.3
Supplemental cash flow information related to Kemper’s operating leases for the year-ended December 31, 2019 follows.
DOLLARS IN MILLIONS
Operating Cash Flows from Operating Leases (Fixed Payments).....................................................................
Operating Cash Flows from Operating Leases (Liability Reduction) ...............................................................
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities............................................
$
2019
1.2
1.0
7.9
Significant judgments and assumptions for determining lease asset and liability as December 31, 2019 are presented below.
Weighted-average Remaining Lease Term - Operating Leases..........................................................................
Weighted-average Discount Rate - Operating Leases ........................................................................................
13.0 years
4.0%
SCH II-5
NOTE 4. LEASES (Continued)
Kemper’s leases do not provide an implicit rate. Accordingly, Kemper uses its incremental borrowing rate based on the
information available at the commencement date in determining the present value of its lease payments.
Future minimum operating lease payments at December 31, 2019 were:
DOLLARS IN MILLIONS
2020...........................................................................................................................................................
2021...........................................................................................................................................................
2022...........................................................................................................................................................
2023...........................................................................................................................................................
2024...........................................................................................................................................................
2025 and Thereafter ..................................................................................................................................
Total Future Payments...............................................................................................................................
Less Discount ............................................................................................................................................
Present Value of Minimum Lease Payments.............................................................................................
$
$
$
Operating
Leases
2.1
3.5
3.7
3.5
2.5
25.6
40.9
9.6
31.3
SCH II-6
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I
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S
KEMPER CORPORATION
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(Dollars in Millions)
SCHEDULE IV
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed to
Net
Year Ended December 31, 2019
Life Insurance in Force ........................................................ $ 19,479.9
Premiums:
Life Insurance..................................................................
Accident and Health Insurance........................................
Property and Liability Insurance .....................................
Total Premiums.....................................................................
Year Ended December 31, 2018
Life Insurance in Force ........................................................
Premiums:
Life Insurance..................................................................
Accident and Health Insurance........................................
Property and Liability Insurance .....................................
Total Premiums.....................................................................
Year Ended December 31, 2017
Life Insurance in Force ........................................................
Premiums:
$
383.6
188.5
3,835.4
$ 4,407.5
$ 19,435.1
$
378.2
174.3
2,778.3
$ 3,330.8
$ 19,208.7
Life Insurance..................................................................
Accident and Health Insurance........................................
Property and Liability Insurance .....................................
Total Premiums.....................................................................
$
366.8
171.0
1,757.5
$ 2,295.3
$
$
$
$
$
$
$
$
$
411.6
1.2
1.7
24.5
27.4
436.4
1.2
1.7
28.7
31.6
455.2
1.4
1.5
15.3
18.2
$
$
$
$
$
$
$
$
$
162.8
$ 19,231.1
0.8%
0.9
5.3
86.1
92.3
$
383.3
192.1
3,897.0
$ 4,472.4
0.2 %
2.8 %
2.2 %
2.1 %
172.7
$ 19,171.4
0.9 %
1.0
5.3
78.9
85.2
$
378.0
177.9
2,828.5
$ 3,384.4
0.3 %
3.0 %
2.8 %
2.5 %
184.0
$ 18,937.5
1.0 %
1.1
5.4
66.4
72.9
$
366.5
174.9
1,808.6
$ 2,350.0
0.3 %
3.1 %
3.7 %
3.1 %
See Accompanying Report of Independent Registered Public Accounting Firm.
SCH IV-1
Kemper Corporation
Description of Capital Stock
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:23)(cid:17)(cid:26)
The following is a summary of the material terms and provisions of the capital stock of Kemper Corporation (“we,”
“us,” “our,” “Kemper” or “Company”) and does not purport to be complete. It is qualified by reference to our amended and
restated Certificate of Incorporation (“Certificate of Incorporation”) and our amended and restated bylaws (“Bylaws”), each of
which is incorporated by reference as an exhibit to our Annual Report on Form 10-K of which this Exhibit is a part (“Annual
Report”), and by certain provisions of the General Corporation Law of the State of Delaware (“DGCL”).
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $.10 per share, and
20,000,000 shares of preferred stock, par value $.10 per share. No preferred stock is outstanding as of the date of the filing of
the Annual Report. As of December 31, 2019, there were 66,665,888 shares of our common stock outstanding, and 3,254,822
shares reserved for issuance pursuant to our 2011 Omnibus Equity Plan.
Common Stock
Voting Rights. Each holder of shares of our common stock is entitled to attend all special and annual meetings of our
shareholders. The holders of our common stock have one vote for each share held on all matters voted upon by our
shareholders, including the election of directors to our Board of Directors (“Board of Directors”). Other than the election of
directors, if an action is to be taken by vote of our shareholders at a meeting of shareholders at which a quorum is present, it
will be decided by a majority of the votes cast with respect to such matter, unless a different vote is required under our
Certificate of Incorporation or the DGCL. In an election of directors at a meeting of shareholders at which a quorum is present,
a nominee for director shall be elected to the Board of Directors if the votes cast for such nominee’s election exceed the votes
cast against such nominee’s election, provided, however, in the event the number of nominees for director is greater than the
number of directors to be elected, directors shall be elected by a plurality of the votes cast.
Dividends. Except for any preferential rights of holders of any preferred stock that may then be issued and outstanding
and any other class or series of stock having a preference over the common stock, holders of our common stock are entitled to
receive dividends as and when declared by our Board of Directors, from legally available funds.
Liquidation and Dissolution. In the event of our liquidation or dissolution, the holders of our common stock are
entitled to receive ratably all assets available for distribution to shareholders after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred stock.
Other Rights. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of our common stock are subject to and may be adversely affected by the rights of
the holders of shares of any series of preferred stock that we may designate and issue in the future.
Listing. Our common stock is listed on the New York Stock Exchange, or the NYSE, under the symbol “KMPR.”
Transfer Agent and Registrar. The transfer agent and registrar for our common stock is Computershare Trust
Company, N.A.
Preferred Stock
Our Certificate of Incorporation authorizes our Board of Directors to issue up to 20,000,000 shares of preferred stock
in one or more series, with such distinctive designation or title and in such number of shares as may be authorized by our Board
of Directors. Our Board of Directors is authorized to prescribe the relative rights and preferences of each series, and the
limitations applicable thereto, including but not limited to the following: (i) the voting powers, full, special, or limited, or no
voting powers, of each such series; (ii) the rate, terms and conditions on which dividends will be paid, whether such dividends
will be cumulative, and what preference such dividends shall have in relation to the dividends on other series or classes of
stock; (iii) the rights, terms and conditions, if any, for conversion of such series of preferred stock into shares of other series or
classes of stock; (iv) any right of the Company to redeem the shares of such series of preferred stock, and the price, time, and
conditions of such redemption, including the provisions for any sinking fund; and (v) the rights of holders of such series of
preferred stock in relation to the rights of other series and classes of stock upon the liquidation, dissolution or distribution of
our assets. Unless otherwise provided by our Board of Directors, upon redemption or conversion, shares of preferred stock will
revert to authorized but unissued shares and may be reissued as shares of any series of preferred stock.
Certain Statutory, Certificate of Incorporation and Bylaw Provisions Affecting Shareholders
Various provisions of our Certificate of Incorporation and Bylaws, the DGCL and state insurance laws could have the
effect of delaying, deferring or discouraging another party from acquiring control of Kemper. These provisions, which are
summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage, or could have the effect of encouraging, persons seeking to acquire control of Kemper to first
negotiate with our Board of Directors.
The portions of the summary set forth below describing certain provisions of our Certificate of Incorporation and
Bylaws is qualified in its entirety by reference to the provisions of our Certificate of Incorporation and Bylaws.
Certificate of Incorporation and Bylaw Provisions
Special Meetings of Shareholders. Our Certificate of Incorporation and Bylaws do not grant the shareholders the right
to call a special meeting of shareholders. Under our Certificate of Incorporation and Bylaws, special meetings of shareholders
may be called only by the Chairman of the Board of Directors or by a majority of the Board of Directors then in office.
No Shareholder Action by Written Consent. Our Certificate of Incorporation also provides that shareholders may not
take any action by written consent.
Advance Notice Requirements. Our Bylaws set forth advance notice procedures with regard to shareholder proposals
relating to the nomination of candidates for election as directors or other business to be presented at meetings of shareholders.
These procedures provide that notice of such shareholder proposals must be timely given in writing to the Secretary of Kemper
prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be delivered to the Secretary at the
principal executive offices of Kemper not less than 60 nor more than 90 days prior to the anniversary of the preceding year’s
annual meeting. The notice must contain specified information concerning the person to be nominated or the business to be
brought before the meeting and concerning the shareholder submitting the proposal. The advance notice requirement does not
give the Board of Directors any power to approve or disapprove shareholder director nominations or proposals but may have
the effect of precluding the consideration of such nominations or proposals at a meeting if the proper notice procedures are not
followed.
Blank Check Preferred Stock. Our preferred stock could be deemed to have an anti-takeover effect in that, if a hostile
takeover situation should arise, shares of preferred stock could be issued to purchasers sympathetic with our management or
others in such a way as to render more difficult or to discourage a merger, tender offer, proxy contest, the assumption of control
by a holder of a large block of our securities or the removal of incumbent management.
The effects of the issuance of one or more series of the preferred stock on the holders of our common stock could
include:
•
•
•
•
•
reduction of the amount otherwise available for payments of dividends on common stock if dividends are payable
on the series of preferred stock;
restrictions on dividends on our common stock if dividends on the series of preferred stock are in arrears;
dilution of the voting power of our common stock if the series of preferred stock has voting rights, including a
possible “veto” power if the series of preferred stock has class voting rights;
dilution of the equity interest of holders of our common stock if the series of preferred stock is convertible, and is
converted, into our common stock; and
restrictions on the rights of holders of our common stock to share in our assets upon liquidation until satisfaction
of any liquidation preference granted to the holders of the series of preferred stock.
Business Combinations. Article Seven of our Certificate of Incorporation places certain restrictions on the following
transactions with a direct or indirect beneficial owner (including certain former beneficial owners and successors to such
beneficial owners) of more than 15% of the voting power of Kemper’s outstanding voting stock (an “Interested Shareholder”):
•
•
any merger or consolidation of Kemper or any subsidiary with any Interested Shareholder or any other person
(whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an
affiliate of an Interested Shareholder; or
any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of
transactions) to or with any Interested Shareholder or any affiliate of any Interested Shareholder of any assets of
Kemper or any subsidiary having an aggregate fair market value of $10,000,000 or more; or
•
•
•
the issuance or transfer by Kemper or any subsidiary (in one transaction or a series of transactions) of any
securities of Kemper or any subsidiary to any Interested Shareholder or any affiliate of any Interested Shareholder
in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value
of $10,000,000 or more; or
the adoption of any plan or proposal for the liquidation or dissolution of Kemper proposed by or on behalf of any
Interested Shareholder or any affiliate of any Interested Shareholder; or
any reclassification of securities (including any reverse stock split or recapitalization of Kemper) or any merger or
consolidation of Kemper with any of its subsidiaries or any other transaction (whether or not with or into or
otherwise involving any Interested Shareholder) which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or convertible securities of Kemper or any
subsidiary beneficially owned by any Interested Shareholder or any affiliate of any Interested Shareholder.
We may only enter into one of the transactions described above if:
•
•
the transaction has been approved by a majority of our “continuing directors,” being (A) members of our original
Board of Directors, (B) persons unaffiliated with an Interested Shareholder who were members of the Board of
Directors prior to such person or entity becoming an Interested Shareholder, or (C) successors of continuing
directors who were recommended to succeed continuing directors by a majority of continuing directors then on
the Board of Directors; or
the transaction has been approved by the affirmative vote of 75% of the voting power of our outstanding voting
stock, voting together as a single class, and (A) the consideration to be received by the holders of each class or
series of our capital stock is (i) not less than the highest price paid by the Interested Shareholder for any shares of
such class or series during the preceding 24 months, and (ii) is either in cash or in the form of consideration
previously used by the Interested Shareholder to acquire the largest number of shares of such class or series
previously acquired by such Interested Shareholder, and (B) certain other conditions have been met.
Exclusive Forum Provision. Our Bylaws provide that, unless we consent to the selection of an alternative forum, the
sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of
breach of a fiduciary duty owed to us or our shareholders by any of our directors, officers or other employees or agents, (iii)
any action asserting a claim against us or any of our directors or officers or other employees or agents arising pursuant to any
provision of the DGCL or our Certificate of Incorporation or Bylaws, or (iv) any action asserting a claim against us or any of
our directors or officers or other employees or agents governed by the internal affairs doctrine, shall be the Court of Chancery
of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another court of the State of Delaware or, if no
court of the State of Delaware has jurisdiction, the federal district court for the District of Delaware), in all cases subject to the
court having personal jurisdiction over the indispensable parties named as defendants.
Business Combination Statute
We are a Delaware corporation and consequently are also subject to certain anti-takeover provisions of the DGCL.
Subject to certain exceptions, Section 203 of the DGCL prevents a publicly held Delaware corporation from engaging in a
“business combination” with any “interested stockholder” for three years following the date that the person became an
interested stockholder, unless the interested stockholder attained such status with the approval of the corporation’s board of
directors or unless the business combination is approved in a prescribed manner. A “business combination,” in reference to
Kemper, includes, among other things, a merger or consolidation of Kemper or one of its subsidiaries and an interested
stockholder or the sale by Kemper or any of its subsidiaries to an interested stockholder of assets having an aggregate market
value equal to 10% or more of either the aggregate market value of Kemper’s consolidated assets or the aggregate market value
of Kemper’s outstanding stock. In general, in relation to Kemper, an “interested stockholder” is any person that is the owner of
15% or more of Kemper’s outstanding voting stock and the affiliates and associates of such person. Section 203 makes it more
difficult for an interested stockholder to effect various business combinations with a corporation for a three-year period. This
statute could prohibit or delay mergers or other takeover or change in control attempts not approved in advance by our Board of
Directors, and as a result could discourage attempts to acquire Kemper, which could depress the market price of our common
stock.
Change in Control Requirements Under Insurance Laws
State insurance laws impose requirements that must be met prior to a change of control of an insurance company or
insurance holding company based on the insurer’s state of domicile and, in some cases, additional states in which it is deemed
commercially domiciled due to the substantial amount of business it conducts therein. These requirements may include the
advance filing of specific information with the state insurance regulators, a public hearing on the matter, and the review and
approval of the change of control by such regulators. Kemper has insurance subsidiaries domiciled or deemed commercially
domiciled in Alabama, California, Florida, Georgia, Illinois, Indiana, Louisiana, Missouri, New York, Ohio, Oregon, Texas and
Wisconsin. In these states, except Alabama, “control” generally is presumed to exist through the direct or indirect ownership of
10% or more of the voting securities of an insurance company. Control is presumed to exist in Alabama with a 5% or more
ownership interest in such securities. Any purchase of Kemper’s shares that would result in the purchaser owning Kemper’s
voting securities in the foregoing percentages for the states indicated would be presumed to result in the acquisition of control
of Kemper’s insurance subsidiaries in those states. Therefore, acquisitions subject to the 10% threshold generally would require
the prior approval of insurance regulators in each state in which the Company’s insurance subsidiaries are domiciled or deemed
commercially domiciled, including those in Alabama, while acquisitions subject to the 5% threshold generally would require
the prior approval of only Alabama regulators. Similarly, several of the states in which the Company’s insurance subsidiaries
are domiciled have enacted legislation that requires either the divesting and/or acquiring company to notify regulators of, and in
some cases to receive regulatory approval for, a change in control.
Many state statutes also require pre-acquisition notification to state insurance regulators of a change of control of an
insurance company licensed in the state if specific market concentration thresholds would be triggered by the acquisition. Such
statutes authorize the issuance of a cease and desist order with respect to the insurance company if certain conditions, such as
undue market concentration, would result from the acquisition.
These regulatory requirements may deter, delay or prevent transactions affecting control of Kemper or its insurance
subsidiaries, or the ownership of Kemper’s voting securities, including transactions that could be advantageous to Kemper’s
shareholders.
Subsidiaries of KEMPER CORPORATION
Exhibit 21
Subsidiaries of Kemper Corporation, with their states of incorporation in parentheses, are as follows:
1. Alliance United Insurance Company (California)
2. Alliance United Insurance Services, LLC (California)
3. Alpha Property & Casualty Insurance Company (Wisconsin)
4. Casualty Underwriters, Inc. (Georgia)
5. Capitol County Mutual Fire Insurance Company (Texas)*
6. Charter Indemnity Company (Texas)
7. Direct Response Corporation (Delaware)
8. Family Security Funerals Company (Texas)
9. Financial Indemnity Company (Illinois)
10. Infinity Assurance Insurance Company (Ohio)
11. Infinity Auto Insurance Company (Ohio)
12. Infinity Casualty Insurance Company (Ohio)
13. Infinity County Mutual Insurance Company (Texas)
14. Infinity Financial Centers, LLC (Delaware)
15. Infinity Indemnity Insurance Company (Indiana)
16. Infinity Insurance Agency, Inc. (Alabama)
17. Infinity Insurance Company (Indiana)
18. Infinity Preferred Insurance Company (Ohio)
19. Infinity Property and Casualty Corporation (Ohio)
20. Infinity Property and Casualty Services, Inc. (Georgia)
21. Infinity Safeguard Insurance Company (Ohio)
22. Infinity Security Insurance Company (Indiana)
23. Infinity Select Insurance Company (Indiana)
24. Infinity Standard Insurance Company (Indiana)
25. KAHG LLC (Illinois)
26. Kemper Corporate Services, Inc. (Illinois)
27. Kemper Financial Indemnity Company (Illinois)
28. Kemper General Agency, Inc. (Texas)
29. Kemper Independence Insurance Company (Illinois)
30. Kemper Personal Insurance General Agency, Inc. (Texas)
31. Leader Group, Inc. (Ohio)
32. Leader Managing General Agency, Inc. (Texas)
33. Merastar Industries LLC (Delaware)
34. Merastar Insurance Company (Illinois)
35. Mutual Savings Fire Insurance Company (Alabama)
36. Mutual Savings Life Insurance Company (Alabama)
37. National Association of Self-Employed Business Owners (Oklahoma)
38. NCM Management Corporation (Delaware)
39. Old Reliable Casualty Company (Missouri)*
41. The Reliable Life Insurance Company (Missouri)
42. Reserve National Insurance Company (Illinois)
43. Response Insurance Company (Illinois)
44. Response Worldwide Direct Auto Insurance Company (Illinois)
45. Response Worldwide Insurance Company (Illinois)
46. Rural American Consumers A National Association (Oklahoma)
47. Security One Agency LLC (Illinois)
48. Summerset Marketing Company (Oklahoma)
49. Trinity Universal Insurance Company (Texas)
50. Union National Fire Insurance Company (Louisiana)
51. Union National Life Insurance Company (Louisiana)
52. United Casualty Insurance Company of America (Illinois)
53. United Insurance Company of America (Illinois)
54. Unitrin Advantage Insurance Company (New York)
55. Unitrin Auto and Home Insurance Company (New York)
56. Unitrin County Mutual Insurance Company (Texas)*
57. Unitrin Direct Insurance Company (Illinois)
58. Unitrin Direct Property & Casualty Company (Illinois)
59. Unitrin Preferred Insurance Company (New York)
60. Unitrin Safeguard Insurance Company (Wisconsin)
61. Valley Property & Casualty Insurance Company (Oregon)
62. Warner Insurance Company (Illinois)
* May be deemed to be an affiliate pursuant to Rule 1-02 of SEC Regulation S-X.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-217781 on Form S-3 and Registration
Statement Nos. 33-58300, 333-4530, 333-86935, 333-76076, 333-173877 and 333-231180 on Form S-8 of our report dated
February 14, 2020, relating to the financial statements of Kemper Corporation and the effectiveness of Kemper Corporation's
internal control over financial reporting appearing in this Annual Report on Form 10-K for the year ended December 31, 2019.
Exhibit 23
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 14, 2020
Exhibit 31.1
I, Joseph P. Lacher, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Kemper Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 14, 2020
/S/ JOSEPH P. LACHER, JR.
Joseph P. Lacher, Jr.
President and Chief Executive Officer
Exhibit 31.2
I, James J. McKinney, certify that:
1. I have reviewed this annual report on Form 10-K of Kemper Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 14, 2020
/S/ JAMES J. MCKINNEY
James J. McKinney
Executive Vice President and Chief Financial Officer
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Kemper Corporation (the “Company”) for the year ended
December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Joseph P. Lacher,
Jr., as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/S/ JOSEPH P. LACHER, JR.
Name:
Title:
Date:
Joseph P. Lacher, Jr.
President and Chief Executive Officer
February 14, 2020
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Kemper Corporation (the “Company”) for the year ended
December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), James J.
McKinney, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Name:
Title:
Date:
/S/ JAMES J. MCKINNEY
James J. McKinney
Executive Vice President and Chief Financial Officer
February 14, 2020
Kemper Corporation
Definitions of Non-GAAP Financial Measures Used on Inside Front Cover and Letter to Shareholders
The Company believes that investors’ understanding of Kemper’s performance is enhanced by the disclosure of
the following non-GAAP financial measures. The methods for calculating these measures may differ from those
used by other companies and therefore comparability may be limited.
Adjusted Consolidated Net Operating Income or “Adjusted operating earnings” is an after-tax, non-GAAP
financial measure and is computed by excluding from Income from Continuing Operations the after-tax impact
of:
1. Net Realized Gains on Sales of Investments;
2. Net Impairment Losses Recognized in Earnings related to investments;
3.
Income (Loss) from Change in Fair Value of Equity and Convertible Securities;
4. Acquisition Related Transaction, Integration and Other Costs;
5.
6.
Loss from Early Extinguishment of Debt; and
Significant non-recurring or infrequent items that may not be indicative of ongoing operations
Significant non-recurring items are excluded when (a) the nature of the charge or gain is such that it is reasonably
unlikely to recur within two years and (b) there has been no similar charge or gain within the prior two years. The
most directly comparable GAAP financial measure is Income from Continuing Operations. The Company
believes that Adjusted Consolidated Net Operating Income provides investors with a valuable measure of its
ongoing performance because it reveals underlying operational performance trends that otherwise might be less
apparent if the items were not excluded. Net Realized Gains on Sales of Investments, Net Impairment Losses
Recognized in Earnings related to investments, and Income (Loss) from Change in Fair Value of Equity and
Convertible Securities included in the Company’s results may vary significantly between periods and are
generally driven by business decisions and external economic developments such as capital market conditions
that impact the values of the Company’s investments, the timing of which is unrelated to the insurance
underwriting process. Acquisition Related Transaction, Integration and Other Costs may vary significantly
between periods and are generally driven by the timing of acquisitions and business decisions which are
unrelated to the insurance underwriting process. Loss from Early Extinguishment of Debt is driven by the
Company’s financing and refinancing decisions and capital needs, as well as, external economic developments
such as debt market conditions, the timing of which is unrelated to the insurance underwriting process.
Significant non-recurring items are excluded because, by their nature, they are not indicative of the Company’s
business or economic trends.
A reconciliation of Income from Continuing Operations to Adjusted Consolidated Net Operating Income is
presented on page 27 of the company’s Annual Report on Form 10-K.
Adjusted Consolidated Net Operating Income Per Unrestricted Share—Diluted is a non-GAAP financial
measure. It is computed by dividing Adjusted Consolidated Net Operating Income by the weighted average
unrestricted shares and common stock equivalents outstanding. The most directly comparable GAAP financial
measure is Income from Continuing Operations Per Unrestricted Share—Diluted. A reconciliation of Income
from Continuing Operations Per Unrestricted Share—Diluted to Adjusted Consolidated Net Operating Income
Per Unrestricted Share—Diluted is presented below.
Income from Continuing Operations Per Unrestricted Share—
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Net (Income) Loss Per Unrestricted Share—Diluted
From:
Change in Fair Value of Equity and Convertible
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Realized Gains on Sales of Investments . . . . . . . . . . .
Net Impairment Losses Recognized in Earnings . . . . . . . .
Acquisition Related Transaction, Integration and Other
Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Loss from Early Extinguishment of Debt
Year Ended Dec. 31.,
2017
2018
2019
$ 2.31
$ 3.19
$ 7.96
—
(0.71)
0.18
—
—
0.86
(0.35)
0.06
0.61
—
(1.64)
(0.50)
0.16
0.22
0.07
Adjusted Consolidated Net Operating Income Per Unrestricted
Share—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.78
$ 4.37
$ 6.27
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Kemper Corporation Board of Directors
Robert J. Joyce
Chairman of the Board,
Kemper Corporation
Retired Chairman and
Chief Executive Officer
Westfield Group
Joseph P. Lacher, Jr.
President and
Chief Executive Officer
Kemper Corporation
Teresa A. Canida
Principal and Portfolio Manager
Cito Capital Group, LLC
Gerald Laderman
Executive Vice President and
Chief Financial Officer
United Airlines Holdings Inc.
George N. Cochran
Retired Chairman
Global Financial Institutions Group
Macquarie Capital
Christopher B. Sarofim
Vice Chairman
Fayez Sarofim & Co.
Kathleen M. Cronin
Senior Managing Director,
General Counsel and
Corporate Secretary
CME Group Inc.
David P. Storch
Non-Executive Chairman of the Board
AAR Corp.
Lacy M. Johnson
Partner
Ice Miller LLC
Susan D. Whiting
Retired Vice Chairman
Nielsen Holdings plc
Director and Trustee
Kemper Corporation Senior Executives
Joseph P. Lacher, Jr.
President
Chief Executive Officer
Kimberly A. Holmes
Executive Vice President
Chief Actuary
Strategic Analytics Officer
John M. Boschelli
Executive Vice President
Chief Investment Officer
James J. McKinney
Executive Vice President
Chief Financial Officer
Charles T. Brooks
Executive Vice President
Operations and Systems
Christine F. Mullins
Executive Vice President
Chief Human Resources Officer
C. Thomas Evans, Jr.
Executive Vice President
Secretary and General Counsel
Duane A. Sanders
Executive Vice President
President,
Property & Casualty Division
Mark A. Green
Executive Vice President
Business Development and Reinsurance
Erich Sternberg
Executive Vice President
President,
Life & Health Division
Kemper Corporation Information
Stock Listing
Kemper Corporation is traded
on the New York Stock Exchange
under the symbol KMPR.
Common Stock Transfer Agent/Registrar
Please direct questions regarding stock registration,
change of address, change of name or transfer to:
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233
877.282.1168 (in the United States)
computershare.com/investor
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
2020 Annual Meeting*
May 6, 2020
8:00 a.m. Central Time
200 East Randolph Street
80th Floor
Chicago, IL 60601
Investor Relations
Christine Patrick
Kemper Corporation
200 East Randolph Street
Suite 3300
Chicago, IL 60601
312.661.4930
investors@kemper.com
* Please check for announcements on kemper.com and in the Company’s SEC filings
in the event that a change to the meeting location and/or date is determined
necessary in connection with developments related to COVID-19.