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. Yesx 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). Yesx 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
☒
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
66,618,655 shares of common stock, $0.10 par value, were outstanding as of July 29, 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)
Six Months Ended
Three Months Ended
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Revenues:
Earned Premiums
$
2,191.4
$
1,267.9
$
1,116.6
$
658.1
Net Investment Income
178.7
157.6
96.0
78.4
Other Income
24.6
2.4
22.7
1.2
Income from Change in Fair Value of Equity and Convertible Securities
89.9
1.1
25.5
0.4
Net Realized Gains on Sales of Investments
37.4
6.4
21.3
3.8
Other-than-temporary Impairment Losses:
Total Other-than-temporary Impairment Losses
(10.2
)
(0.5
)
(6.7
)
—
Portion of Losses Recognized in Other Comprehensive Income
(0.1
)
—
—
—
Net Impairment Losses Recognized in Earnings
(10.3
)
(0.5
)
(6.7
)
—
Total Revenues
2,511.7
1,434.9
1,275.4
741.9
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses
1,590.8
936.4
825.4
499.5
Insurance Expenses
498.3
331.3
263.5
171.2
Interest and Other Expenses
79.4
54.7
38.0
25.7
Total Expenses
2,168.5
1,322.4
1,126.9
696.4
Income from Continuing Operations before Income Taxes
343.2
112.5
148.5
45.5
Income Tax Expense
(65.8
)
(21.4
)
(26.4
)
(8.0
)
Income from Continuing Operations
277.4
91.1
122.1
37.5
Income from Discontinued Operations
—
0.3
—
0.1
Net Income
$
277.4
$
91.4
$
122.1
$
37.6
Income from Continuing Operations Per Unrestricted Share:
Basic
$
4.25
$
1.76
$
1.87
$
0.73
Diluted
$
4.20
$
1.75
$
1.84
$
0.73
Net Income Per Unrestricted Share:
Basic
$
4.25
$
1.77
$
1.87
$
0.73
Diluted
$
4.20
$
1.76
$
1.84
$
0.73
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)
Six Months Ended
Three Months Ended
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net Income
$
277.4
$
91.4
$
122.1
$
37.6
Other Comprehensive Income (Loss) Before Income Taxes:
Unrealized Holding Gains (Losses)
322.1
(182.2
)
159.3
(60.8
)
Foreign Currency Translation Adjustments
—
0.3
—
1.2
Decrease in Net Unrecognized Postretirement Benefit Costs
0.6
0.6
—
0.3
Gain (Loss) on Cash Flow Hedges
0.1
0.2
—
(0.7
)
Other Comprehensive Income (Loss) Before Income Taxes
322.8
(181.1
)
159.3
(60.0
)
Other Comprehensive Income Tax Benefit (Expense)
(67.7
)
38.1
(33.3
)
12.7
Other Comprehensive Income (Loss)
255.1
(143.0
)
126.0
(47.3
)
Total Comprehensive Income (Loss)
$
532.5
$
(51.6
)
$
248.1
$
(9.7
)
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)
Jun 30, 2019
Dec 31, 2018
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized Cost: 2019 - $6,074.6; 2018 - $6,284.5)
$
6,540.2
$
6,424.2
Equity Securities at Fair Value
923.3
684.4
Equity Securities at Modified Cost
38.1
41.5
Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings
219.7
187.0
Convertible Securities at Fair Value
34.3
31.5
Short-term Investments at Cost which Approximates Fair Value
Long-term Debt, Current and Non-current, at Amortized Cost (Fair Value: 2019 - $798.5; 2018 - $911.2)
873.3
909.0
Accrued Expenses and Other Liabilities
741.9
687.3
Total Liabilities
8,932.8
8,494.8
Shareholders’ Equity:
Common Stock, $0.10 Par Value, 100 Million Shares Authorized; 66,564,175 Shares Issued and Outstanding at June 30, 2019 and 64,756,833 Shares Issued and Outstanding at December 31, 2018
6.7
6.5
Paid-in Capital
1,806.4
1,666.3
Retained Earnings
1,593.7
1,355.5
Accumulated Other Comprehensive Income
276.9
21.8
Total Shareholders’ Equity
3,683.7
3,050.1
Total Liabilities and Shareholders’ Equity
$
12,616.5
$
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)
Six Months Ended
Jun 30, 2019
Jun 30, 2018
Operating Activities:
Net Income
$
277.4
$
91.4
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Increase in Deferred Policy Acquisition Costs
(51.1
)
(23.5
)
Amortization of Intangible Assets Acquired
16.7
1.8
Equity in Earnings of Equity Method Limited Liability Investments
(1.0
)
(8.5
)
Distribution of Accumulated Earnings of Equity Method Limited Liability Investments
6.3
5.0
Increase in Value of Equity and Convertible Securities at Fair Value
(89.9
)
(1.1
)
Amortization of Investment Securities and Depreciation of Investment Real Estate
5.9
2.9
Net Realized Gains on Sales of Investments
(37.4
)
(6.4
)
Net Impairment Losses Recognized in Earnings
10.3
0.5
Depreciation and Amortization of Property, Equipment and Software
14.8
8.2
Increase in Receivables
(95.0
)
(38.7
)
Increase in Insurance Reserves
56.2
65.8
Increase in Unearned Premiums
121.3
69.9
Change in Income Taxes
23.2
18.8
Change in Accrued Expenses and Other Liabilities
(22.5
)
0.3
Other, Net
1.3
5.0
Net Cash Provided by Operating Activities
236.5
191.4
Investing Activities:
Sales, Paydowns and Maturities of Fixed Maturities
959.0
607.5
Purchases of Fixed Maturities
(721.5
)
(633.7
)
Sales of Equity and Convertible Securities
82.7
122.9
Purchases of Equity and Convertible Securities
(231.7
)
(61.9
)
Acquisition and Improvements of Investment Real Estate
(0.6
)
(0.4
)
Sale of and Return of Investment of Equity Method Limited Liability Investments
13.7
6.2
Acquisitions of Equity Method Limited Liability Investments
(51.6
)
(12.6
)
Decrease (Increase) in Short-term Investments
(353.4
)
67.6
Increase (Decrease) in Other Investments
(29.2
)
2.1
Purchases of Corporate-owned Life Insurance
(50.0
)
—
Acquisition of Software and Long-lived Assets
(30.7
)
(32.8
)
Other, Net
(0.3
)
3.3
Net Cash Provided (Used) by Investing Activities
(413.6
)
68.2
Financing Activities:
Net Proceeds from Issuance of Long-term Debt
—
249.4
Repayment of Long-term Debt
(35.0
)
—
Proceeds from Advances from FHLB
—
110.0
Proceeds from Collateralized Investment Borrowings
259.0
10.0
Repayment of Collateralized Investment Borrowings
(113.9
)
—
Proceeds from Issuance of Common Stock, Net of Transaction Costs
127.5
—
Dividends and Dividend Equivalents Paid
(32.8
)
(24.9
)
Cash Exercise of Stock Options
2.0
0.6
Other, Net
(0.4
)
(0.5
)
Net Cash Provided by Financing Activities
206.4
344.6
Increase in Cash
29.3
604.2
Cash, Beginning of Year
75.1
45.7
Cash, End of Period
$
104.4
$
649.9
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)
Six Months Ended Jun 30, 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
—
—
—
277.4
—
277.4
Other Comprehensive Income (Note 8)
—
—
—
—
255.1
255.1
Cash Dividends and Dividend Equivalents to Shareholders ($0.50 per share)
—
—
—
(32.8
)
—
(32.8
)
Issuance of Common Stock, Net of Transaction Costs
1.6
0.2
127.0
—
—
127.2
Equity-based Compensation Cost
—
—
14.1
—
—
14.1
Equity-based Awards, Net of Shares Exchanged
0.3
—
(1.0
)
(6.4
)
—
(7.4
)
Balance, June 30, 2019
66.6
$
6.7
$
1,806.4
$
1,593.7
$
276.9
$
3,683.7
Six Months Ended Jun 30, 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
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
—
—
—
91.4
—
91.4
Other Comprehensive Income (Note 8)
—
—
—
—
(143.0
)
(143.0
)
Cash Dividends and Dividend Equivalents to Shareholders ($0.48 per share)
—
—
—
(24.9
)
—
(24.9
)
Equity-based Compensation Cost
—
—
8.1
—
—
8.1
Equity-based Awards, Net of Shares Exchanged
0.1
0.1
0.3
(1.9
)
—
(1.5
)
Balance, June 30, 2018
51.6
$
5.2
$
681.5
$
1,289.4
$
69.6
$
2,045.7
7
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(Dollars in millions)
(Unaudited)
Three Months Ended June 30, 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, March 31, 2019
64.9
$
6.5
$
1,673.0
$
1,489.7
$
150.9
$
3,320.1
Net Income
—
—
—
122.1
—
122.1
Other Comprehensive Income (Note 8)
—
—
—
—
126.0
126.0
Cash Dividends and Dividend Equivalents to Shareholders ($0.25 per share)
—
—
—
(16.4
)
—
(16.4
)
Issuances of Common Stock, Net of Transaction Costs
1.6
0.2
127.0
—
—
127.2
Equity-based Compensation Cost
—
—
6.5
—
—
6.5
Equity-based Awards, Net of Shares Exchanged
0.1
—
(0.1
)
(1.7
)
—
(1.8
)
Balance, June 30, 2019
66.6
$
6.7
$
1,806.4
$
1,593.7
$
276.9
$
3,683.7
Three Months Ended June 30, 2018
(Dollars and Shares in Millions, Except Per Share Amounts)