Earned Premiums were $2,107.1 million in 2012, compared to $2,173.6 million in 2011, a decrease of $66.5 million. Earned Premiums decreased by $54.7 million and $25.4 million in the Kemper Direct and Kemper Specialty segments, respectively, offset by a $19.6 million increase in premiums in the Kemper Preferred segment.
Net Investment Income decreased by $2.1 million in 2012 due primarily to $4.1 million in higher Other Investment Expenses, partially offset by $1.2 million of higher net investment income from Real Estate and $1.2 million of higher investment income from Loans to Policyholders.
As a result of a decrease in the Company’s ownership percentage and other qualitative factors, the Company determined that its investment in the common stock of Intermec no longer qualified for the equity method of accounting in the third quarter of 2010. Accordingly, beginning with the Company’s September 30, 2010 interim consolidated financial statements, the
On February 2, 2011, the Board of Directors approved a new share repurchase program under which Kemper is authorized to repurchase up to $300 million of its common stock. During 2012, Kemper repurchased approximately 2.0 million shares of its common stock at an aggregate cost of $60.7 million in open market transactions under the new repurchase program. During 2011, Kemper repurchased approximately 0.9 million shares of its common stock at an aggregate cost of $27.4 million in open market transactions.
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 either result in investment gains or losses. Management believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they experience several future catastrophic events over a relatively short period of time. Prior to the sale of its active portfolio of automobile loan receivables, the primary sources of funds for Fireside included the repayments of automobile loans, interest on automobile loans, investment income and proceeds from the sales and maturity of investments. The primary uses of funds for Fireside were general expenses and purchase of investments. Prior to the redemption of its Certificates of Deposits, the primary uses of funds for Fireside also included the repayment of customer deposits and interest paid to depositors.
The fair value of the Company’s investments measured and reported at fair value was $5,386.6 million at December 31, 2012, of which $4,866.2 million, or 90%, was based on quoted market prices or significant value drivers that are observable and $520.4 million, or 10%, was based on significant value drivers that are unobservable. 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, 2012 due to limitations inherent in the estimation process and changing market conditions.
ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements;
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 annually for recoverability or when certain triggering events require testing. On January 1, 2012, the Company adopted ASU 2011-08, Testing Goodwill for Impairment. See discussion below under the caption “Adoption of New Accounting Standards” regarding the adoption of the new standard.
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The standard is effective for interim and annual reporting periods beginning after December 15, 2011. The provisions of the standard can be applied either prospectively or retrospectively. The standard amends ASC Topic 944, Financial Services-Insurance, and modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The Company adopted the standard on January 1, 2012 and applied its provisions retrospectively. The adoption of the standard reduced consolidated shareholders’ equity by $99.5 million on January 1, 2012. The Company’s financial statements have been retrospectively adjusted as if ASU 2010-26 had been adopted to all prior periods presented.
The Company accounts for Kemper’s subsidiary, Fireside, and the Company’s former Unitrin Business Insurance operations as discontinued operations.
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 Equity Method Limited Liability Investments. In 2012, 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. 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
Goodwill balances by business segment at December 31, 2012 and December 31, 2011 were:
In the fourth quarter of 2010, Kemper borrowed $140 million under the Former Credit Agreement. As discussed below, Kemper used a portion of the proceeds from the issuance of its 2015 Senior Notes to repay in full the borrowings under the Former Credit Agreement.
Outstanding awards under the Omnibus Plan and Prior Plans at December 31, 2012 consisted of stand-alone stock options, tandem stock option and stock appreciation rights, time-vested restricted stock and performance-based restricted stock. Recipients of restricted stock are entitled to full dividend and voting rights on the same basis as all other outstanding shares of Kemper common stock, and all awards are subject to forfeiture until certain restrictions have lapsed.
Included in the balance of unrecognized tax benefits at December 31, 2012, 2011 and 2010 are tax positions of $3.5 million, $3.7 million and $5.7 million, respectively, 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 components of Income Tax Expense from Continuing Operations for the years ended December 31, 2012, 2011 and 2010 were:
At December 31, 2012, the Company had unfunded commitments to invest an additional $86.2 million in certain private equity funds and mezzanine debt funds that will be included in Other Equity Interests.
The majority of Investments in Fixed Maturities that are classified as Level 3 are priced using a yield approach. A yield approach uses a risk-free rate plus a credit spread depending on the underlying credit profile of the security. For floating rate securities, the risk free rate used in the yield is the contractual floating rate of the security. For each 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 yield for each security. The yield selected is then used to discount the future cash flows of the security to determine the fair value. The Company separately evaluates yields based upon asset class to assess the reasonableness of the recorded fair value. For Investments in Fixed Maturities, corporate bonds and notes makes up the majority of the Company’s investments classified as Level 3. For corporate bonds and notes, the primary asset classes are investment grade private placements, non-investment grade senior debt, non-investment grade junior debt and other debt. Non-investment grade senior debt includes those securities that receive first priority in a liquidation and non-investment grade junior debt includes any fixed maturity security with other than first priority in a liquidation.
Transfers into Level 2 from Level 1 were $2.2 million for the year ended December 31, 2011. Transfers into Level 1 from Level 2 were $2.2 million for the year ended December 31, 2011. Transfers between Levels 1 and 2 for the year ended December 31, 2011 were due to changes in the observable inputs for one security. Transfers into Level 3 for the year ended December 31, 2011 were due to changes in the availability of market observable inputs.
Certain state insurance regulators, legislators and treasurers are involved in an array of initiatives that could result in significant changes to unclaimed property laws and claims handling practices with respect to life insurance policies. These initiatives seek, in various ways, to impose a new duty on the part of life insurers to proactively search for deaths of their insureds. For example, Kentucky, New York, Maryland and Alabama have each enacted legislation, with effective dates of January 1, 2013, June 17, 2013, October 1, 2013 and January 1, 2014, respectively, that requires life insurers to compare their in-force policy records against the database of reported deaths maintained by the Social Security Administration (the “SSA Death Master File”) for the purpose of proactively identifying potentially deceased insureds for whom the life insurer has not yet received a death claim. If state officials are successful in applying this new standard retroactively to existing life insurance policies, it will fundamentally alter the responsibilities of the parties to such contracts by effectively eliminating contract terms that condition claim settlement and payment on the receipt of notice and “due proof of death” of an insured. The outcome of the various state initiatives could have a significant effect on, including acceleration of, the payment and/or escheatment of policy benefits and significantly increase claims handling costs.