Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “accelerated filer, large accelerated filer, smaller reporting company and emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller Reporting Company
¨
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
64,930,663 shares of common stock, $0.10 par value, were outstanding as of April 22, 2019.
This Quarterly Report on Form 10-Q, including, but not limited to, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), Risk Factors and the accompanying unaudited Condensed Consolidated Financial Statements (including the notes thereto) of Kemper Corporation (“Kemper”) and its subsidiaries (individually and collectively referred to herein as the “Company”) may contain or incorporate by reference information that includes or is based on forward-looking statements within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “believe(s),” “goal(s),” “target(s),” “estimate(s),” “anticipate(s),” “forecast(s),” “project(s),” “plan(s),” “intend(s),” “expect(s),” “might,” “may,” “could” and other terms of similar meaning. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong, and, accordingly, Kemper cautions readers not to place undue reliance on such statements. Kemper bases these statements on current expectations and the current economic environment as of the date of this Quarterly Report on Form 10-Q. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties that may be important in determining the Company’s actual future results and financial condition.
In addition to those factors discussed under Item 1A., “Risk Factors,” of Part I of Kemper’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”), for the year ended December 31, 2018 (the “2018 Annual Report”) as updated by Item 1A. of Part II of this Quarterly Report on Form 10-Q, the reader should consider the following list of general factors that, among others, could cause the Company’s actual results and financial condition to differ materially from estimated results and financial condition.
Factors related to the legal and regulatory environment in which Kemper and its subsidiaries operate
•
Evolving practices and interpretations by regulators and courts that increase operating costs and potential liabilities, particularly any that involve retroactive application of new requirements, including, but not limited to, state initiatives related to unclaimed property laws or claims handling practices with respect to life insurance policies and the proactive use of death verification databases;
•
Adverse outcomes in litigation or other legal or regulatory proceedings involving Kemper or its subsidiaries or affiliates;
•
Governmental actions, including, but not limited to, implementation of new federal and state laws and regulations, and court decisions interpreting existing laws and regulations or policy provisions;
•
Uncertainties related to regulatory approval of insurance rates, policy forms, insurance products, license applications, dividends from insurance subsidiaries, acquisitions of businesses and other matters within the purview of state insurance regulators;
Factors relating to insurance claims and related reserves in the Company’s insurance businesses
•
The incidence, frequency and severity of catastrophes occurring in any particular reporting period or geographic area, including natural disasters, pandemics and terrorist attacks or other man-made events;
•
The number and severity of insurance claims (including those associated with catastrophe losses);
•
Changes in facts and circumstances affecting assumptions used in determining loss and loss adjustment expenses (“LAE”) reserves, including, but not limited to, the number and severity of insurance claims, changes in claims handling procedures and closure patterns and development patterns;
•
The impact of inflation on insurance claims, including, but not limited to, the effects on personal injury claims of increasing medical costs and the effects on property claims attributed to scarcity of resources available to rebuild damaged structures, including labor and materials and the amount of salvage value recovered for damaged property;
•
Developments related to insurance policy claims and coverage issues, including, but not limited to, interpretations or decisions by courts or regulators that may govern or influence losses incurred in connection with hurricanes and other catastrophes;
•
Orders, interpretations or other actions by regulators that impact the reporting, adjustment and payment of claims;
1
•
Changes in the pricing or availability of reinsurance, or in the financial condition of reinsurers and amounts recoverable therefrom;
Factors related to the Company’s ability to compete
•
Changes in the ratings by rating agencies of Kemper and/or its insurance company subsidiaries with regard to credit, financial strength, claims paying ability and other areas on which the Company is rated;
•
The level of success and costs incurred in realizing or maintaining economies of scale, integrating acquired businesses and implementing significant business initiatives, 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;
•
The ability of the Company to maintain the availability of critical systems and manage technology initiatives cost-effectively to address insurance industry developments and regulatory requirements;
•
Heightened competition, including, with respect to pricing, consolidations of existing competitors or entry of new competitors and alternate distribution channels, introduction of new technologies, emergence of telematics, refinements of existing products and development of new products by current or future competitors;
•
Expected benefits and synergies from mergers, acquisitions and/or divestitures that may not be realized to the extent anticipated, within expected time frames or at all, due to a number of factors including, but not limited to, the loss of key agents/brokers, customers or employees, increased costs, fees, expenses and related charges and delays caused by factors outside of the Company’s control;
Factors relating to the business environment in which Kemper and its subsidiaries operate
•
Changes in general economic conditions, including, but not limited to, performance of financial markets, interest rates, inflation, unemployment rates and fluctuating values of particular investments held by the Company;
•
Absolute and relative performance of investments held by the Company;
•
Changes in insurance industry trends and significant industry developments;
•
Changes in consumer trends and significant consumer or product developments;
•
Changes in capital requirements, including the calculations thereof, used by regulators and rating agencies;
•
Regulatory, accounting or tax changes that may affect the cost of, or demand for, the Company’s products or services or after-tax returns from the Company’s investments;
•
The impact of required participation in windpools and joint underwriting associations, residual market assessments and assessments for insurance industry insolvencies;
•
Changes in distribution channels, methods or costs resulting from changes in laws or regulations, lawsuits or market forces;
•
Increased costs and risks related to cybersecurity that could materially affect the Company’s operations, including, but not limited to, data breaches, cyber-attacks, virus or malware installation 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 SEC
Kemper cannot provide any assurances that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable or that future events or developments will not cause such statements to be inaccurate. Kemper assumes no obligation to correct or update any forward-looking statements publicly for any changes in events or developments or in the Company’s expectations or results subsequent to the date of this Quarterly Report on Form 10-Q. Kemper advises the reader, however, to consult any further disclosures Kemper makes on related subjects in its filings with the SEC.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended
Mar 31, 2019
Mar 31, 2018
Revenues:
Earned Premiums
$
1,074.8
$
609.8
Net Investment Income
82.7
79.2
Other Income
1.9
1.2
Income from Change in Fair Value of Equity and Convertible Securities
64.4
0.7
Net Realized Gains on Sales of Investments
16.1
2.6
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses
(3.5
)
(0.5
)
Portion of Losses Recognized in Other Comprehensive Income
(0.1
)
—
Net Impairment Losses Recognized in Earnings
(3.6
)
(0.5
)
Total Revenues
1,236.3
693.0
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses
765.4
436.9
Insurance Expenses
234.8
160.1
Interest and Other Expenses
41.4
29.0
Total Expenses
1,041.6
626.0
Income from Continuing Operations before Income Taxes
194.7
67.0
Income Tax Expense
(39.4
)
(13.4
)
Income from Continuing Operations
155.3
53.6
Income from Discontinued Operations
—
0.2
Net Income
$
155.3
$
53.8
Income from Continuing Operations Per Unrestricted Share:
Basic
$
2.38
$
1.03
Diluted
$
2.35
$
1.02
Net Income Per Unrestricted Share:
Basic
$
2.38
$
1.03
Diluted
$
2.35
$
1.02
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)
Three Months Ended
Mar 31, 2019
Mar 31, 2018
Net Income
$
155.3
$
53.8
Other Comprehensive Income (Loss) Before Income Taxes:
Unrealized Holding Gains (Losses)
162.8
(121.4
)
Foreign Currency Translation Adjustments
—
(0.9
)
Decrease in Net Unrecognized Postretirement Benefit Costs
0.6
0.3
Gain on Cash Flow Hedges
0.1
0.9
Other Comprehensive Income (Loss) Before Income Taxes
163.5
(121.1
)
Other Comprehensive Income Tax Benefit (Expense)
(34.4
)
25.4
Other Comprehensive Income (Loss)
129.1
(95.7
)
Total Comprehensive Income (Loss)
$
284.4
$
(41.9
)
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
(Unaudited)
Mar 31, 2019
Dec 31, 2018
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized Cost: 2019 - $6,266.9; 2018 - $6,284.5)
$
6,573.1
$
6,424.2
Equity Securities at Fair Value
916.9
684.4
Equity Securities at Modified Cost
39.2
41.5
Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings
197.8
187.0
Convertible Securities at Fair Value
33.8
31.5
Short-term Investments at Cost which Approximates Fair Value
Long-term Debt, Current and Non-current, at Amortized Cost (Fair Value: 2019 - $933.8; 2018 - $911.2)
908.5
909.0
Accrued Expenses and Other Liabilities
742.7
687.3
Total Liabilities
8,862.1
8,494.8
Shareholders’ Equity:
Common Stock, $0.10 Par Value, 100 Million Shares Authorized; 64,930,663 Shares Issued and Outstanding at March 31, 2019 and 64,756,833 Shares Issued and Outstanding at December 31, 2018
6.5
6.5
Paid-in Capital
1,673.0
1,666.3
Retained Earnings
1,489.7
1,355.5
Accumulated Other Comprehensive Income
150.9
21.8
Total Shareholders’ Equity
3,320.1
3,050.1
Total Liabilities and Shareholders’ Equity
$
12,182.2
$
11,544.9
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months Ended
Mar 31, 2019
Mar 31, 2018
Operating Activities:
Net Income
$
155.3
$
53.8
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Increase in Deferred Policy Acquisition Costs
(29.2
)
(12.7
)
Amortization of Intangible Assets Acquired
8.7
0.3
Equity in Earnings of Equity Method Limited Liability Investments
(3.6
)
(7.1
)
Distribution of Accumulated Earnings of Equity Method Limited Liability Investments
4.3
1.1
Increase in Value of Equity and Convertible Securities at Fair Value
(64.4
)
(0.7
)
Amortization of Investment Securities and Depreciation of Investment Real Estate
1.6
2.3
Net Realized Gains on Sales of Investments
(16.1
)
(2.6
)
Net Impairment Losses Recognized in Earnings
3.6
0.5
Depreciation of Property and Equipment
3.1
5.0
Increase in Receivables
(56.1
)
(14.5
)
Increase in Insurance Reserves
3.8
2.1
Increase in Unearned Premiums
75.2
36.3
Change in Income Taxes
40.1
18.1
Change in Accrued Expenses and Other Liabilities
(42.4
)
(13.5
)
Other, Net
5.1
5.6
Net Cash Provided by Operating Activities
89.0
74.0
Investing Activities:
Sales, Paydowns and Maturities of Fixed Maturities
402.6
397.8
Purchases of Fixed Maturities
(368.4
)
(408.6
)
Sales of Equity and Convertible Securities
39.6
32.4
Purchases of Equity and Convertible Securities
(207.6
)
(51.1
)
Acquisition and Improvements of Investment Real Estate
(0.4
)
(0.7
)
Sale of and Return of Investment of Equity Method Limited Liability Investments
7.1
1.6
Acquisitions of Equity Method Limited Liability Investments
(18.6
)
(3.5
)
Decrease (Increase) in Short-term Investments
(53.3
)
47.2
Increase (Decrease) in Other Investments
(10.6
)
2.1
Acquisition and Development of Software
(9.3
)
(22.1
)
Other, Net
(0.8
)
2.9
Net Cash Used by Investing Activities
(219.7
)
(2.0
)
Financing Activities:
Proceeds from Collateralized Investment Borrowings
187.7
10.0
Repayment of Collateralized Investment Borrowings
(10.0
)
—
Dividends and Dividend Equivalents Paid
(16.4
)
(12.5
)
Cash Exercise of Stock Options
1.3
0.6
Other, Net
—
(0.4
)
Net Cash Provided (Used) by Financing Activities
162.6
(2.3
)
Increase in Cash
31.9
69.7
Cash, Beginning of Year
75.1
45.7
Cash, End of Period
$
107.0
$
115.4
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
6
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in millions)
(Unaudited)
Three Months Ended March 31, 2019
(Dollars and Shares in Millions,
Except Per Share Amounts)
Number of
Shares
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders’
Equity
Balance, December 31, 2018
64.7
$
6.5
$
1,666.3
$
1,355.5
$
21.8
$
3,050.1
Net Income
—
—
—
155.3
—
155.3
Other Comprehensive Income (Note 8)
—
—
—
—
129.1
129.1
Cash Dividends and Dividend Equivalents to Shareholders ($0.25 per share)
—
—
—
(16.4
)
—
(16.4
)
Equity-based Compensation Cost
—
—
7.6
—
—
7.6
Equity-based Awards, Net of Shares Exchanged
0.2
—
(0.9
)
(4.7
)
—
(5.6
)
Balance, March 31, 2019
64.9
$
6.5
$
1,673.0
$
1,489.7
$
150.9
$
3,320.1
Three Months Ended March 31, 2018
(Dollars and Shares in Millions, Except Per Share Amounts)
Number of
Shares
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders’
Equity
Balance, December 31, 2017 As Reported
51.5
$
5.1
$
673.1
$
1,243.0
$
194.4
$
2,115.6
Cumulative Effect of Adoption of New Accounting Standard
—
—
—
(18.2
)
18.2
—
Balance, January 1, 2018 As Adjusted
51.5
$
5.1
$
673.1
$
1,224.8
$
212.6
$
2,115.6
Net Income
—
—
—
53.8
—
53.8
Other Comprehensive Income (Note 8)
—
—
—
—
(95.7
)
(95.7
)
Cash Dividends and Dividend Equivalents to Shareholders ($0.24 per share)
—
—
—
(12.5
)
—
(12.5
)
Equity-based Compensation Cost
—
—
3.4
—
—
3.4
Equity-based Awards, Net of Shares Exchanged
—
—
0.4
(1.2
)
—
(0.8
)
Balance, March 31, 2018
51.5
$
5.1
$
676.9
$
1,264.9
$
116.9
$
2,063.8
7
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the SEC and include the accounts of Kemper Corporation and its subsidiaries and are unaudited. All significant intercompany accounts and transactions have been eliminated.
Certain financial information that is normally included in annual financial statements, including certain financial statement footnote disclosures, prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation. The preparation of interim financial statements relies heavily on estimates. This factor and other factors, such as the seasonal nature of some portions of the insurance business, as well as market conditions, call for caution in drawing specific conclusions from interim results. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included in the 2018 Annual Report.
Adoption of New Accounting Guidance
Guidance 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 ASC 842 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 $78.0 million, a lease liability of $82.5 million and an adjustment to deferred rent liability of $4.5 million. The ROU Asset and related liabilities were reflected in Other Assets and Accrued Expenses and Other Liabilities, respectively, on the Condensed Consolidated Balance Sheets as of March 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 within those annual periods with early adoption permitted. The impact of adoption of ASU 2017-12 on the Company’s consolidated financial position was not material.
Guidance 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 incurred loss impairment methodology in current GAAP with a methodology that utilizes expected credit losses to provide for an allowance for credit losses for financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement includes the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities are measured in a manner similar to current GAAP, although the ASU requires that they be presented as an allowance rather than as a write-down. In situations where the estimate of credit loss on an available-for-sale debt security declines, entities will be able to record the reversal to income in the current period, which GAAP currently prohibits. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods with early adoption permitted for fiscal years beginning after December 31, 2018 and interim periods within such year. The Company is currently evaluating the impact of this guidance on its financial statements.
8
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1 - Basis of Presentation (continued)
In August 2018, the FASB issued ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. ASU 2018-12 amends the accounting model for certain long-duration insurance contracts and requires the insurer to provide additional disclosures in annual and interim reporting periods. ASU 2018-12 is effective for fiscal years beginning after December 15, 2020, including interim periods therein. The amendments in ASU 2018-12 are intended to improve measurement of the liability for future policy benefits related to nonparticipating traditional and limited-payment contracts, measurement and presentation of market risk benefits, amortization of deferred acquisition costs, and enhance presentation and disclosures. The Company is currently evaluating the impact of this guidance on its financial statements.
The Company has adopted all other recently issued accounting pronouncements with effective dates prior to January 1, 2019. Other than the adoption of ASU 2016-02, 2016-02, Leases—(Topic 842) there were no adoptions of such accounting pronouncements during the three months endedMarch 31, 2019 that had a material impact on the Company’s Condensed Consolidated Financial Statements. With the possible exceptions of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, andASU 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 March 31, 2019 to have a material impact on the Company’s financial statements and/or disclosures.
9
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 2 - Acquisition of Business
Acquisition of Infinity Property and Casualty Corporation
On July 2, 2018, Kemper acquired 100% of the outstanding common stock of Infinity Property and Casualty Corporation (“Infinity”), pursuant to the terms of the merger agreement dated February 13, 2018.
The Company has not yet completed the process of estimating the fair value of assets acquired and liabilities assumed, including, but not limited to, receivables, intangible assets, unearned premium reserves, certain tax-related balances and certain other asset and liabilities. Accordingly, the Company’s preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as the Company completes the process, which would also likely impact the Company’s allocation of the purchase price to Goodwill. In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, changes if any, to the preliminary estimates and allocation as a result of events or conditions as of the acquisition date, will be reported in the Company’s financial statements as an adjustment to the assets acquired and liabilities assumed. During the first quarter of 2019, the Company further refined its estimate of certain bonus accruals, other liabilities and related tax-related balances, decreasing liabilities assumed by $0.9 million and decreasing goodwill by $0.9 million. 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.
Based on the Company’s preliminary allocation of the purchase price as of March 31, 2019, the fair value of the assets acquired and liabilities assumed were:
(Dollars in Millions)
Investments
$
1,569.3
Short Term Investments
98.8
Cash
4.0
Receivables from Policyholders
583.4
Other Receivables
31.7
Value of Intangible Assets Acquired (Reported in Other Assets)
262.7
Current Income Tax Assets
0.8
Goodwill1
788.5
Other Assets
102.1
Property and Casualty Insurance Reserves
(713.6
)
Unearned Premiums
(715.6
)
Debt
(282.1
)
Deferred Income Tax Liabilities
(11.7
)
Accrued Expenses and Other Liabilities
(169.6
)
Total Purchase Price
1,548.7
1Non-deductible for tax-purposes.
10
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments
Fixed Maturities
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at March 31, 2019 were:
Amortized
Cost
Gross Unrealized
Fair Value
(Dollars in Millions)
Gains
Losses
U.S. Government and Government Agencies and Authorities
$
845.9
$
20.2
$
(7.7
)
$
858.4
States and Political Subdivisions
1,582.2
101.4
(1.7
)
1,681.9
Foreign Governments
5.8
—
(0.6
)
5.2
Corporate Securities:
Bonds and Notes
3,281.5
216.4
(17.8
)
3,480.1
Collateralized Loan Obligations
536.8
1.5
(6.8
)
531.5
Other Mortgage- and Asset-backed
14.7
1.3
—
16.0
Investments in Fixed Maturities
$
6,266.9
$
340.8
$
(34.6
)
$
6,573.1
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2018 were:
Amortized
Cost
Gross Unrealized
Fair Value
(Dollars in Millions)
Gains
Losses
U.S. Government and Government Agencies and Authorities
$
865.9
$
14.8
$
(15.0
)
$
865.7
States and Political Subdivisions
1,553.7
74.0
(8.6
)
1,619.1
Foreign Governments
6.5
—
(0.6
)
5.9
Corporate Securities:
Bonds and Notes
3,307.8
135.1
(49.1
)
3,393.8
Collateralized Loan Obligations
535.7
1.5
(13.2
)
524.0
Other Mortgage- and Asset-backed
14.9
0.9
(0.1
)
15.7
Investments in Fixed Maturities
$
6,284.5
$
226.3
$
(86.6
)
$
6,424.2
Accrued Expenses and Other Liabilities included unsettled purchases of Investments in Fixed Maturities of $15.5 million and $10.5 million at March 31, 2019 and December 31, 2018, respectively.
11
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments (continued)
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at March 31, 2019 by contractual maturity were:
(Dollars in Millions)
Amortized Cost
Fair Value
Due in One Year or Less
$
90.1
$
90.9
Due after One Year to Five Years
905.9
921.6
Due after Five Years to Ten Years
1,658.4
1,731.8
Due after Ten Years
2,434.4
2,649.2
Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date
1,178.1
1,179.6
Investments in Fixed Maturities
$
6,266.9
$
6,573.1
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 March 31, 2019 consisted of securities issued by the Government National Mortgage Association with a fair value of $616.4 million, securities issued by the Federal National Mortgage Association with a fair value of $8.1 million, securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $7.6 million and securities of other non-governmental issuers with a fair value of $547.5 million.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at March 31, 2019 is presented below.
Less Than 12 Months
12 Months or Longer
Total
(Dollars in Millions)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fixed Maturities:
U.S. Government and Government Agencies and Authorities
$
13.2
$
(0.2
)
$
262.2
$
(7.5
)
$
275.4
$
(7.7
)
States and Political Subdivisions
1.6
(0.3
)
77.8
(1.4
)
79.4
(1.7
)
Foreign Governments
4.4
(0.5
)
0.5
(0.1
)
4.9
(0.6
)
Corporate Securities:
Bonds and Notes
222.6
(5.2
)
321.4
(12.6
)
544.0
(17.8
)
Collateralized Loan Obligations
406.6
(6.0
)
28.7
(0.8
)
435.3
(6.8
)
Other Mortgage- and Asset-backed
—
—
4.6
—
4.6
—
Total Fixed Maturities
648.4
(12.2
)
695.2
(22.4
)
1,343.6
(34.6
)
The Company regularly reviews its fixed maturity investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. The portions of the declines in the fair values of fixed maturity investments that are determined to be other than temporary are reported as losses in the Condensed Consolidated Statements of Income in the periods when such determinations are made.
Unrealized losses on fixed maturities, which the Company has determined to be temporary at March 31, 2019, were $34.6 million, of which $22.4 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were no unrealized losses at March 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 March 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 $23.1 million and below-investment-grade fixed maturity investments comprised $11.5 million of the unrealized losses on investments in fixed maturities at March 31, 2019. For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was approximately 4% of the amortized cost basis of the investment. At March 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
12
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3 - Investments (continued)
evaluation of the prospects of the issuers at March 31, 2019, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company’s intention to not sell and its determination that it would not be required to sell before it recovered the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company’s investments in fixed maturities presented in the preceding table were temporary at the evaluation date.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities at December 31, 2018 is presented below.
Less Than 12 Months
12 Months or Longer
Total
(Dollars in Millions)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fixed Maturities:
U.S. Government and Government Agencies and Authorities